CGL v DKL, 2016 ABQB 71

Court of Queen ’ s Bench of Alberta Citation: CGL v DKL, 2016 ABQB 71 Date: 20160204 Docket: 4803 122672 Registry: Edmonton Between: CGL Plaintiff - and - DKL Defendant _______________________________________________________ Memorandum of Decision of Binding Judicial Dispute Resolution of the Honourable Mr. Justice Robert A. Graesser _______________________________________________________ Introduction [ 1 ] This is my decision on the Binding Judicial Dispute Resolution Conference held on June 18, 2015.

The parties have been unable to resolve issues relating to child support (retroactive and ongoing) and require a determination of DKL’s Guideline income so they can make the calculations themselves. [ 2 ] Following the issuance of draft reasons in August, 2015, counsel contacted me to seek a determination as to the date retroactive child support payments are to be calculated from. Issues remained relating to

section 7 payments. They also wanted to address costs. [ 3 ] I heard submissions from counsel on January 26, 2016. At the hearing,

section 7 issues were discussed and resolved. There is

no need to deal with those arguments and their resolution in this written decision. Similarly, costs were awarded in CGL’s favour based on Column 1 of

Schedule C. I do not need to review the arguments and the reasons for my decision here. [ 4 ] Counsel advised me that they had agreed that despite the decision arising in the context of a binding judicial dispute resolution process, the decision should be made public as the issues were somewhat unique. I agreed to do so. Hence this decision being released instead of sitting only on counsel’s files. Background [ 5 ] The parties were married in July, 1986. They were divorced in December, 2004. There are three children, S (22), M (nearly 20) and A (16).

The parents have joint custody and the children have been primarily resident with CGL since the parties separated. [ 6 ] Shortly after the parties married, they began to acquire farmland. Over the course of their marriage, they accumulated a number of quarter-sections and actively farmed. DKL worked off the farm as well to supplement the family income.

That employment provided T-4 income which was used for the purposes of calculating his Guideline income (in addition to the net proceeds from the farming operation). [ 7 ] CGL has long been of the view that DKL’s Line 150 income did not accurately reflect his income for child support purposes. [ 8 ] In December, 2007, a request was made by CGL for updated financial information. DKL’s 2004 to 2006 tax returns were provided shortly after that.

A request was made for increased support and arrears by CGL’s counsel in February, 2008. [ 9 ] In July, 2008 CGL filed an application to have income imputed to DKL and for increased child support as well as arrears in child support. [ 10 ] That application worked its way towards a special chambers application scheduled for June 15, 2012 but on June 5, 2012 the special application was adjourned so that the parties could get expert opinions concerning DKL’s income. [ 11 ] Ultimately, a special chambers application before Nielsen J on June 25, 2014 directed that the matter proceed to trial or JDR. [ 12 ] The parties agreed on a binding JDR and the matter was heard by me on June 18. [ 13 ] The positions of the parties are defined by the expert reports each has obtained.

CGL retained Ray Manek of Odessey Chartered Accountant and Advisor, and DKL has retained Brenda Pisko of Pisko Valuation Services Inc. [ 14 ] The reports are as follows: Pisko – June 1, 2012 Manek – May 31, 2013 Manek – April 14, 2014 Pisko - May 29, 2015 Manek - June 7, 2015 Manek - June 11, 2015 [ 15 ] From the information in the reports, it is clear that since the parties separated in 2004, DKL has greatly expanded the farming operation. The total acreage owned and leased has increased from 1,650 acres in 2006 to 3,284 in 2013.

DKL’s farming operation has also expanded from being primarily a grain farm to also providing custom fertilizing for non-related farmers. [ 16 ] In connection with these expanded operations, DKL has also taken on a large amount of debt and leases a significant amount of equipment. [ 17 ] The current operations are carried out by a proprietorship, with DKL being the sole proprietor. He is the owner or lessor of the lands involved in his grain operation. Equipment is owned by a corporation in which he is the sole shareholder. Operations are conducted so that all revenues come to the proprietorship.

The corporation operates on a break-even basis so all of its expenses are billed to the proprietorship, without markup. [ 18 ] Essentially, the “net” results of the farming and custom fertilizing operations are contained in DKL’s personal tax return. There are two significant income tax considerations at play: capital cost allowance relating to equipment owned by DKL and inventory inclusions/deductions. [ 19 ] CCA allows the farmer taxpayer to reduce taxable income by claiming depreciation on farming equipment.

Inventory adjustments allow the farmer taxpayer to average crop revenues by claiming reserves for unsold inventory. [ 20 ] Gross revenues for DKL’s operations increased significantly in 2010 as that is the year in which DKL began to perform custom fertilizing. He acquired machinery for the purpose and hired workers to do the custom work. [ 21 ] Ms. Pisko’s calculations on behalf of DKL are based on:

1. DKL’s line 150 income; 2. Adding 1/3 of the CCA claimed for that year; and 3. Reversing inventory inclusions/deductions. [ 22 ] For the years 2006 to 2013, DKL’s line 150 incomes were between $9,265 and $21,234. The average would be approximately $16,000. [ 23 ] According to Ms. Pisko’s proposed method of calculation, DKL’s income would be as follows: 2006 $72,264 2007 $107,073 2008 $56,570 2009 $12,644 2010 ($108,113) 2011 $230,533 2012 ($110,748) 2013 $29,792 [ 24 ] Mr. Manek provides alternate calculations. There are essentially four main differences between Mr. Manek’s approach and Ms. Pisko’s. Mr.

Manek does not take major issue with Ms. Pisko’s approach to CCA or inventory adjustments. He suggests that it would be more appropriate to add back 2/3 of the CCA. His opinions are that: 1. The lease costs relating to equipment used in farming and custom fertilizing are not “true” expenses. He bases this on a review of several of DKL’s lease agreements where there is an option to purchase the leased equipment at the end of the lease term for nominal consideration. He describes these leases as rent-to-own arrangements and suggests that DKL is building up significant equity in the equipment.

His suggested approach is to allow a deduction for imputed interest on the lease agreements, which he estimates to be 5% per annum and to treat 1/2 of the lease payments as being payments on principal. That amount should be added back into DKL’s income. 2. Fertilizer costs are too high and should be reduced to more reasonable levels. 3. Revenues from farming operations should be higher, based on statistical information he has obtained for other farming operations on land he considers similar to be DKL’s lands. 4. Equipment repair costs are too high.

Expert Opinions [ 25 ] Most of the analysis comes down to my assessment of the expert opinions. At a proceeding such as this, it is difficult to compare the expertise of the experts because all that is provided is the opinions. The experts are not cross-examined to test their opinions. The trier of fact is left to try to make an assessment based on the contents of the reports and the curricula vitae of the experts. [ 26 ] Here, both are qualified business valuators. Both are chartered accountants. I have no reason to doubt the qualifications and skills of the two experts.

There is, however, one significant difference between the reports that I must comment on. Ms. Pisko’s reports rely on records provided by DKL including his income tax returns. She states her assumptions and applies her expertise (including income tax expertise) to those assumptions. [ 27 ] Mr. Manek goes further. Instead of reliance on records from the parties, Mr. Manek has researched issues including the useable life of farm equipment and crop yields and provides opinions based on his research. He also comments on case law relating to treatment of CCA in family law. [ 28 ] In undertaking these tasks, Mr.

Manek has to some degree crossed the line between independent expert and an advocate. Lawyers are advocates in legal proceedings, not the experts they engage. The utility of an expert report where the expert is acting as an advocate for the party retaining him as well as providing expert opinions is compromised. [ 29 ] That is clear from cases such as the recent Supreme Court of Canada decision in White Burgess Langille Inman v Abbott and Haliburton Co , 2015 SCC 23 .

That decision emphasizes the expectation that experts will be independent and points out some of the harm that may result from a lack of independence: [10] In my view, expert witnesses have a duty to the court to give fair, objective and non-partisan opinion evidence. They must be aware of this duty and able and willing to carry it out. If they do not meet this threshold requirement, their evidence should not be admitted.

Once this threshold is met, however, concerns about an expert witness’s independence or impartiality should be considered as part of the overall weighing of the costs and benefits of admitting the evidence. This common law approach is, of course, subject to statutory and related provisions which may establish different rules of admissibility.

B. Expert Witness Independence and Impartiality [11] There have been long-standing concerns about whether expert witnesses hired by the parties are impartial in the sense that theyare expressing their own unbiased professional opinion and whether they are independent in the sense that their opinion is the product oftheir own, independent conclusions based on their own knowledge and judgment: see, e.g., G. R. Anderson, Expert Evidence (3rd ed.2014), at p. 509; S. N. Lederman, A. W. Bryant and M. K. Fuerst, The Law of Evidence in Canada (4th ed. 2014), at p. 783.

As SirGeorge Jessel, M.R., put it in the 1870s, “[u]ndoubtedly there is a natural bias to do something serviceable for those who employ youand adequately remunerate you. It is very natural, and it is so effectual, that we constantly see persons, instead of considering themselveswitnesses, rather consider themselves as the paid agents of the person who employs them”: Lord Abinger v. Ashton (1873), L.R. 17 Eq.358, at p. 374. [12] Recent experience has only exacerbated these concerns; we are now all too aware that an expert’s lack of independence andimpartiality can result in egregious miscarriages of justice: R. v.

D.D., 2000 SCC 43 , [2000] 2 S.C.R. 275, at para. 52. Asobserved by Beveridge J.A. in this case, The Commission on Proceedings Involving Guy Paul Morin: Report (1998) authored by theHonourable Fred Kaufman and the Inquiry into Pediatric Forensic Pathology in Ontario: Report (2008) conducted by the HonourableStephen T. Goudge provide two striking examples where “[s]eemingly solid and impartial, but flawed, forensic scientific opinion hasplayed a prominent role in miscarriages of justiceˮ: para. 105.

Other reports outline the critical need for impartial and independent expertevidence in civil litigation: ibid., at para. 106; see the Right Honourable Lord Woolf, Access to Justice: Final Report (1996); theHonourable Coulter A. Osborne, Civil Justice Reform Project:

Summary of Findings & Recommendations (2007). [30] I do not go so far as was done by the Newfoundland Supreme Court in McNamara Construction Co v NewfoundlandTransshipment Ltd et al, (NL SCTD). In that case, Orsborn J (as he then was) placed no reliance at all on thePlaintiff’s expert evidence and her report. Here, the partisanship goes to weight, not admissibility. [31] I point these out as an observation on Mr. Manek’s reports. I conclude that I need to treat his reports with caution. I do nothave the same concerns about Ms. Pisko’s reports. That does not mean that I simply accept her reports over Mr.

Manek’s, but herindependence gives me greater reason to be confident in her opinions. Legal Principles [32] Obviously, I am approaching this task pursuant to s 19 of the Federal Child Support Guidelines: Imputing income 19.

(1) The court may impute such amount of income to a spouse as it considers appropriate in the circumstances, which circumstancesinclude the following: (

a) the spouse is intentionally under-employed or unemployed, other than where the under-employment or unemployment isrequired by the needs of a child of the marriage or any child under the age of majority or by the reasonable educational or health needs ofthe spouse; (

b) the spouse is exempt from paying federal or provincial income tax; (

c) the spouse lives in a country that has effective rates of income tax that are significantly lower than those in Canada; (

d) it appears that income has been diverted which would affect the level of child support to be determined under these Guidelines; (

e) the spouse’s property is not reasonably utilized to generate income; (

f) the spouse has failed to provide income information when under a legal obligation to do so; (

g) the spouse unreasonably deducts expenses from income; (

h) the spouse derives a significant portion of income from dividends, capital gains or other sources that are taxed at a lower ratethan employment or business income or that are exempt from tax; and (

i) the spouse is a beneficiary under a trust and is or will be in receipt of income or other benefits from the trust. Reasonableness of Expenses

(2) For the purpose of paragraph (1)(g), the reasonableness of an expense deduction is not solely governed by whether the deductionis permitted under the Income Tax Act. SOR/2000-337, s. 5. [33] DKL’s counsel has referenced the case law which has dealt with adding back capital cost allowance: Jaasma v Jaasma, 1999ABQB 764, and Beaudry v Beaudry, 2010 ABQB 119. [34] In Jaasma, Lee J does an excellent review of case law from other jurisdictions. In particular, he cites the Manitoba Court ofAppeal decision in Cornelius v Andres, . There, the Court held at para 29: In

summary, if one can extrapolate a

summary, it would appear that the following are factors that have been considered in decidingwhether or not CCA deductions should be imputed back into income:

1. Was the CCA deduction an actual expense in the year? 2. Was the CCA deduction greater than or less than the cost of acquisitions during the same time period? 3. Was the CCA deduction greater than or less than the repayments of principal with respect to chattels in question? 4. Was the CCA deduction the maximum allowable CCA deduction? 5. Was it necessary to take the CCA deduction in that year? 6. How much of a loss in a business year resulted in that year? 7. Are the chattels for which the CCA was claimed truly needed for business purposes? 8. Do the chattels for which the CCA was claimed truly depreciate? 9.

Is it foreseeable that future chattel purchases will not be required? 10. Is there a pattern of spending which establishes a greater real income than income tax returns indicate? 11. If the children were living with the spouse, would they benefit from the actual income earned by the spouse? 12. Is there a dire need for child support? [35] The Manitoba Court of Appeal cites with approval the Alberta Court of Appeal decision in Levesque v Levesque, .

In Levesque, the Court of Appeal stated at para 13: The calculation of gross income does not, of course, work as simply for the self-employed as for those who are employed for wages.They have business expenses that must be put against gross income. For them, the judge must do a calculation of what, as near as can be,would be gross income were the party employed for wages. While we cannot offer detailed assistance, we warn judges not necessarily touse the tests employed by the Income Tax Act for the calculation of expenses.

Some of these, as, for example, capital cost allowance,reflect tax policy not related to the issue before us. [36] In Beaudry, Nielsen J references Levesque, Jaasma and Balaban v Balaban, 2001 ABQB 323. At paras 29 and 30 he states: [29] The situation with respect to the Capital Cost Allowance deductions is somewhat different.

Our Courts have held in the pastthat it is appropriate to include the Capital Cost Allowance deduction in income for Guideline purposes if such deduction is anaccounting entry only for the purposes of artificially reducing income: Balaban v Balaban, 2001 ABQB 323 , 287 A.R. 369,Jaasma v Jaasma, 1999 ABQB 764 , 249 A.R. 357, Levesque v Levesque (supra). [30] Based on the evidence before me, I am satisfied that the deductions for Capital Cost Allowances in both 2007 and 2008 byMrs. Beaudry were in fact accounting entries only taken to reduce her income.

While such deductions are completely proper pursuant tothe Income Tax Act, in the circumstances of this case, these amounts should be added to Mrs. Beaudry’s income for 2007 and 2008 todetermine her income for the purposes of the Guidelines. [37] Chekowski v Howland, 2013 ABCA 299 is cited essentially for its conclusion at para 22: In conclusion, Mr.

Howland has taken as income the money that was fairly available to him and that reflected his duties with Gridline.There was no evidence that he tried to reduce his personal income or that he increased Gridline's pre-tax corporate income after childsupport obligations were placed on him in an attempt to evade his responsibilities. [38] There, the issue was the extent to which retained earnings should be added back into income for child support purposes. [39] No cases have been cited with respect to the approach suggested by Mr.

Manek relating to the leasing costs for equipmentused primarily with the fertilizer business. As well, no cases have been cited relating to the Court’s ability to impute income on the basisthat the payor is not as successful in his business endeavours than he should be, using industry comparisons.

This argument is in effect anargument that DKL is underemployed, and that type of argument brings into play s 19(1)(1) of the Guidelines. [40] I would be remiss in not recognizing Hunt v Smolis-Hunt, 2001 ABCA 229 and the Court of Appeal’s determination thatimputing income for child support purposes may only be done when the payor has been found to be deliberately avoiding his childsupport obligations. I note, however, that Hunt v Smolis-Hunt is more concerned with under-employment issues and s 19(1)(

a) issues.In my view, that decision should be limited so s 19(1)(

a) claims, and it has no application to claims under other subsections of s 19. Thatis consistent with the approach taken by the Court of Appeal in Heximer v Heximer, 2009 ABCA 242. [41] At the end of the legal analysis, the statement at para 30 of Cornelius v Andres is perhaps the most helpful: It does not appear as if a general rule can easily be established as to when CCA expenditures should be imputed back into income as eachcase must be decided on its own merits.

The business of the individual seeking to maintain the deduction must be scrutinized as well asthe equipment on which the deduction is being claimed. I also accept that when one looks at the business, it is part of the assessment toevaluate what CCA claims have been made in past years, as well as the justification advanced by the party making the claim. Analysis

[ 42 ] The information presented at the JDR does not satisfy me that DKL has conducted his business affairs in a manner deliberately intended to reduce or avoid his child support obligations. The fact that he has for some time agreed to pay child support on a deemed income of $80,000 per annum suggests that he recognizes that his available funds for child support purposes are greater than what line 150 of his income tax returns show. [ 43 ] I would observe that this is not uncommon with farmers.

While I cannot likely take judicial notice of this, my experience in practice and my experience with farmers’ tax returns while I have been on the bench suggests that many farmers have the ability to minimize their income tax obligations and frequently have surprisingly low incomes and pay little tax when viewed in the context of their net worth. [ 44 ] Most farming operations have assets of hundreds of thousands of dollars if not millions of dollars. Many carry large amounts of debt. All run significant risks relating to weather and market conditions.

It would not be unfair to observe that family farming operations are as much matters of lifestyle and tradition as they are money-making ventures. Often, the success of the operation is not realized until it is sold at the end of the farming career. [ 45 ] The information presented suggests that DKL lives a modest lifestyle.

However, the parties did not have a long enough relationship to judge the standard of living his children are entitled to by the lifestyle he has chosen. [ 46 ] The question to ask, in the context of the Guidelines, is the extent to which DKL should be contributing to the parties’ children having regard to the funds available to him. [ 47 ] For me, the most significant factor to consider is DKL’s gross income. Ms.

Pisko’s May 29, 2015 report details his revenues: 2006 $491,942 2007 $577,158 2008 $951,710 2009 $971,756 2010 $1,030,652 2011 $1,847,982 2012 $1,435,012 2013 $1,823,926 [ 48 ] His farming income after expenses but before the inventory adjustments has been: 2006 $42,813 2007 $73,312 2008 $21,467 2009 ($31,222) 2010 ($140,171) 2011 $206,824 2012 ($170,734) 2013 ($26,110) [ 49 ] After inventory adjustments, the farm income has been: 2006 ($6,687) 2007 $3,312 2008 $967 2009 ($4,922) 2010 $5,029 2011 ($7,824) 2012 ($26,744) 2013 ($24,365) [ 50 ] When you average these results, it can be seen that the inventory adjustment is essentially a neutral factor when spread over a

number of years. That is a point made by Ms. Pisko in her reports, and is essentially agreed by Mr. Manek. [ 51 ] CCA over that period has been: 2006 $29,497 2007 $34,444 2008 $50,294 2009 $50,028 2010 $48,698 2011 $45,032 2012 $39,199 2013 $32,208 [ 52 ] For the same period, equipment lease payments have been: 2006 $54,962 2007 $43,619 2008 $77,449 2009 $143,612 2010 $299,026 2011 $341,860 2012 $567,023 2013 $495,243 Fertilizer [ 53 ] I will deal firstly with Mr. Manek’s arguments relating to fertilizer costs and crop yields.

DKL maintains that he has spent exactly what his financial statements say on fertilizer. There is no information to the contrary. Mr. Manek’s suggestion that DKL is spending too much on fertilizer may be correct, but he has no expertise to offer such an opinion. It is also a suggestion that defies logic. [ 54 ] Why would a businessman-farmer deliberately pay more for fertilizer to reduce his profits? There is no suggestion that the purchases are not legitimate, third party, arm’s-length purchases. While Mr.

Manek may be correct in suggesting that costs could be lowered, that is not within the purview of the Child Support Guidelines. S 19(1)(

g) allows for an adjustment based on unreasonable deduction of expenses from income. That is different from “unreasonably incurring expenses). Here, DKL purchased fertilizer for use in his business. He gained no personal benefit from it. Charging that expense to his business operations is normal and reasonable. The Child Support Guidelines do not, and should not, encourage the recipient to pore over the payor’s expenses and point out where the payor paid too much. [ 55 ] That would be like the spouse of a lawyer complaining that the lawyer’s profits were too little because he or she paid his staff too generously. S 19(1)(

g) is looking for deviations from the norm, not questioning judgment calls in the course of business by the businessman. [ 56 ] No adjustment to DKL’s income should be made on account of fertilizer costs. Crop Yields [ 57 ] I make the same determination relating to the production rates achieved by DKL. The incomes of business people, including farmers, are determined by the activities of the individual, not on the basis of statistics. [ 58 ] Again, Mr. Manek has no expertise enabling him to comment on DKL’s skills as a farmer.

But adjusting his income to deem his production to meet the “norm” as disclosed in statistics would be similar to the above lawyer’s spouse suggesting that income for child support purposes should be based on the “average” lawyer where the average is higher than the lawyer’s actual income. [ 59 ] There is no basis to do this, other than in the context of deliberate underemployment (in Alberta), and there is certainly no evidence of that. Machinery Repairs

[ 60 ] Mr. Manek is critical of DKL’s equipment repair costs and suggests that they should be lower. That issue is outside of his area of expertise, and I see no basis in the materials before me to make any adjustment to DKL’s income on account of equipment repairs, recognizing that the costs are actual cash outlays. CCA [ 61 ] CCA is a non-cash item. The theory is that a taxpayer who requires depreciating assets in his or her business should be able to expense the equipment over time. It is an artificial adjustment to income, as it is discretionary.

The taxpayer need only use so much of the CCA available to him or her as is necessary to reduce income to the optimal level for that taxpayer. [ 62 ] The cases cited by DKL show that CCA has been added back in a number of cases. The cases cited (and the cases referenced in those) range from a 10% add-back to 100%. [ 63 ] Mr. Manek suggests that 2/3 is the right number here; Ms.

Pisko suggests that the amounts actually claimed are reasonable but recognizes that there is an argument that would have an add-back set as high as 33%. [ 64 ] It appears to be common ground that most of the equipment DKL has is depreciated at a 30% rate (15% for the year of acquisition). Assuming full depreciation is taken, after 6 years, the equipment will have been depreciated to about 14% of its acquisition cost. [ 65 ] Information presented by Mr.

Manek, which was not disputed or contradicted, suggests that farm equipment has a useable life of perhaps 20 years, and an optimal life of 13.5 years. [ 66 ] No information was provided as to whether DKL is setting aside the claimed CCA amounts for future equipment replacements. I do not see that as the critical issue relating to depreciation.

The real issue for child support purposes is whether at all or the extent to which the CCA amounts should be made available for child support. [ 67 ] CCA is discretionary; from a practical point of view it seems highly unlikely that equipment with an optimal life of 13.5 years and a useable life of 20 years would depreciate to less than 15% of its original value after 6 years of use.

That is a generality and depends on many factors such as the extent of use, extent of maintenance and upkeep as well as good luck. [ 68 ] Nevertheless, for the purposes of determining child support income levels here, I conclude that the depreciation rates are generous. I also take into account DKL’s age, and conclude that he is likely to remain farming for some time so replacement of equipment is likely, and depreciation is a real issue for him. [ 69 ] As a result of this, I conclude that 50% of the depreciation claimed should be added back to DKL’s income for child support calculation purposes.

It is not as if the entire amount gets paid out as child support; it is only a relatively small percentage of that amount. It is a real expense in a farming operation. Without detailed evidence as to actual depreciation rates, usage of particular pieces of equipment and the age of particular pieces of equipment, I am left with determining this issue on generalities. Leased Equipment [ 70 ] This is the area with the biggest swing, having regard to the amounts paid by DKL for leased equipment. [ 71 ] Mr.

Manek’s argument that 50% of the lease payments should be added back to DKL’s income for child support purposes is based on his contention that DKL will be able to purchase the equipment at significantly less than market value at the expiry of the lease term. He bases this on a review of leases provided to him by DKL as part of disclosure. [ 72 ] The discussion at the JDR was to the effect that Mr. Manek had not reviewed all of the leases. DKL maintains that the “option” price at the end of the term of the lease is based on the expected market value of the equipment at the time of exercise of the option. Ms.

Reeves argues that this “market value” option payment is required by CCRA so that an equipment lease will qualify as a lease and not be treated or characterized as a rent-to-own or conditional sale agreement. [ 73 ] The tax treatment of these two types of agreements is different: with leases, the entire payment is deductible from income. For purchase agreements, the interest is deductible, as is the applicable depreciation. Principal payments are not. [ 74 ] Mr. Manek’s approach to this issue is, as far as I can tell, novel, but it has some attraction.

It seems that there are advantages to leasing that have the effect of lowering taxable income. Because of the ability to deduct the full lease payment, instead of interest and depreciation, the taxpayer can “depreciate” an asset more quickly than if purchased up front. There is flexibility in being able to get rid of unsatisfactory or unnecessary equipment. There are operating advantages to using newer equipment. There are advantages in not having to employ capital in the acquisition of operating equipment. [ 75 ] Not all of the value of economic activity is reflected in line 150 of a tax return.

Nevertheless, the lease payments are actual cash outlays. My understanding is that generally, over the long term, it is more expensive to lease than to purchase. [ 76 ] Instinctively, however, there must be some value to this arrangement. The difficulty is in putting a number to it. [ 77 ] If I understand the “philosophy” applicable to equipment leases, payments are based on the financing cost of the whole value of the equipment for the term of the lease, plus the estimated depreciation on the equipment over the term of the lease, plus the lessee’s costs, overhead and profit.

I have no information (or any idea) as to what the lessee’s costs, overhead and anticipated profit may be on leased equipment. I expect that the answer to that depends mainly on the type of equipment, but there are undoubtedly many factors. It is

likely impossible to generalize or use averages to create an accurate estimate of these issues.

To be accurate, there would have to be a review of all equipment leases, and expert testimony from someone versed in the equipment leasing business and with farm equipment values. [ 78 ] At the end of the term, the lessee will have the option of buying the equipment for its then remaining value (having essentially paid for all of the profit, dealer expenses and depreciation over the term) or turning the equipment back into the dealer and owing nothing. [ 79 ] The benefit for the lessee is that the payments over the term are lower than the payments would be if the lessee were purchasing the equipment; the detriment is that at the end of the lease term, he has nothing other than the right to buy the equipment for what it is then worth. [ 80 ] Here, Mr.

Manek proceeded with limited information. I think it unlikely that very many of DKL’s leases provide for nominal payments on the expiry date. That appears contrary to income tax policy; and in the absence of evidence that the lease payments essentially reflect the purchase price of the equipment amortized over the lease term, I am not prepared on the information before me to make that finding or proceed on that assumption. [ 81 ] That being said, if farm equipment generally enjoys a 13.5-year useable life, the availability of the option to purchase at a predetermined price has some value to it.

Payments over the lease term are lower than the purchase costs would be; profits would presumably be higher, and the financing of familiar machinery at the end of the lease term may be attractive. [ 82 ] I do not see, however, that 50% of the lease payments should be considered “principal payments” and added back to DKL’s income. [ 83 ] I recognize the difference between capital leases and operating leases, but if the leases in question were capital leases, DKL would also have the ability to deduct not only the interest payments but also to claim CCA on the full purchase price of the equipment. [ 84 ] At the end of the analysis, Mr.

Manek’s assessment of a 50% benefit appears to be an arbitrary figure with no support for it from the information presented. [ 85 ] Ms. Pisko provided an analysis at para 8.11 of her May 29, 2015 report. There, she has differentiated between leased equipment used for the fertilizer operation and excluded consideration of that equipment. With respect to leased farming equipment, she has for the purposes of her calculations added 50% of the lease payments back to DKL’s income. From that, however, she has deducted estimated financing costs and deducted 20% for depreciation.

That approach, along with her add-back of 1/3 of the depreciation and the personal use component discussed briefly below, leads to her

Schedule 4. That

Schedule would deem income averaging about $97,000 per annum to DKL over the full 8-year period. [ 86 ] More recently, from 2010 on (when the size of the farm expanded and the commercial fertilizing business started), the average deemed income would be approximately $130,000. [ 87 ] It seems to me that Ms. Pisko’s approach is preferable. I recognize that she provided these calculations as an alternate view, as her opinion is that there should be no adjustment relating to lease payments. That being said, I do not see that Ms.

Pisko’s alternate calculations take into account the negative aspects of leasing and the reality that the lease payments are an actual out-of-pocket expense. There is nothing artificial about them. They are calculated on the basis that DKL will always exercise options which are favourable to him. [ 88 ] Nevertheless, there is a logic to Ms. Pisko’s alternate calculations, and from my perspective her approach to the lease payments is preferable to the approach suggested by Mr. Manek.

However, I think that her alternate calculation should be adjusted by reducing the base add-back amount (50%) by a negative contingency factor of 25% to take into account these negatives and DKL’s actual cash position. [ 89 ] It should be noted in fairness to Mr. Manek that he had limited production of the actual equipment leases, and was in the position of having to make estimates based on less information that was available to Ms. Pisko. His approach to the equipment leasing issue in general, in the context of farming operations such as DKL’s, has been very helpful.

Personal Use [ 90 ] The two experts appear to be in agreement with the personal use amount to be added back to DLGL’s income relating to the personal benefits he obtains from some of the farm expenses. The agreed amounts, or range, appear reasonable, if not modest. Conclusion [ 91 ] I thus conclude that DKL’s income for the purposes of child support should be calculated adjusting his line 150 income in accordance with s 19 of the Guidelines as follows: 1. 50% of claimed CCA should be added back; 2. Lease payments should be added back in the manner calculated by Ms.

Pisko, subject to a 25% negative contingency being applied to the basic add-back rate; and 3. Personal use should be added back as agreed between the experts.

[ 92 ] I trust that the experts can provide these calculations easily and economically. 2014 and Ongoing [ 93 ] The difficulty with the information before me is that it is of limited value on an ongoing basis, unless the parties are content in having Ms. Pisko (checked by Mr.

Manek) calculate DKL’s child support income in accordance with the above formula. [ 94 ] I do not think that it was the intent of the drafters of the Child Support Guidelines to require guideline incomes to be calculated on an ongoing basis by chartered accountants. [ 95 ] For complicated situations such as this, it would be preferable to determine a formula that will provide a reasonable level of support for the children as well as some certainty for the parents. It is easy enough to do what the experts did by way of assessing a personal benefit component and add that back.

It is easy enough to add back 50% of the claimed CCA. The difficulty comes with the treatment of the lease expenses. To do what Ms. Pisko did, you have to know which lease payments are to be included and her calculations are more sophisticated than simply applying a percentage. [ 96 ] My sense of “rough justice” would have been to simply add 25% of the total lease payments back into income.

That would be calculable from the financial statements themselves and would not require detailed calculations. [ 97 ] From 2010 onward, when I add back that amount, as well as 50% of the CCA and the personal use amounts, I come up with numbers that are not completely dissimilar to those calculated by Ms. Pisko in

Schedule 4. That may be coincidence, so I encourage the parties to see if they can resolve 2014 (and future years) on the basis of a formula. [ 98 ] Since the resulting child support payments are only a fraction of the add-backs, there is utility in arriving at a formula that the parties themselves can understand and apply, even though it might not provide “perfect” calculations. Effective Date [ 99 ] Counsel for CGL argues that the child support adjustments should be retroactive to 2006.

Counsel for DKL argues that the effective date should be 2010. [ 100 ] The Divorce Judgment does not contain what is now the “standard” annual disclosure obligations. As noted above, CGL first sought updated disclosure in December, 2007. DKL complied in February, 2008.

An application for increased child support was brought in July, 2008. [ 101 ] While there are arguments concerning delay and a technical argument as to whether the application before me was a new application dating from 2010, I am satisfied that the date of CGL’s initial request for updated financial information should be considered to be the effective date of notice. [ 102 ] DBS v SRG , [2006] 2 SCR 231, 2006 SCC 37 , holds that the general rule should reflect the date of effective notice.

In this case, that would be December, 2007. [ 103 ] Curiously, if one of the alternate approaches is used – the date the amount of child support should have changed - it is in DKL’s interests to have 2006 included, as his obligations for 2006 were actually slightly lower than the amount estimated for the purposes of the divorce judgment. [ 104 ] He had not sought to lower his payments, but in reviewing the history of the matter, it seems fairer to adjust child support going back to 2006.

Conclusion [ 105 ] I trust this memorandum will provide sufficient direction for the parties to calculate with the assistance of their experts any child support arrears and to calculate ongoing child support payments. [ 106 ] I will reserve jurisdiction to deal with the actual calculation of any arrears and the setting of ongoing payments. [ 107 ] I am grateful to counsel for their cooperation during this matter and for their professionalism in the presentation of their clients’ positions. Heard on the 18 th day of June, 2015. Dated at the City of Edmonton, Alberta, this 4th day of February, 2016.

Robert A. Graesser J.C.Q.B.A. Appearances: Darren W. Moroz Darren W. Moroz Professional Corporation for the Plaintiff Michele J. Reeves Attia Reeves Tropak for the Defendant