McCarty v McCarty, 2016 ABQB 91

Court of Queen ’ s Bench of Alberta Citation: McCarty v McCarty, 2016 ABQB 91 Date: 20160212 Docket: 4803 142575 Registry: Edmonton Between: Patricia Jane McCarty Plaintiff - and - Richard Henry McCarty Defendant _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice W.N. Renke _______________________________________________________ [ 1 ] Patricia Jane McCarty and Richard Henry McCarty were married in 1992. They have two children, C (age 21) and D (age 17). Mr. and Ms. McCarty separated in 2007 and entered into Minutes of Settlement.

They were divorced on July 29, 2008, pursuant to the Divorce Judgment and Corollary Relief Order of Justice Greckol (the Divorce Judgment). In 2009, the parties agreed that C would live with Mr. McCarty and D would live with Ms. McCarty. A Consent Order was granted by Justice Greckol on August 21, 2009 respecting custody and access and child support (the Consent Order). [ 2 ] Ms. McCarty sought three orders in a Special Chambers application. She applied for an order directing Mr. McCarty to reimburse her for orthodontic expenses incurred for D, as required by the Consent Order.

She also applied for orders varying child support under the Consent Order retroactively to January 1, 2010 and prospectively. The variation applications relied on the argument that the amount of child support for D paid by Mr. McCarty has not fairly reflected all the money available to him for the payment of child support and that all or part of the pre-tax income of corporations controlled by Mr. McCarty should be included in his income. The application proceeded on the basis of the affidavits of Ms. McCarty of April 9, 2015 and September 3, 2015 and Mr.

McCarty’s affidavit of August 27, 2015. [ 3 ] I have concluded that Mr. McCarty is obligated to reimburse Ms. McCarty in the amount of $5,966 for the payment of D’s orthodontic expenses, as required by the Consent Order.

[ 4 ] I have concluded that (

a) Mr. McCarty’s income for the purposes of the payment of child support must include pre-tax income of his corporations as detailed below; and (

b) Mr. McCarty is obligated to pay retroactive child support based on the inclusion of pre-tax income of his corporations for the period April 1, 2012 to December 31, 2014; but that (

c) the retroactive child support award is stayed pending review, on or after June 2, 2016, of the actual earnings of the corporations in 2015; (

d) Mr. McCarty’s income for child support purposes for 2015 and on an ongoing basis shall be determined in the review; and (

e) the terms of the stay include Mr. McCarty’s obligation to continue to pay child support as set out in the Consent Order pending the review. The terms of the stay and the elements of my order are detailed below. [ 5 ] My reasons follow. Table of Contents I. ORTHODONTIC EXPENSES . 2 A. BACKGROUND .. 2 B. ISSUES . 5 1. Was Mr. McCarty required by the Consent Order to carry insurance for orthodontic expenses? 5 2. If Mr. McCarty violated the Consent Order, what is Ms. McCarty’s remedy? . 8 3. What, if anything, should be ordered respecting additional orthodontic or dental work for D? 9 II.

RETROACTIVE VARIATION OF CHILD SUPPORT . 10 A. PRELIMINARY ISSUES . 10 1. Evidential issues . 10 2. Corporations and related persons . 11 3. Objectives of the Guidelines . 12 B. Nature of the application . 13 1. What remedy did Ms. McCarty seek – rescission, setting aside, or variation? . 13 2. What tests must be addressed to determine whether Ms. McCarty is entitled to a retroactive child support order? . 16 C.

SECTION 18 AND THE “AVAILABILITY” OF CORPORATE INCOME .. 20 1. What is the interpretive orientation to s. 18? . 21 2. What was Ms. McCarty’s initial position? . 22 3. What was Mr. McCarty’s position as set out in the Pisko Report? . 22 4. What was Ms. McCarty’s response to the Pisko Report? . 25 5. Was Ms. McCarty’s response to the Pisko Report valid? . 26 6. Was the approach of the parties to “available” pre-tax corporate income correct? . 28 7. What are the consequences of the parties’ approaches to “available” pre-tax corporate income? 32 D.

SECTION 18 AND ADJUSTMENTS TO CORPORATE INCOME .. 33 1. Did Mr. McCarty receive benefits from his corporations that should be included in the pre-tax income of the corporations under s. 18(2)? . 33 2. Did C receive benefits from the corporations that should be included in the pre-tax income of the corporations under s. 18(2)? . 39 3. What is the total amount that should be added to the pre-tax income of the corporations under s. 18(2)? 41

4. What are the total amounts that should be added to Mr. McCarty’s income under s. 18? . 41 E. APPLICATION OF THE RETROACTIVE VARIATION APPLICATION FACTORS . 41 1. Did Ms. McCarty have a reasonable excuse for not seeking a variation of child support at an earlier time? 42 2. Did Mr. McCarty engage in “blameworthy” conduct? . 44 3. Did D’s circumstances justify a retroactive variation of child support? . 50 4. Would a retroactive child support award cause hardship to Mr. McCarty? . 52 5. Is Ms. McCarty entitled to a retroactive variation of the Consent Order respecting child support? 53 F.

PERIOD OF RETROACTIVE CHILD SUPPORT AWARD .. 54 1. Approach . 54 2. To what date should the retroactive variation of child support extend? . 54 G. SECTION 19(1)(

E) AND UNREASONABLE FAILURE TO GENERATE INCOME .. 56 H. THE DOUBLE-COUNTING ISSUE .. 58 III. TERMS OF ORDER .. 59 IV. COSTS . 61 I. ORTHODONTIC EXPENSES A. BACKGROUND [ 6 ] Clause 5.1 of the 2007 Minutes of Settlement provided as follows: The Husband shall continue to maintain the children and the Wife on his Alberta Health Care Plan and such other plans to ensure health, dental, orthodontic and vision coverage.

The parties agree that in the event the health plans do not cover all expenses relating to medical, dental, optical and orthodontic procedures for the children, or in the event that the Husband no longer has health and dental insurance through his corporations, then the Husband shall be responsible for provable extraordinary health expenses of the children and the Wife for a period of three years. The substance of this clause was repeated as paragraph 6 of the Divorce Judgment. [ 7 ] The Consent Order vacated paragraph 6 of the Divorce Judgment. The Consent Order provides as follows: 6. ... the Defendant [Mr.

McCarty] shall continue to maintain the children of the marriage on his Alberta Health Care, Blue Cross coverage, Quick Card ( sic ) dental and other plans available to him to ensure health, dental, orthodontic and vision coverage. 7. ... the Defendant shall continue to maintain the Plaintiff [Ms. McCarty] on his Alberta Health Care, Blue Cross coverage, Quick Card dental and other plans available to him to ensure health, dental, orthodontic and vision coverage until June 30 th , 2010. 8. ... the Plaintiff shall be responsible for all of the

section 7 expenses relating to [D] and the Defendant shall be responsible for all of the

section 7 expenses relating to [C]. I note that in para 5 of her April affidavit, Ms. McCarty asserted that Mr. McCarty’s obligations relating to payment of orthodontic expenses were under the “Minutes.” That reference was inaccurate. Responsibilities are set by the Consent Order. The basis of responsibility is a legal matter and technically outside the scope of an affidavit so Ms. McCarty’s error is not significant. The inaccuracy was not referred to in the concise letters or argument and in any event caused no prejudice to Mr. McCarty. [ 8 ] In para 5 of her April affidavit, Ms.

McCarty stated that It was recommended that our son [D] have braces and I made those arrangements. The Defendant [Mr. McCarty] refused to contribute to this cost. The braces and associated medications cost $9615.00 and I was able to use my benefit plan to recover $3649.00 only. This leaves $5,966 as the amount in dispute. The dates of the orthodontic services were not provided. Mr. McCarty registered no objection to the orthodontic services provided or the cost of these services. [ 9 ] It appears that Mr. McCarty covered D’s dental-related expenses until January 2012: Ms.

McCarty’s September affidavit at para 5; Quikcard Claim Payments

summary relating to D for dental services over the period 25/11/2009 to 20/03/2012 attached as the second page of Exhibit C to Mr. McCarty’s affidavit. [ 10 ] Mr. McCarty responded to Ms. McCarty’s claims in his affidavit at paras 7 and 8:

7. I maintained the children on my Alberta Health Care until the time when payments were no longer required. I did not ever haveBlue Cross coverage, the Plaintiff did. I had Quikcard medical and dental coverage (which is basically that I pay in to the plan andpayments are made from the plan and an administrative charge is assessed). Orthodontic coverage is not available on Quikcard.Quikcard is basically a savings scheme for medical and dental expenses. 8. .... Under the terms of the Consent Order ... I am required to continue Blue Cross coverage, Quikcard dental and other plansavailable to me.

I continued Quikcard coverage and the Plaintiff had Blue Cross coverage. The Consent Order ... is clear ... that I amresponsible for

section 7 expenses relating to [C] and the Plaintiff is responsible for

section 7 expenses relating to [D] .... [11] Ms. McCarty disputed the claim that Quikcard does not provide orthodontic coverage. She attached as Exhibit A to herSeptember affidavit a copy of a Quikcard webpage. Under the headings “Quikcard Insurance Products” and “Dental” the webpage refersto “Basic, major restorative and orthodontic dental services.” [12] Mr. McCarty has not, through insurance coverage, provided any reimbursement to Ms. McCarty respecting the braces andassociated costs. Three questions arise: (1) was Mr.

McCarty required by the Consent Order to have insurance coverage in placepermitting the reimbursement of Ms. McCarty? (2) if so, what is Ms. McCarty’s remedy? (3) what, if anything, should be orderedrespecting additional orthodontic or dental work for D? B. ISSUES 1. Was Mr. McCarty required by the Consent Order to carry insurance fororthodontic expenses? [13] The answer to this question might appear straightforward. Paragraph 6 of the Consent Order provides that Mr.

McCarty “shallcontinue to maintain the children of the marriage on his Alberta Health Care, Blue Cross coverage, Quick Card dental and other plansavailable to him to ensure ... orthodontic ... coverage.” Paragraph 6 does not have an end date, as does paragraph 7 of the Consent Order(June 30, 2010). Paragraph 6 of the Divorce Judgment, which incorporated the substance of clause 5.1 of the Minutes of Settlement, alsohad an end date, but paragraph 6 of the Divorce Judgment was vacated by the Consent Order. It no longer has any application. [14] The Consent Order provides two bases for Mr.

McCarty’s obligation to maintain orthodontic insurance coverage and onebasis for the potential negation of this obligation. (

a) Quikcard coverage [15] Quikcard insurance coverage (generally) was “available to” Mr. McCarty. He had Quikcard coverage. There was no evidencethat Quikcard coverage became unavailable to Mr. McCarty. [16] Ms. McCarty’s evidence respecting the orthodontic services coverage by Quikcard is not strong. It is hearsay, but hearsay isadmissible in an interim application under rule 3.18. The Quikcard webpage, though, was attached to Ms. McCarty’s September replyaffidavit. Mr.

McCarty could not respond to this evidence in his affidavit since Family Law Practice Note 2, as it then was, did not permithim to file his own affidavit in reply. Reliance on this evidence, even though it is not precisely a “new matter” under para 3(

a) of thepractice note, would not be fair to Mr. McCarty. Regardless, the webpage is not dated. Even if it confirmed that orthodontic servicescoverage was available at some point, the evidence does not disclose whether coverage was available during the material time. Thewebpage provides no evidence about the terms of orthodontic services coverage or the circumstances in which this coverage is available.It simply says that “orthodontic dental services” are a Quikcard insurance product. At the very least, though, Ms.

McCarty has providedsome evidence about Quikcard coverage for orthodontic services and has put this matter in issue. [17] Mr. McCarty’s evidence about Quikcard coverage for orthodontic services was even weaker than Ms. McCarty’s evidence.His claim that Quikcard coverage was not available for orthodontic expenses was a bare assertion (or better bare denial) withoutevidential support. It has no evidential weight: See Guarantee Co. of North America v Gordon Capital Corp, (SCC),[1999] 3 S.C.R. 423, Iacobucci and Bastarache JJ at para 31. Mr. McCarty had been a Quikcard customer.

He intimated that he isfamiliar with the terms of coverage provided by Quikcard. In the circumstances, he bore the burden of proof on the insurance coverageissue. See Snell v Farrell, (SCC), [1990] 2 SCR 311, Sopinka J at 321: if the subject matter of an allegation liesparticularly within the knowledge of one party, that party may be required to prove it. In this case, no evidence besides his bare denialhas been provided. [18] On the Quikcard issue, then, I am left with weak evidence rebutted by no evidence, or (if the burden of proof on this issue lieson Mr. McCarty) with no evidence rebutting weak evidence.

On the evidence in this application, scant as it is, I would find that it islikely that Quikcard provides orthodontic services coverage. I need not rest my finding respecting Mr. McCarty’s obligation to maintaininsurance coverage on the scope of Quikcard coverage, however. (

b) other plans available to Mr. McCarty [19] Regardless of whether Quikcard provided orthodontic services coverage, Mr. McCarty was required by paragraph 6 to carrythis coverage through another insurance provider. Paragraph 6 refers to “other plans available to him to ensure ... orthodontic coverage.”Mr. McCarty provided no evidence that “other plans” were not “available to him.” He did not deny that other coverage was available.Hence, paragraph 6 imposes an obligation on Mr. McCarty to maintain orthodontic insurance coverage. On the facts, he did not. (

c) negation of obligation through paragraph 8? [20] What stands in the way of this straightforward approach to Mr. McCarty’s responsibilities under paragraph 6 is paragraph 8 of

the Consent Order. Under paragraph 8, Mr. McCarty shall be responsible for all of the s. 7 expenses relating to C and Ms. McCarty shallbe responsible for all of the s. 7 expenses relating to D. But orthodontic services expenses are s. 7 expenses. Paragraph 7(1)(

c) of theFederal Child Support Guidelines (the Guidelines) includes as expenses “health-related expenses that exceed insurance reimbursementby at least $100 annually, including orthodontic treatment ....” [21] Mr. McCarty made the following argument: D’s orthodontic expenses were not covered by insurance under paragraph 6. Theexpenses then were s. 7 expenses. Under paragraph 8, Ms. McCarty was responsible for these expenses because the expenses were forD. [22] Although court orders are often interpreted in litigation, there is little authority respecting the principles of

interpretation forcourt orders: see John Tarrant, “Construing undertakings and court orders” (2008), 82 Australian Law Journal 82. In the absence ofspecial rules, general rules for interpreting texts should apply. Three are important. First, the order should be read as a whole; clauseswhich might in isolation appear to contradict one another should be reconciled, so long as that is a reasonable reading of the order.Second, the general yields to the specific. Justices La Forest and McLachlin, as she then was, provided useful guidance in BG ChecoInternational Ltd. v.

British Columbia Hydro and Power Authority, (SCC), [1993] 1 S.C.R. 12 at 23 – 24: It is a cardinal rule of the construction of contracts that the various parts of the contract are to be interpreted in the context of theintentions of the parties as evident from the contract as a whole …. Where there are apparent inconsistencies between different terms of acontract, the court should attempt to find an

interpretation which can reasonably give meaning to each of the terms in question. Only if aninterpretation giving reasonable consistency to the terms in question cannot be found will the court rule one clause or the otherineffective …. In this process, the terms will, if reasonably possible, be reconciled by construing one term as a qualification of the otherterm ….

A frequent result of this kind of analysis will be that general terms of a contract will be seen to be qualified by specific terms -or, to put it another way, where there is apparent conflict between a general term and a specific term, the terms may be reconciled bytaking the parties to have intended the scope of the general term to not extend to the subject-matter of the specific term. Third, resort should be had to extrinsic evidence only if an order is ambiguous, meaning that the language supports at least tworeasonable

interpretations and without the evidence the

interpretation cannot be decided one way or the other: Ziegler v Green Acres(Pine Lake) Ltd, 2013 ABQB 349, Yamauchi J at paras12 and 36. [23] In my opinion, the Consent Order is not ambiguous. Paragraphs 6 and 8 deal with different matters or at least different aspectsof similar matters. Paragraph 6 was an order under s. 6 of the Guidelines: 6 In making a child support order, where medical or dental insurance coverage for the child is available to either spouse through hisor her employer or otherwise at a reasonable rate, the court may order that coverage be acquired or continued.

Such an order is a means for defraying costs that the parties would otherwise have to absorb personally under s. 7 of the Guidelines.Paragraph 6 of the Consent Order was targeted at the identified insured expenses. It required Mr. McCarty to maintain the specifiedhealth insurance coverages for his children. Should covered expenses be incurred, insurance would then be available so that Mr. and Ms.McCarty would not have to look to personal resources to cover those expenses. Paragraph 8 concerned other types of s. 7 expenses.(Conceivably, health insurance might not cover 100% of the costs of the identified expenses.

The uninsured portion, then, could fallunder paragraph 8.) [24] Were Mr. McCarty’s reading of paragraphs 6 and 8 correct, he could simply have allowed all coverages to lapse immediatelyafter the Consent Order was granted leaving paragraph 8 to sort out responsibilities for the s. 7 expenses. That would drain paragraph 6of any purpose or value. [25] Since the Consent Order is not ambiguous, I need not consider extrinsic evidence, particularly evidence relating to the parties’intentions or the history of their interactions predating the Consent Order. [26] Hence, paragraph 8 does not negate Mr.

McCarty’s responsibilities under paragraph 6 of the Consent Order. 2. If Mr. McCarty violated the Consent Order, what is Ms. McCarty’s remedy? [27] The answer to this question too might seem straightforward. Mr. McCarty failed to maintain the required insurance coverage;Ms. McCarty has been left responsible for the entire amount of the orthodontic services expenses; Ms. McCarty should therefore bereimbursed so she is put into as good a position as she would have been in had Mr. McCarty complied with the Consent Order. Ms.McCarty has mitigated her injury through obtaining reimbursement from her own insurer.

She claims only the balance owing from Mr.McCarty, not the full cost of the braces and associated expenses. [28] Getting from Mr. McCarty’s non-compliance with the Consent Order to a payment to Ms. McCarty entails some complexity.Ms. McCarty does not have a cause of action against Mr. McCarty based (only) on the violation of the court order: MacDonald &Freund v Haljan, 1996 ABCA 387, Hetherington JA at para 12. Contempt of court would not be useful avenue of approach. Contemptwas neither raised nor argued and rightly so: aside from any question of reasonable excuse, under rule 10.52(3)(a)(

i) civil contempt maynot be declared for an “order to pay money” (which paragraph 6 may well be) and rule 10.53 does not appear to allow for acompensation order. [29] The appropriate remedy is a variation of the Consent Order, providing for a lump sum payment of retroactive child support todeal with the specific non-compliance by Mr. McCarty. This was the type of solution adopted by Justice Jollimore in Galbraith vGalbraith, 2014 NSSC 337 at paras 5 and 70. The change of circumstances warranting the variation is the failure by Mr.

McCarty tohave maintained the insurance coverage required by paragraph 6 of the Consent Order and Ms. McCarty’s consequent shouldering of theburden of the orthodontic services payments without insurance coverage relief through Mr. McCarty’s insurer. As in the case of otherforms of retroactive child support relief, the remedy is not truly retroactive. It is a specification and quantification of the obligation thathad been borne by Mr. McCarty under the Consent Order.

[ 30 ] The insurance coverage obligation was imposed on Mr. McCarty “outright” so the expense balance should not be proportionately shared. I recognize that it is possible that the entire amount of the balance would not have been covered by insurance proceeds, but Mr. McCarty provided no evidence on this issue. The evidence we have is of his obligation, his failure to maintain insurance without explanation, and the amount spent by Ms. McCarty. [ 31 ] Mr. McCarty shall therefore be ordered to make a lump sum payment to Ms. McCarty of $5,966. This amount shall be paid to Ms. McCarty by April 15, 2016. 3.

What, if anything, should be ordered respecting additional orthodontic or dental work for D? [ 32 ] In para 4 of her September affidavit, Ms. McCarty stated that ... [D] now also requires a root canal treatment and the costs are estimated at $3610. I have put a claim through Blue Cross but so far they have only reimbursed $84.00. Treatment estimates were attached as Exhibit B to her affidavit. [ 33 ] No claim was made for root canal costs in the Family Law Application (FL-18). This is a “new matter” under para 3 of the practice note.

Despite rule 1.3(2) (“A remedy may be granted by the Court whether or not it is claimed or sought in an action”), because this matter was raised only in the reply affidavit, Mr. McCarty did not have an opportunity to respond and providing a remedy would not be fair to him. The Court of Appeal has warned that [27] Normally, a court should not give relief that a party has not ... expressly sought in the notice of application or pleading. Natural justice requires that the opposing party know what is being sought, and why.

Usually that information is only available from the notice of application, although that is not always so. The opposing party may know what relief is sought, and why, by some other means and in enough time to marshal his or her arguments and evidence ...: Wagner v Wagner , 2014 ABCA 428 at para 27 . I will not make an additional lump sum order respecting this expense, particularly because, on the evidence, the costs are estimates only. [ 34 ] However, the reasoning governing responsibility for the payment of dental services expenses is the same as that just canvassed respecting orthodontic services expenses. Mr.

McCarty is required to have dental insurance coverage in place or to provide an explanation for the lack of availability of this coverage. If (

a) Mr. McCarty fails to maintain dental insurance coverage or fails to reimburse Ms. McCarty for any dental expenses for D for which she has not otherwise received reimbursement; (

b) Ms. McCarty is forced to bring an application to compel payment by Mr. McCarty; and (

c) Ms. McCarty is successful in such an application, I would expect Mr. McCarty to be required to pay significant costs, to deter the knowing violation of a court order. [ 35 ] Fairness to Mr. McCarty, and potentially terms of insurance, may require that Ms. McCarty process future dental or orthodontic payments through any insurance plan that Ms. McCarty may hold before claiming any unreimbursed portion from Mr. McCarty. I leave this issue for the parties to work out, or failing that, to bring this matter before the court by way of a variation application. II. RETROACTIVE VARIATION OF CHILD SUPPORT [ 36 ] Ms.

McCarty claimed retroactive child support to 2010 based on what she contended was Mr. McCarty’s “available income” for child support purposes. After reviewing some preliminary issues, I will consider the following questions arising from her application: • what remedy did Ms. McCarty seek – rescission, setting aside, or variation? • what tests must be addressed to determine whether Ms. McCarty is entitled to a retroactive child support order? • what income was available to Mr. McCarty for the payment of child support under s. 18 of the Guidelines ? • what adjustments to the income available to Mr.

McCarty should be made in relation to non-arm’s length transactions? • is Ms. McCarty entitled to a retroactive child support award? • if so, from what date should the retroactive child support award be calculated? • should an amount be imputed to Mr. McCarty’s income under s. 19(1)(

e) of the Guidelines , because he did not reasonably utilize his property to generate income? A. PRELIMINARY ISSUES

1. Evidential issues [ 37 ] Again, the retroactive variation application proceeded on the basis of only the parties’ affidavits. There was, for example, no questioning on affidavit. The parties, particularly Ms. McCarty, are not wealthy. I do not question or criticize proceeding on this slim record. Nonetheless, it is difficult not to see the wisdom in the Saskatchewan approach to retroactive award issues, particularly when corporate income is under scrutiny. According to Justice Popescul in Skomorowski v Bernier , 2009 SKQB 55 at para 32 : ….

In order to properly address all of the factors that need to be considered for making a retroactive award, viva voce evidence, tested by cross - examination, is appropriate. There is a consistent series of decisions that suggest that courts, except perhaps in the clearest of circumstances or in exceptional cases, ought not grant retroactive support orders on interim applications. See Algner v. Algner , 2008 SKQB 132 , [2008] 10 W.W.R. 509; Franson v. Franson , 2007 SKQB 266 , [2007] S.J. No. 391 (QL); S.K. v. T.Z. , 2007 SKQB 210 , [2007] S.J. No. 351 (QL); and Kirk v. Hackl , 2007 SKQB 82 , 292 Sask. R. 109.

See also Thompson v Bear , 2014 SKCA 111 , Klebuc JA at para 12. [ 38 ] Regardless, my job is to come to the conclusions that I can, given the evidence provided, the constraints on fact-finding should affidavits conflict, and the urging of rule 1.2 and Hryniak v Mauldin , 2014 SCC 7 to work toward the proportional, timely, and cost-effective resolution of claims. [ 39 ] This was not and on the record could not be a “final”application: see Panasiuk v Leclercq , 2015 ABQB 464 , Shelley J at paras 24 -31.

Aside from confirming that the issues may be revisited at trial or in permissible review or variation proceedings ( Olson v Olson , 2014 ABCA 15 at paras 2 and 5 ), the interim nature of these proceedings entails that both parties could rely on hearsay evidence under rule 13.18. Rule 3.18(2), however, provides that “[i]f an affidavit is sworn on the basis of information and belief, the source of the information must be disclosed in the affidavit.” [ 40 ] The central hearsay evidence was the report dated August 27, 2015, prepared by Brenda Pisko (the Pisko Report) attached as Exhibit G to Mr. McCarty’s affidavit.

Ms. McCarty did not object to the admissibility of the Pisko Report although, as discussed below, she challenged its conclusions. 2. Corporations and related persons (

a) definitions [ 41 ] Paragraph 18(1)(

a) of the Guidelines refers to “related” corporations and s. 18(2) refers to to “persons with whom the corporation does not deal at arm’s length.” The Guidelines do not define these terms but they are defined through s. 2(2) of the Guidelines : 2(2) Words and expressions that are used in sections 15 to 21 and that are not defined in this

section have the meanings assigned to them under the Income Tax Act . See REG v TWJG , 2011 SKQB 269 , Ryan-Froslie J, as she then was, at para 159. [ 42 ] Under s. 251 of the Income Tax Act , 251(1) For the purposes of this Act, (

a) related persons shall be deemed not to deal with each other at arm’s length; ….

(2) For the purpose of this Act, related persons, or persons related to each other, are (

a) individuals connected by blood relationship, marriage or common-law partnership or adoption; (

b) a corporation and (

i) a person who controls the corporation, if it is controlled by one person, … or (iii) any person related to a person described in subparagraph 251(2)(b)(i) … ; and (

c) any two corporations (

i) if they are controlled by the same person or group of persons, (ii) if each of the corporations is controlled by one person and the person who controls one of the corporations is related to the person who controls the other corporation, (iii) if one of the corporations is controlled by one person and that person is related to any member of a related group that controls the other corporation, (iv) if one of the corporations is controlled by one person and that person is related to each member of an unrelated group that controls the other corporation ….

(3) Where two corporations are related to the same corporation within the meaning of subsection 251(2), they shall, for the purposes of subsections 251(1) and 251(2), be deemed to be related to each other.

(

b) Mr. McCarty’s corporations and related persons [ 43 ] Mr. McCarty has carried on business through four corporations. He is and has been the sole shareholder of each corporation. All four corporations, then, are related. Mr. McCarty is related to each corporation. C is Mr. McCarty’s son and so is also related to each of the corporations. Mr. McCarty and C do not deal at arm’s length with the corporations. [ 44 ] The corporations are (

i) Affordable Excellence Cleaning & Maid Service Inc. (Affordable), which owns real property leased to third party tenants as well as to Mr. McCarty’s other corporations; (ii) Richard’s Janitor Service Inc. (Richard’s Janitor), which provides janitorial services; (iii) Venture Supply Ltd. (Venture), which sells janitorial supplies and equipment to third parties as well as to Mr. McCarty’s other corporations; and (iv) 630922 Alberta Ltd., operating as Leggo’s Window Cleaning (Leggo’s), which provides window cleaning services to high rise towers. Leggo’s sold its operating assets in mid-2004 and no longer carries on operations. See the Pisko Report,

part 4.0 (pp. 3 – 4) and Mr. McCarty’s affidavit at para 21. [ 45 ] Because of the financial relationships between the corporations, their incomes were combined for the purposes of determining whether any or all of their income should be attributable to Mr. McCarty for child support purposes: Pisko Report,

part 5.05 (p. 5). This combined approach was appropriate. 3. Objectives of the Guidelines [ 46 ] Since the retroactive variation and s. 18 claims turn on the application of the Guidelines , it is useful to foreground the objectives of the Guidelines set out in s. 1: The objectives of these Guidelines are (

a) to establish a fair standard of support for children that ensures that they continue to benefit from the financial means of both spouses after separation; (

b) to reduce conflict and tension between spouses by making the calculation of child support orders more objective; (

c) to improve the efficiency of the legal process by giving courts and spouses guidance in setting the levels of child support orders and encouraging settlement; and (

d) to ensure consistent treatment of spouses and children who are in similar circumstances. As Justice Schutz, as she then was, observed in Wildeman v Wildeman , 2014 ABQB 732 at para 22 , “[i]t is through the prism of these legislated objectives … that all specific provisions of the Guidelines must be viewed, interpreted, and applied.” B. Nature of the application [ 47 ] Two questions are addressed under this heading: 1. what remedy did Ms. McCarty seek – rescission, setting aside, or variation? 2. what tests must be addressed to determine whether Ms. McCarty is entitled to a retroactive child support order? 1.

What remedy did Ms. McCarty seek – rescission, setting aside, or variation? [ 48 ] The remedy sought came into question for two reasons, one legal, one factual. [ 49 ] The factual reason is that the circumstances of this application do not fit the retroactive support application paradigm. The circumstances are not that Mr. McCarty has progressed from (e.g.) employment earnings at a particular amount at the time of the Consent Order to significantly greater earnings without having disclosed his greater earnings and without having paid child support based on those greater earnings.

Instead (and I will return to this problem below), circumstances are now much as they have been. Prior to the marriage, Mr. McCarty carried on business through the corporations. During the marriage, Mr. McCarty carried on business through the corporations.

Article 10 of the Minutes of Settlement (2007) expressly left Mr. McCarty with his interests in the corporations. Mr. McCarty has carried on business through the corporations to the present. In her April affidavit, Ms. McCarty has now registered concerns about Mr. McCarty’s available income extending back to 2009: see Exhibit F. Her application is not premised on change in Mr. McCarty’s personal economic position. It is premised on a recalibration of his obligations based on the corporate interests which he has had since the time of (and before) the Consent Order. Practically, it appears that Ms.

McCarty seeks a fresh consideration of child support. [ 50 ] A legal argument advanced by Ms. McCarty complements the factual circumstances. The statutory basis of this argument is s. 17(1) of the Divorce Act . This subsection authorizes (among other orders) not only variation but rescission:

(1) A court of competent jurisdiction may make an order varying, rescinding or suspending, prospectively or retroactively, (

a) a support order or any provision thereof on application by either or both former spouses (under s. 2(1), “support order” means a child support order or a spousal support order). [51] In her concise letter, Ms.

McCarty referred to para 32 of Justice Yungwirth’s decision in Roseberry v Roseberry, 2015 ABQB75, revd other grounds 2015 ABCA 218 (subsequent references to QB): [32] Even where … the parties consent to a variation order, if it is subsequently determined that the income amount upon whichthe order was based was not accurate, then such orders are subject to variation without having to demonstrate a change in circumstancesonce the true facts are known. They are also subject to being set aside: Rick v Brandsema, 2009 SCC 10 , [2009] 1 SCR 295.

In Rick v Brandsema, a separation agreement was set aside on the basis of unconscionability. The husband engaged in intentionalwrongdoing. He failed to disclose information and exploited the psychological frailty of his wife. According to Justice Abella at para 63, [63] The combination in this case, therefore, of misleading informational deficits and psychologically exploitative conduct led thetrial judge to conclude that the resulting, significant deviation from the wife’s statutory entitlement rendered the agreementunconscionable and therefore unenforceable.

This conclusion is amply supported by the evidence. [52] While the technical or historical remedy for unconscionability was rescission, in circumstances in which rescission is notpossible because the parties cannot be restored to the status quo ante, damages may be awarded.

Justice Abella explained that [66] Historically, rescission was the remedy when a contract was found to be unenforceable because of unconscionability.Increasingly, however, when rescission is unavailable because restitution, as a practical matter, cannot be made, damages in the form of“equitable compensation” are imposed to provide relief to the wronged party. This is because, as the British Columbia Court of Appealsaid in Dusik v.

Newton (1985), (BC CA), 62 B.C.L.R. 1: “Where rescission is impossible or inappropriate, it would beinequitable for the defendant to retain the benefits of the unconscionable bargain” (p. 47): Rick v Brandsema at para 66. [53] In the present case, while there was a claim of lack of proper disclosure, there was no evidence of unconscionability. Inparticular, there was no evidence of any form of exploitation.

Rescission, or setting aside coupled with damages, could not be availableon the basis of unconscionability. [54] Justice Yungwirth, however, appears to suggest that a remedy may be available on the basis of inadequate disclosure alone –i.e., on the basis of “informational deficits” without any attendant exploitative conduct.

While care must be taken in importing non-family law into the family law context, equity did recognize rescission as a remedy even for innocent misrepresentation: John D.McCamus, The Law of Contracts (Toronto: Irwin Law, 2005) at 338 (“There is a danger in borrowing terminology rooted in otherbranches of the law and transposing it into what all agree is a unique legal context:” Miglin v Miglin, [2003] 1 S.C.R. 303, 2003 SCC 24at para 82).

Equitable innocent misrepresentation doctrine could be extended to non-disclosure in the circumstances of negotiating familybreak-up, when full and proper information sharing is critical. The equitable jurisprudence respecting contracts could also be extended toconsent orders. A consent order is “only an agreement elevated to an order on consent:” James G McLeod, quoted in Rick v Brandsemaat para 64.

Rick v Brandsema impels us towards a broad appreciation of when agreements (or consent orders embodying agreements)might be set aside: [47] In my view, it flows from the observations and principles set out in Miglin that a duty to make full and honest disclosure of allrelevant financial information is required to protect the integrity of the result of negotiations undertaken in these uniquely vulnerablecircumstances.

The deliberate failure to make such disclosure may render the agreement vulnerable to judicial intervention where theresult is a negotiated settlement that is substantially at variance from the objectives of the governing legislation. [48] Such a duty in matrimonial negotiations anchors the ability of separating spouses to genuinely decide for themselves whatconstitutes an acceptable bargain. It also helps protect the possibility of finality in agreements. An agreement based on full and honestdisclosure is an agreement that, prima facie, is based on the informed consent of both parties.

It is, as a result, an agreement that courtsare more likely to respect. Where, on the other hand, an agreement is based on misinformation, it cannot be said to be a true bargainwhich is entitled to judicial deference. [49] Whether a court will, in fact, intervene will clearly depend on the circumstances of each case, including the extent of thedefective disclosure and the degree to which it is found to have been deliberately generated. It will also depend on the extent to which theresulting negotiated terms are at variance from the goals of the relevant legislation.

As Miglin confirmed, the more an agreementcomplies with the statutory objectives, the less the risk that it will be interfered with. Imposing a duty on separating spouses to providefull and honest disclosure of all assets, therefore, helps ensure that each spouse is able to assess the extent to which his or her bargain isconsistent with the equitable goals in modern matrimonial legislation, as well as the extent to which he or she may be genuinely preparedto deviate from them. [55] DBS too raised the prospect of a retroactive award based on the honest and innocent provision of incorrect financialinformation.

Justice Bastarache wrote that it is entirely conceivable that retroactive support could be ordered where a payor parent engages in no blameworthy conduct. Thus, theBritish Columbia Court of Appeal has ordered retroactive support where an interim support award was based on incorrect financialinformation, even though the initial underestimate was honestly made [(see Tedham v. Tedham (2003), 2003 BCCA 600 , 20B.C.L.R. (4th) 56)]: D.B.S. v. S.R.G.; L.J.W. v. T.A.R.; Henry v. Henry; Hiemstra v. Hiemstra, [2006] 2 S.C.R. 231, 2006 SCC 37 atpara 99.

These circumstances, though, were woven into the retroactive support award framework in DBS and were not described as supporting anindependent remedy. [56] Despite Ms. McCarty’s reference to para 32 of Roseberry and despite the potential availability of a broad Rick v Brandsemaapproach to the present circumstances (which may or may not be overtaken by DBS), in my opinion the remedy sought and the remedyavailable to Ms. McCarty was variation, not rescission or setting aside. The Roseberry point was not pressed or elaborated in argument.Ms.

McCarty’s Family Law (FL-18) application expressly sought variation of the Consent Order based on a change in circumstanceswithout reference to setting aside or rescission. [57] Ms. McCarty’s application therefore shall be treated as a variation application. 2. What tests must be addressed to determine whether Ms. McCarty is entitled toa retroactive child support order? (

a) principles [58] A retroactive child support award is granted through a variation application under s. 17(1) of the Divorce Act. Instead ofvarying support only on a prospective basis, a retroactive award varies support as of an earlier time when increased payments shouldhave been made. But both prospective and retroactive variation orders depend on a finding that a material change in circumstances hasoccurred. Under s. 17(4) of the Divorce Act,

(4) Before the court makes a variation order in respect of a child support order, the court shall satisfy itself that a change ofcircumstances as provided for in the applicable guidelines has occurred since the making of the child support order or the last variationorder made in respect of that order.

Justice Sopinka discussed “material change in circumstances” in the context of the variation of an order for child support in Willick vWillick, (SCC), [1994] 3 S.C.R. 670 at 688 - 689: In deciding whether the conditions for variation exist, it is common ground that the change must be a material change of circumstances.This means a change, such that, if known at the time, would likely have resulted in different terms The corollary to this is that if thematter which is relied on as constituting a change was known at the relevant time it cannot be relied on as the basis for variation.

Thecontroversial aspect of this appeal is whether it is also a pre-condition to variation that there be a change in the circumstances of thepayor spouse and the child or children in whose favour the support provisions were made. In determining this issue it is important to bearin mind that an order for maintenance of children is made by assessing the needs of the children having regard to the means of theparents. The purpose of s. 17(4) appears to be to permit the court to vary the order when the relationship between those factors changesin a material way.

There can be a material change in the relation of the factors if one of them undergoes a significant change because therelationship between them is altered. The following passage from the reasons for judgment of Keenan Dist. Ct. J. in Moosa v. Moosa(1990), (ON SC), 26 R.F.L. (3d) 107 (Ont. Dist. Ct.), at pp. 110-11 is apt: It is established beyond dispute that a dependent child is entitled to look to both parents for support. It is also established beyond disputethat each parent has an obligation to provide for the support of the child.

The amount of the support to be provided is the amount thatwill meet the needs of that particular child. The measure of those needs depends on a number of factors including the age of the child andthe standard at which that child could reasonably expect to be supported. The reasonableness of the expectation is to be measured againstthe means and circumstances of the parents who have the obligation to provide the support. I know of no reason why that expectationshould be any different for a child who is the innocent victim of the breakdown of the relationship between its parents.

If the ability ofthe parents or either of them increases or decreases, it is reasonable to expect that the level of support of the child will increase ordecrease. [Emphasis added.] [59] Entitlement to a variation of a child support order with retroactive effect requires balancing two sets of interests – those of thechildren, typically protected through the payee parent, and those of the payor parent.

With a focus on children’s interests, JusticeBastarache reminded us at para 38 of DBS that the core principles animating parents’ child support obligations include the following: 38 .... child support is the right of the child; the right to support survives the breakdown of a child’s parents’ marriage; child supportshould, as much as possible, provide children with the same standard of living they enjoyed when their parents were together; andfinally, the specific amounts of child support owed will vary based upon the income of the payor parent. [60] With the perspective of the payor parent in mind, Justice Bastarache stated in DBS at para 63 that 63 ....

A payor parent who diligently follows the instructions of a court order may expect that (s)he would not be confronted with aclaim that (s)he was deficient in meeting his/her obligations. After all, until it is varied, a court order is legally binding. It providescomfort and security to the recipient parent, but it also provides predictability to the payor parent. Put most simply, the payor parent’sinterest in certainty appears to be most compelling where (s)he has been following a court order. Further, 65 … a court order awarding a certain amount of child support must be considered presumptively valid.

This presumption isnecessary not only to maintain the certainty promised by a court order, but also to maintain respect for the legal system itself. It isinappropriate for a court, just as it is inappropriate for a parent, to assume that a previously ordered award is invalid: DBS at para 65. [61] Nonetheless, a payor parent’s interest in certainty does not trump a child’s right to support. Justice Bastarache provided thiscaution at para 64: 64 … parents should not have the impression that child support orders are set in stone. Even where an order does not provide for

automatic disclosure, variation or review, parents must understand that it is based upon a specific snapshot of circumstances which existed at the time the order was made. For this reason, there is always the possibility that orders may be varied when these underlying circumstances change …. But even if the parents choose not to seek variation of an order, depending on why (and how freely) this choice was made, the child may still have the right to receive support in the amount that should have been payable.

The certainty offered by a court order does not absolve parents of their responsibility to continually ensure that their children receive the appropriate amount of support. Justice Bastarache, I note, referred to the responsibilities of “parents”. The responsibility of ensuring that children receive appropriate support falls not only on the payor parent but also on the payee parent: DBS at paras 74 and 103. [ 62 ] While a child support order is presumptively valid, the presumption may be rebutted on proof of a material change in circumstances.

This accords with the general rule respecting the variation of child support orders. According to Justice Bastarache, The presumption that a court order is valid, however, is not absolute…. [T]he applicable legislation recognizes that a previously ordered award may merit being altered. This power will be triggered by a material change in circumstances …. An increase in income that would alter the amount payable by a payor parent is also a material change in circumstances ….: DBS at para 66.

The most common cause for an application of this variety would be an increase in the payor parent’s income that is not reflected by an increase in the amount of child support paid. In addition to a request for prospective variation, a parent in this situation would ask for a retroactive award representing an additional amount due: DBS at para 62. If a payor parent has been found to have been underpaying his or her support obligations, “it will be open for a court … to vary an existing order retroactively.

The consequence will be that amounts that should have been paid earlier will become immediately enforceable:” DBS at para 74. [ 63 ] Yet even though a court has jurisdiction to make a retroactive child support award and a material change in circumstances may support the exercise of this jurisdiction, retroactive child support should not be ordered unless it fairly takes into account both the interests of the child and the payor parent. Justice Bastarache commented as follows in DBS commencing at para 95: 95 It will not always be appropriate for a retroactive award to be ordered.

Retroactive awards will not always resonate with the purposes behind the child support regime; this will be so where the child would get no discernible benefit from the award. Retroactive awards may also cause hardship to a payor parent in ways that a prospective award would not.

In short, while a free-standing obligation to support one’s children must be recognized, it will not always be appropriate for a court to enforce this obligation once the relevant time period has passed. 96 Unlike prospective awards, retroactive awards can impair the delicate balance between certainty and flexibility in this area of the law. As situations evolve, fairness demands that obligations change to meet them. Yet, when obligations appear to be settled, fairness also demands that they not be gratuitously disrupted. Prospective and retroactive awards are thus very different in this regard.

Prospective awards serve to define a new and predictable status quo; retroactive awards serve to supplant it. [ 64 ] To ensure an appropriate balancing of interests, the following factors must be considered, keeping in mind that “[a]t all times, a court should strive for a holistic view of the matter and decide each case on the basis of its particular factual matrix:” ( DBS at para 99): (

i) whether the payee spouse had a reasonable excuse for not seeking a variation of support at an earlier time; (ii) the conduct of the payor parent; (iii) the present and past circumstances of the child; and (iv) hardship that would be caused by a retroactive award. A consideration supporting the mandated “holistic” approach is that types of evidence may be relevant to two or more factors. [ 65 ] Before considering the application of these factors, a condition for variation must be addressed: in this application, has there been a material change in circumstances? (

b) material change in circumstances? [ 66 ] For a retroactive variation of child support application to get off the ground, there must be evidence of a material change in circumstances. That change in circumstances not only (potentially) justifies the variation of the existing order, but animates the application of the other retroactive award tests – e.g., what did the applicant know about the change and how diligent was he or she in pursuing an application based on the change? did the payor parent hide the change, directly or indirectly, intentionally or not? [ 67 ] As indicated above, a difficulty for Ms.

McCarty’s application is that, from one perspective at least, there has been no material change in circumstances. Mr. McCarty’s employment earnings have remained more-or-less steady. As summarized at para 22 of his affidavit, his line 150 income has been as follows: 2010 $120,000 2011 $119,729 2012 $105,500 2013 $150,000 (dividends of $120,000)

2014 $141,600 (dividends of $113,280). Ms. McCarty’s application was not based on changes to Mr. McCarty’s line 150 income. It was based on his economic relationship withhis corporations. [68] Mr. McCarty’s relationship with his corporations has remained constant from before the marriage, through the marriage, afterthe separation and divorce, until today. Ms. McCarty knew about Mr. McCarty’s corporations. Ms.

McCarty deposed to having earnedincome through the corporations herself: see her September affidavit at para 10 (“When the Defendant and I were together, a salary wasalso attributed to me although I did not actually receive a cheque and did not do any work”). His interests in the corporations werereferred to in the Minutes of Settlement. [69] The foundation of Ms. McCarty’s application is not a material change in circumstances in the sense of a change in the facts orbased on new knowledge about the facts. Rather, what is urged is a material change in the legal characterization of the facts.

What isurged is that under s. 18 of the Guidelines, income from Mr. McCarty’s corporations should be considered to have been available to himfor the payment of child support – all along. Increases in corporate income should have been taken into account for the payment of childsupport, just as if increased income had been earned directly by Mr. McCarty. [70] Is Ms. McCarty entitled to make this argument (and make the retroactive variation application) now, about six years after theConsent Order? (

c) entitlement to proceed with the retroactive variation application [71] I must bear in mind that D is still a child of the marriage, 17 as he may be, and some 6 years having elapsed after the grantingof the Consent Order. The best interests of the child must be paramount. Objective 1(

a) of the Guidelines cannot be ignored: “toestablish a fair standard of support for children that ensures that they continue to benefit from the financial means of both spouses afterseparation.” [72] The Consent Order, Divorce Judgment, and Minutes of Settlement may have been wrongly oriented. But as DBS confirmed,“child support is the right of the child and cannot be waived by the recipient parent:” at para 104.

In Richardson v Richardson, (SCC), [1987] 1 S.C.R. 857, Justice Wilson wrote at 869 that “[c]hild maintenance, like access, is the right of the child: ReCartlidge and Cartlidge, (ON CJ), [1973] 3 O.R. 801 (Fam. Ct.). For this reason, a spouse cannot barter away his orher child's right to support in a settlement agreement. The court is always free to intervene and determine the appropriate level of supportfor the child ….” Justice Schutz wrote in Wildeman at para 19 that “I first reiterate that child support is the right of the child that cannotbe bargained away.

And, courts have no difficulty intervening where a spousal settlement agreement adversely affects the financialinterests of the children.” [73] In my opinion, despite the lack of factual change and despite what Ms. McCarty knew, a material legal change incircumstances may support Ms. McCarty’s application. Not permitting the application to go forward would be to ignore D’s interests, theparamountcy of the best interests of the child, and a parent’s lack of entitlement (disability) to waive his or her child’s rights. Neither Ms.McCarty nor Mr.

McCarty could bargain away D’s rights. [74] None of this is to say that, at this point, a material change in Mr. McCarty’s circumstances has been recognized; still less is itto say what the change might be, or whether all or part of the change might be captured through a retroactive variation of the ConsentOrder. [75] The next

section begins these aspects of my assessment. C.

SECTION 18 AND THE “AVAILABILITY” OFCORPORATE INCOME [76] The linchpin issue in Ms. McCarty’s application is whether, since 2010, Mr. McCarty’s annual income as determined under s.16 of the Guidelines has fairly reflected all the money available to him for the payment of child support or whether additional incomeshould be attributed to him under s. 18 of the Guidelines. The s. 18 “availability” issue is relevant to whether a material change incircumstances occurred and to the retroactive award analysis. [77]

Section 18 of the Guidelines provides as follows: 18(1) Where a spouse is a shareholder, director or officer of a corporation and the court is of the opinion that the amount of thespouse’s annual income as determined under

section 16 does not fairly reflect all the money available to the spouse for the payment ofchild support, the court may consider the situations described in

section 17 and determine the spouse’s annual income to include (

a) all or part of the pre-tax income of the corporation, and of any corporation that is related to that corporation, for the most recenttaxation year; or (

b) an amount commensurate with the services that the spouse provides to the corporation, provided that the amount does not exceedthe corporation’s pre-tax income.

(2) In determining the pre-tax income of a corporation for the purposes of subsection (1), all amounts paid by the corporation assalaries, wages or management fees, or other payments or benefits, to or on behalf of persons with whom the corporation does not deal atarm’s length must be added to the pre-tax income, unless the spouse establishes that the payments were reasonable in the circumstances. Mr. McCarty was the sole shareholder of the corporations. Subsection 18(1) is engaged. The arguments turned on the application of s.

18(1)(a); para (

b) did not figure in the application. Under s. 18(2), Mr. McCarty clearly bears the burden of proof on the issue ofreasonableness of non-arm’s length benefits. [78] The “availability” issue is best approached through responding to seven questions: 1. What is the interpretive orientation to s. 18? 2. What was Ms. McCarty’s initial position? 3. What was Mr. McCarty’s position as set out in the Pisko Report? 4. What was Ms. McCarty’s response to the Pisko Report? 5. Was Ms. McCarty’s response to the Pisko Report valid? 6. Was the approach of the parties to “available” pre-tax corporate income correct? 7.

What are the consequences of the assessment of the parties’ approaches to “available” pre-tax corporate income? A final aspect of the “availability” analysis will be considered in part H below, the “double-counting” problem. 1. What is the interpretive orientation to s. 18? [79] The application of s. 18 does not depend on a finding of bad faith or intention to avoid child support obligations: Kowalewichv Kowalewich, 2001 BCCA 450 at para 40. A corporation or group of corporations may be validly organized for business or income taxpurposes; those purposes, though, may differ from the objectives of child support.

The question is whether Mr. McCarty, both as the soleshareholder of his corporations and as a parent responsible for paying child support, has “fairly” taken into account all the moneyavailable to him for the payment of child support: Baum v Baum, (BC SC), 182 D.L.R. (4th) 715 at para. 28.

In Kowalewich at paras 44 and 45, Justice Huddart provided a good description of the task of working out what is fair: [44] A court’s effort to ensure fairness does not require a court to second-guess business decisions nor, as Justice Pitfield socolourfully noted in Stamoulos, supra, at para. 44, to “place the largest available shovel in the company store.” What it does require isthat a spouse’s allocation of pre-tax corporate income between business and family purposes be assessed for fairness by an impartialtribunal when parents cannot reach agreement on priorities as they would in an intact family and may upon separation under s. 15(2). [45] To determine whether “Total income” fairly reflects money available for child support, a court might ask what an objective well-informed parent would make available for child support in the circumstances of a particular business over which the parent exercisedcontrol, having regard to the objectives of the Guidelines, the underlying parental obligation to support children in accordance with one’smeans, and any applicable situation in s. 17. 2.

What was Ms. McCarty’s initial position? [80] The initial position taken by Ms. McCarty, reflected in her first concise letter, is set out at Exhibit F to her April affidavit.While flawed, her approach was in the right direction. She began, properly, with the annual income of the corporations. She relied onafter-tax rather than pre-tax corporate income. She added back to corporate income benefits received by Mr. McCarty and C. Herquantification of these benefits was (understandably) contentious. She did not make adjustments under

Schedule III to the Guidelines.She added an unexplained “annualized profit adjustment.” This position was not relied on in argument. Instead, a revised version of thePisko Report conclusions was advanced. 3. What was Mr. McCarty’s position as set out in the Pisko Report? [81] In argument, Ms. McCarty conceded that – except as specifically challenged – Ms. Pisko’s methodology was correct, hercalculations of adjustments under

Schedule III of the Guidelines were correct, and the numbers she used in her calculations were correct. [82] The Pisko Report came to the following conclusions respecting Mr. McCarty’s income under s. 18 of the Guidelines at part5.08 (p. 6) (the Distributable Income

Summary). The last column is key: line 150 $ income with

Schedule IIIadjustments, note 1 $ income includingpersonal benefits, note 2 $ income includingdistributable corporateincome, note 3 $ 2010 120,000 120,000 126,000 142,0002011 119,730 119,730 125,730 141,7302012 105,500 99,842 105,842 121,842

2013 2014 150,000 141,600 119,842 120,000 125,842 126,000 141,842 142,000 Note 1 stated “Includes adjustments under

Schedule III of [the Guidelines ].” Further detail was provided in

Schedule 1 to the Pisko Report. Note 2 stated “Includes estimated personal benefits.” These were only benefits relating to Mr. McCarty. Note 3 stated “Includes distributable pre-tax corporate income as determined on

Schedule 2.” The inclusion of personal benefits will be discussed below. [ 83 ] As detailed in

Schedule 1 to the Pisko Report, the amount of corporate income included in Mr. McCarty’s income was $16,000 per year. Note 6 of

Schedule 1 directed the reader to the determination of distributable income in

Schedule 2 to the Pisko Report. [ 84 ]

Schedule 2 summarized two sets of figures, the “combined undistributed corporate income” and the “cash balance of corporate group available for distribution.” [ 85 ] The “combined undistributed corporate income” calculations which follow were not challenged: undistributed income before income taxes note reference 2010 $ 2011 $ 2012 $ 2013 $ 2014 $ 2 Affordable Sch 4 18,292 28,325 26,754 (34,718) (31,308) Richard’s Janitor Sch 6 19,281 (10,194) 60,363 131,331 61,548 Venture Supply Sch 8 (2,149) 27,900 (8,926) 1,261 36,312 Leggo’s Sch 10 (116) (12,379) 24,438 (2,967) 4,830 combined undistributed corporate income 2 35,308 33,652 102,629 94,907 71,382 The Schedules (“Sch”) referred to were summaries of historical statements of income for each corporation attached to the Pisko Report.

Note 2, generally, confirmed the combined income approach adopted. [ 86 ] The “cash balance of corporate group available for distribution” was the critical link between the undistributed corporate income and the total adjusted income for Mr. McCarty, reflected in

Schedule 1 and

part 5.08 of the Pisko Report. As will be seen below, this aspect of the Pisko Report was challenged by Ms. McCarty. The “cash balance of corporate group available for distribution” was set out as follows: cash balance of corporate group available for distribution Dec 31/14 Affordable 67,589 Richard’s Janitor 81,232 Venture Supply 96,043 Leggo’s Window - combined cash balance excluding Leggo’s 244,864 - cash for WCB assessment (40,000) - cash for capital expense (25,000) - cash operating reserve (100,000) cash available for distribution 79,864

allocated over 5 years rounded, Note 3(a) 16,000 16,000 16,000 16,000 16,000 80,000 [ 87 ] Three features of the figures in this table are noteworthy: (

a) the deductions from the cash balance; (

b) the exclusion of Leggo’s from the cash balance calculation; and (

c) the amounts used for the “cash balances” of the corporations as at December 31, 2014. (

a) deductions from cash balance [ 88 ] The cash balance deductions were a WCB assessment, capital expenses, and a “cash operating reserve” amount. [ 89 ] Mr. McCarty indicated at para 27 of his affidavit that Richard’s Janitor was audited by the Workers Compensation Board and was required to pay $39,800 in August 2015. He went on to say that “I have been told to expect an audit of CPP and EI remittances which could lead to another bill of $80,000 or more.” [ 90 ] The capital expenses incurred were described in para 29 of Mr. McCarty’s affidavit: roof repair, driveway repair, and drainage repair, at a cost of $161,000. A capital expenditure of only $25,000 was referred to in

Schedule 2. Ms. Pisko explained that “during 2015 Affordable incurred a capital expenditure of approximately $25,000 to replace a water drain basin related to flooding. Although this is a one time expenditure it was an unexpected cost that impacted cash flow. This expenditure was invoiced in August, 2015 and is not reflected in the year to date July 31, 2015 results:” Pisko Report,

part 5.09(d) (pp. 6 – 7). [ 91 ] According to

Schedule 11 to the Pisko Report, the $100,000 cash operating reserve amount represented a 2015 year-to-date operating loss of $14,000 plus a cash reserve of $86,000. A “cash operating reserve” makes perfect sense for an ongoing business operation. However, why $86,000 was appropriate was not explained, save perhaps through note 3(

b) to

Schedule 2, which stated that “If the amount determined to be distributable based on the cash restriction was distributed, the company’s working capital would still be positive and the working capital ratio would exceed the industry standard required working capital ratio.” Whether $86,000 is the minimum amount that would accomplish these objectives or whether it exceeds the amount required to accomplish these objectives was not discussed. Neither was the desirability of meeting these objectives. [ 92 ] Regardless, Ms. McCarty did not challenge these deductions. (

b) exclusion of Leggo’s sale proceeds [ 93 ] Mr. McCarty indicated at para 21 of his affidavit that Leggo’s assets were sold in mid-2014 and it is no longer active. The sale proceeds are reflected in

Schedule 10 to the Pisko Report. Twenty-thousand dollars was received for the sale of good will and $11,878 for the disposal of equipment, yielding (with $4,830 in additional income) $36,708 before taxes and $33,795 after taxes. Ms. Pisko noted on

Schedule 11 to the Pisko Report that “We have assumed that the income from the sale of assets and the resulting cash is not to be included in the determination of Guideline income” (see also note 3(

a) to

Schedule 2). [ 94 ] Ms. Pisko’s assumption was not taken up in Ms. McCarty’s concise or reply letter but was put in issue in para 18 of her September affidavit: “These proceeds are excluded from the Defendant’s income although presumably available to him when he chooses.” [ 95 ] Should the Leggo’s asset sale proceeds have been included in or excluded from cash available for distribution? [ 96 ] The asset sale proceeds were a return on or were a liquidation of capital, rather than being income from the sale of business goods or services. Yet the result would be cash or its equivalent.

And if there were recapture of capital cost allowance relating to any of the assets the amount of the recapture would be included in business or property income for the year. That might bring any recaptured amount into “pre-tax income” under s. 18(1)(

a) of the Guidelines . A connected issue is whether the allocation of the purchase price as between depreciable assets and goodwill was reasonable since that allocation could affect the amount of the purchase price classifiable as “income.” All this being said, recaptured corporate capital cost allowance does not appear to be included in income under

Schedule III of the Guidelines and the inclusion of recapture in income for the purposes of calculating retroactive child support was found to be in error in Schmidt v Beug , 2009 SKCA 130 at para 2 , although without elaboration. [ 97 ] Aside from the glancing mention in para 18 of her September affidavit, Ms. McCarty did not pursue this issue. Neither shall I. Ms. Pisko’s exclusion of Leggo’s sale proceeds stands. (

c) cash balances as at December 31, 2014 [ 98 ] The cash balances determination is the central area of conflict respecting the Pisko Report. It will be considered next. 4. What was Ms. McCarty’s response to the Pisko Report? [ 99 ] Ms. McCarty claimed that Ms. Pisko made a mistake. The Pisko Report contained transcription errors.

Schedule 2 of the Pisko Report stated that the cash balances as of December 31, 2014 were as set out in column A below. In fact, according to Ms. McCarty, the correct numbers should have been as set out in column B.

Column A Column B Affordable 67,589 90,730 Richards Janitor 81,232 150,124 Venture 96,043 104,106 Leggo’s - 32,383 Combined: 244,864 377,343 If the deductions described by Ms. Pisko are applied to the column B total, the amount of cash available for distribution (i.e., for inclusion in Mr. McCarty’s income) is $212,343 (not $80,000). If this amount were distributed equally across 5 years, the amount of additional income for Mr. McCarty would be $42,468 per year (not $16,000 per year). [ 100 ] If $42,468 is added to Mr. McCarty’s annual income (adjusted under

Schedule III of the Guidelines ), the results would be as follows: line 150 + $42,468 2010 120,000 162,468 2011 119,730 162,198 2012 99,842 142,310 2013 119,842 162,310 2014 120,000 162,468 These amounts do not include benefits paid to C or the adjustment to Mr. McCarty’s income for his personal benefits. [ 101 ] The case for simple error by Ms. Pisko is straightforward. Ms. Pisko expressed the cash balances available for distribution as of December 31, 2014.

But when the Schedules showing the summaries of historical statements of assets are consulted (Schedules 3 (Affordable), 5 (Richard’s Janitor), 7 (Venture), and 9 (Leggo’s)), the December 31, 2014 amounts are Affordable - $90,730; Richard’s Janitor – $150,124; Venture - $104,106; Leggo’s - $32,383 (as in Column B above). The amounts used by Ms. Pisko for “cash balance for corporate group available for distribution” are, on those same Schedules, the amounts in the last column, the July 31, 2015 column.

The error appears to have been taking the numbers from the last column (the July 2015 column) instead of from “three columns in,” the 2014 column. An easy error to make. 5. Was Ms. McCarty’s response to the Pisko Report valid? [ 102 ] The most direct way to have addressed the question of whether Ms. Pisko made an error would have been to have had further evidence from Ms. Pisko. This we did not have. [ 103 ] Mr. McCarty argued that no error was made. The argument had these steps: (a) Subsection 18(1) refers to “all the money available to the spouse for the payment of child support.” (

b) If cash is gone, it is not “available.” (

c) While the corporations had the cash stated in the historical summaries of assets as of December 31, 2014 that cash has been used to cover losses since 2014. (

d) The $80,000 cash is what’s left after the deductions described in

Schedule 11. Ms. Pisko’s comments in her Report supported this argument: 5.09 … the final column includes the portion of pre-tax income considered to be distributable to Mr. McCarty. As indicated in our analysis on

Schedule 2, the pre-tax income of the company is not considered to be fully distributable. Rather the annual pre-tax income is assumed to be impacted by the existing cash balances and cash reserves required for future operations .

Schedule 2, Note 3(a) … The undistributed income from 2010 to 2014 is considered distributable to the extent sufficient cash is available to do so .

Schedule 5 (last lines, bottom of page) Income is considered available for distribution to the extent industry ratios are met and there is sufficient cash to do so (see Schedules 7 and 9 as well). [emphasis added]

Subsection 18(1), one might add, looks to pre-tax income, which in turn augments a payor parent’s “money” available to pay support. The implication of s. 18(1) is that it is concerned with liquid assets, money on hand or its equivalent, not money that was on hand but is no longer. [ 104 ] Furthermore, cash should not be considered “available” if it is needed by a corporation for legitimate business purposes.

Justice Huddart wrote the following in Kowalewich at para 58 : [58] It seems to me regard should also be had to the nature of the company’s business and any evidence of legitimate calls on its corporate income for the purposes of that business. Justice Drake cautioned about not killing the goose who lays the golden eggs. Monies needed to maintain the value of the business as a viable going concern will not be available for support purposes. In my view they should not be included in determining annual income.

In Chekowski v Howland , 2013 ABCA 299 at para 12 the Court of Appeal summarized some of the lessons from Kowalewich : the Court must have regard to: the nature of the company’s business; any evidence of legitimate business; the fact that funds need to maintain the value of the business as a viable going concern are not available for support purposes; the expansion of the business; depreciation; possible economic downturns; and return on invested capital ….

I will return to the issue of legitimate business purposes below, but given the losses that have occurred and, on the evidence, the actual use of the cash to cover losses, retention of the cash in the corporations was justified or proven justified. The full cash balance was not truly “available” as of December 31, 2014 and is not available now. [ 105 ] Typically, corporations drawn into an assessment under s. 18 have the resources to make the necessary monies available to payor parents and are not running losses. They have money on hand.

For example, in Miller v Joynt , 2007 ABCA 214 , the payor parent’s corporation had cash to cover the retroactive award: at paras 18 and 38. We find the following comments in Goett v Goett , 2013 ABCA 216 at paras 15 and 21 : [15] …. The purpose of the exercise is to ensure that the money available to the payor for the payment of child support is actually available for its payment …. [emphasis added]. [21] No credible evidence was adduced by the respondents that considering the pre-tax income of Push N Pilot Inc. would be unfair.

No evidence was adduced to suggest that some or all of the retained earnings could not be utilized for this purpose…. See also REG v TWJG at para 191 : “The uncontradicted evidence establishes that Tom’s corporations are not in breach of their banking covenants and it is unlikely the withdrawal of some additional monies to cover child support would put them in breach.” [ 106 ] In my opinion, given the approaches of the parties to the “availability” issue in the retroactive award context, as between the parties, Mr.

McCarty’s view of the facts and law prevails. [ 107 ] The question is, are the parties’ approaches right? 6. Was the approach of the parties to “available” pre-tax corporate income correct? [ 108 ] The parties ended up with the same approach: start with cash available at the end of a year; divide that by the number of years in question, and the resulting amount will become the amount “available” for each of those years. There are three problems with this approach. [ 109 ] The first problem is that this approach confuses the payor spouse with the corporations in which he or she has relevant interests.

Section 18 does not impose an obligation directly on a corporation: Wagner v Wagner at para 44 .

Section 18 is not a sort of child support garnishment provision. While corporate money may be needed by a payor to fund payment of an award, the application of s. 18 does not impose a payment obligation on the payor’s corporation. Under s. 18, a payor’s income is determined for child support purposes. Corporate income is referred to in that determination. As Justice Ryan-Froslie wrote in REG v TWJG at para 190 , 190) Attribution of income pursuant to s. 18 of the Guidelines does not require that the corporation pay out the pre-tax income attributed to a shareholder parent.

It does not “strip” the corporation of its income. The pre-tax income will remain in the corporation and will be available for all purposes cited by Tom. The pre-tax income of a corporation is only used pursuant to s. 18(1)(

a) to provide a “fair measure” of a shareholder parent’s income for child support purposes. The only money that a shareholder parent might need to withdraw from the company as a result of attribution pursuant to that section, is a sum sufficient to cover his additional child support obligations and the income tax associated with that withdrawal…. And as Justice Huddart put the same point in Kowalewich at para 41 : [41] I note the use of pre-tax corporate income as a basis for the determination of child support does not strip a spouse of his available money.

It is to use available money as a measuring rod for the purpose of fixing annual income and thus the amount of child support. [emphasis added] By focusing on the “cash available” to the corporations, the parties were identifying the s. 18 income of the payor with cash on hand in the corporations. The real question was what Mr. McCarty’s income was under s. 18 over the years in question, not how much cash the corporations had, particularly in a single later year. Practically, of course, Mr.

McCarty would have the problem of coming up with funds to pay for child support retroactively determined to have been payable on his income calculated under s. 18 by reference to corporate income, but that practical issue is different than the calculation issue under s. 18.

[ 110 ] The second problem with the approach adopted by the parties is that it creates arbitrary results. If this application had been decided prior to December 2014 there would have been cash on hand which would have elevated the s. 18 inclusion amounts to those advocated by Ms. McCarty. But since the application was heard in 2015, it came too late, so the annual income determinations were diminished. Put another way, both Ms. and Mr. McCar

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