Kondics v Kondics, 2017 ABQB 493

Court of Queen’s Bench of Alberta Citation: Kondics v Kondics, 2017 ABQB 493 Date: 20170808 Docket: 4803 146196 Registry: Edmonton Between: Ian Stewart Kondics Plaintiff - and - Jennifer Elizabeth Kondics Defendant _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice R. Khullar _______________________________________________________ I Introduction [ 1 ] The Court has been asked to determine the appropriate method to calculate Mr.

Kondics’ income for the purposes of s 3 child support, given that he receives income from, and owns shares in, a privately held corporation, and that he declared a loss in relation to a rental property. As well, the parties seek determinations on several s 7 issues. II Background [ 2 ] The parties married on May 31, 1997 and divorced in February 2009. There are three children of the marriage. Currently, two of the children reside with Ms. Kondics and one resides with Mr. Kondics.

The eldest child is registered in a post-secondary course commencing in September, and the parties agree that she remains a child of the marriage.

[ 3 ] There is a history of disputes from the time of the divorce until recently regarding payment of child and spousal support and related financial disclosure. By way of a Consent Order on February 8, 2017, the parties dealt with the issues of child support arrears and a number of issues related to the remaining matrimonial property. The Consent Order also required Mr. Kondics to pay Ms. Kondics s 3 child support in the amount of $1,200 per month commencing on February 1, 2017 on a without prejudice interim basis. [ 4 ] Mr. Kondics is a realtor and a 50% shareholder in 1183461 Alberta Ltd. (the “Corporation”).

The only other shareholder is his current wife, Chantel, who is also a realtor. Historically, Mr. Kondics had other corporate interests, but those issues are no longer before the Court as a result of the February 8, 2017 Consent Order. III Calculation of Income [ 5 ] Ms. Kondics is an employee of Alberta Health Services. There is no dispute that her Guideline income is $49,438. [ 6 ] Mr. Kondics’ line 150 income on his 2016 tax return is $130,116.02. His main source of income is his salary from the Corporation. [ 7 ] The Corporation pays both Mr. Kondics and Chantel a salary.

In 2016, the Corporation paid each of them of $114,974.08. [ 8 ] Ms. Kondics relies on Mr. Kondics’ 2016 income tax returns, the 2016 financial statements for 1183461 Alberta Ltd. (the “Corporation”) and some historical financial information to argue that his income for child support purposes should be higher. She submits that the Court can consider up to three years of past financial information to draw an inference that Mr. Kondics has a history of receiving an artificially low income from his corporation in an effort to avoid his child support obligations. For instance in 2015, Mr.

Kondics’ income from the Corporation was $80,079.99 while Chantel’s was $122,640.10. [ 9 ] The starting point for calculation of Mr. Kondics’ income is the presumptive rule in s 16 of the Federal Child Support Guidelines , SOR/97-175 to the effect that a spouse’s annual income is determined by looking at the heading “total income” line 150 of the T1 General Form issued by the Canada Revenue Agency. [ 10 ]

Section 18 of the Guidelines provides that where a spouse is a shareholder of a corporation and the Court is of the opinion that the amount of the spouse’s annual income as determined under s 16 does not fairly reflect all the money available to the spouse for the payment of child support, the Court may consider the situations described in s 17 and include all or part of the corporation’s pre-tax income for the most recent taxation year in the spouse’s annual income. In doing so, the Court is to add payments to non-arm’s length persons unless the spouse establishes that they were reasonable in the circumstances. [ 11 ] In addition, ss 19(

d) and (

g) allow the Court to impute income where it appears that income has been diverted which would otherwise have been available to provide child support or there have been unreasonable deductions of expenses from income. [ 12 ] In Goett v Goett , 2013 ABCA 216 , 553 AR 275, the Court of Appeal noted that the Guidelines expressly provide that when a payor of child support operates through a corporation, the Court can pierce the corporate veil if it is satisfied that the s 16 income does not fairly represent the amount available to pay child support.

The Court can then consider all of the money available to pay child support including the pre-tax income of the corporation, and whether the expenses are legitimate business expenses or ones with respect to which the payor has received a personal benefit. [ 13 ] In Sweezey v Sweezey , 2016 ABQB 131 , 78 RFL (7th) 398, the Court listed factors which have been considered by the courts in determining income in these situations, including: • the nature of the corporation’s business; • the historical spending patterns of the corporation; • the role the shareholder spouse plays in the corporation; • whether the shareholder spouse is the sole shareholder; • the degree of control exercised by the shareholder spouse; • the benefits received by non-arm’s length persons as a result of payment of corporate expenses; • whether the company’s pre-tax income is required to manage the business and ensure its ongoing financial viability. [ 14 ] I will consider each of these factors in discussing the issues raised by the parties.

However, I note at the outset that the evidence in this case supports a finding that Mr. Kondics exercises a considerable degree of control over the Corporation and its finances. For example, although Chantel is an equal shareholder, Mr. Kondics used corporate dividends declared in 2016 and 2017 to both shareholders to satisfy his personal obligation in relation to support arrears and the income tax liability associated with the dividends. His evidence is that neither he nor Chantel retained any of those funds for their personal use. A Income from the Corporation [ 15 ] Mr.

Kondics’ 2016 T4 income from the Corporation was $114,974.08. [ 16 ] Ms. Kondics argues that his income from the Corporation should be 50% of the full amount paid by the Corporation in wages

and benefits. This amount was $263,194 in 2016, 50% of which would amount to $131,597. [ 17 ] Mr. Kondics submits that this figure would overstate his income from the Corporation because it includes the mandatory CPP contributions made by the Corporation to the government, as well as payments made to another employee, his father-in-law, who did maintenance work for the Corporation in return for $27,000 in wages and another $10,000 on sub-contract. [ 18 ] Ms. Kondics points to past financial statements demonstrating that Chantel has been paid more than Mr.

Kondics as evidence of a tendency to represent an artificially low income for Mr. Kondics. Further, while Ms. Kondics concedes that some of the money paid to the father-in-law amounted to reasonable wages, she argues that Mr. Kondics has not discharged his onus in establishing that the full amount represents fair market value for the services provided. Ms. Kondics suggests that only the $27,000 in wages should be considered fair market value for those services. [ 19 ] I note that Mr.

Kondics and Chantel, who are both actively employed by the Corporation as realtors, received equivalent T4 incomes from the Corporation in 2016. In addition, there was evidence that the father-in-law was paid for bona fide services to the Corporation. Given the amount involved and the description of the services rendered, I find that those payments were reasonable. Therefore, Mr. Kondics’ income from the Corporation is his T4 income of $114,974.08, subject to any applicable adjustments as discussed below.

B Corporate Pre-tax Income [ 20 ] The determination in a particular case as to the extent to which pre-tax corporate income should be taken into account for the purposes of child support is ultimately fact driven. In one case, where the evidence did not support keeping the funds in the corporation, the pre-tax income was included in the Guideline income ( Sweezey at para 98 ).

In another case, where the evidence provided a credible rationale for leaving it in the corporation, it was not counted in the Guideline income ( Shopik v Shopik , 2014 ABQB 41 at para 70 , 581 AR 46). [ 21 ] The 2016 pre-tax income of the Corporation was $83,160. [ 22 ] Ms. Kondics takes the position that half of $83,160, or $41,580, should be included in Mr. Kondics’ income for child support purposes. [ 23 ] As noted above, the Corporation declared a dividend in both 2016 and 2017 to the two shareholders, Mr. Kondics and Chantel. Mr. Kondics paid $60,000 from those funds to Ms.

Kondics to meet his obligation in relation to support arrears under the Consent Order of February 8, 2017, and the remainder went to Canada Revenue Agency to cover the income tax associated with the dividend. His evidence is that neither he nor Chantel retained any of those funds for their personal use. [ 24 ] Mr. Kondics submits that none of the $83,160 should be included in his income, but if the Court is inclined to include some, then no more than half of $42,160 should be considered, as he used the rest to pay the support arrears and neither he nor Chantel benefitted from the dividend. Mr.

Kondics acknowledges that a dividend would not normally be deducted from the corporate pre-tax income, but he reasons that it would be inappropriate to count this money twice for the purposes of child support calculations. Mr. Kondics also argues that while the Court has overriding discretion to include this amount given that he is receiving a reasonable income, there is no indication that he is trying to shelter or hide earnings in the corporation to avoid child support obligations. [ 25 ] Ms. Kondics submits that a dividend used to pay for support arrears is not properly deducted from income.

She notes that while the Consent Order required Mr. Kondics to pay the arrears, it did not require that he use a corporate dividend to do so. He chose to take money out of the Corporation to meet his liability. Had he chosen to use funds from a personal bank account or a line of credit, the pre-tax income of the Corporation would be $83,160. In addition, it was his accumulation of child support arrears that enabled him to retain those funds in the first place. He enjoyed the use of those funds while the arrears accumulated. [ 26 ] With respect to retained earnings, Ms. Kondics argues that the onus is on Mr.

Kondics to show why he is not taking out all of the income from the Corporation as income. The Corporation has accumulated considerable retained earnings in past years. She submits that in the absence of a reasonable explanation, the Court should draw the inference that the retained earnings are available to pay child support ( Cunningham v Seveny , 2017 ABCA 4 , 88 RFL (7th) 1). [ 27 ] In paragraph 8 of Mr. Kondics’ May 8, 2017 Affidavit, he deposed that he was retaining money in the corporation to deal with the cyclical nature of the industry and to save for his retirement. Ms.

Kondics argues that paragraph ought to be struck, but in any event it is not sufficient to discharge his evidentiary obligation. She objects to paragraph 8 as it contains information that was available to Mr. Kondics’ earlier in the proceedings, and it should have been produced and subject to examination. [ 28 ] Mr. Kondics explains that these paragraphs relate to items on his 2016 tax return, which was not completed until the spring of 2017. [ 29 ] As the information in question arose as a result of preparation of Mr. Kondics’ 2016 tax return, I decline to strike paragraph 8.

However, I am mindful of the timing of the disclosure and Ms. Kondics’ resulting inability to examine him on this information prior to the hearing. [ 30 ] Having considered all of the evidence and the arguments, I conclude that 50% of the entire amount of pre-tax income should be included in Mr. Kondics’ income for the purpose of calculating his Guideline income. I reach this conclusion for the following reasons: • Mr. Kondics was not required to issue the dividend of $41,000 in 2016 to pay his support arrears and it is not appropriate to deduct

his obligation to pay arrears from his current income; • While the financial statements from the Corporation for the last three years show some fluctuation in income and expenses, they do not establish that the cyclical nature of the industry requires retention of these funds in 2016 to ensure that Mr. Kondics receives an income from year to year, particularly given the amount of the Corporation’s accumulated retained earnings; • In 2015 Mr. Kondics’ income from the Corporation was inexplicably $40,000 less than Chantel’s thus raising the question whether the past pre-tax income was appropriate; and • Mr.

Kondics’ retirement planning does not take precedence over his ongoing child support obligations. C Expenses [ 31 ]

Section 19 of the Guidelines provides that the Court may impute such amount of income to a spouse as it considers appropriate if the spouse has unreasonably deducted expenses from his income. Further, the reasonableness of an expense deduction is not solely governed by whether the deduction is permitted under the Income Tax Act , RSC 1985, c 1 (5th Supp). [ 32 ] A number of expenses are at issue in this case. I will review each of them. 1 Amortization [ 33 ] The parties agree that the amortization expense in issue is $11,031. It relates to trailers, inflatables and a computer. [ 34 ] Mr.

Kondics takes the position that when expenses are justified, they should not, or should only rarely, be added back into income, citing for example Hans v Hans , 2010 ABQB 180 , [2010] AJ No 291 and Jang v Jang , 2001 ABQB 351 , 17 RFL (5th) 370. [ 35 ] Ms. Kondics argues that 50% of the amortization should be accounted for in Mr. Kondics’ income. In particular, she asks the Court to infer that Mr. Kondics derives a personal benefit from the computer. [ 36 ] The case law demonstrates that this determination turns on the facts of each particular case.

In CRG v RMH , 2014 ABQB 420 at para 114 , [2015] AJ No 170, the Court found the amortization was a reasonable deduction. However, the Court in Shopik found an amortization expense to be unreasonable because the renovation to the home business also benefited the home. In Sweezey , 30% of the amortization for a freight truck was added back in. [ 37 ] The evidence in this case establishes that the Corporation is primarily based in a commercial space and not in the home. The trailer and inflatables are used for the real estate business.

While there may be some personal benefit from a business computer, the use of it in a commercial space lessens the likelihood of a significant personal benefit. It is reasonable to anticipate that these assets will need to be replaced over time. Therefore, I find that the amortization is properly deducted as an expense in this case. 2 Meals and Entertainment [ 38 ] The parties agree that the amount in issue with respect to meals and entertainment is $6,717. [ 39 ] Mr.

Kondics proposes that 25% of the meals and entertainment expense be added back into his income to recognize that he derived some personal benefit in relation to this expense. He submits that it is reasonable to attribute half of the expense to him and half to Chantel. His half would again be divided in half because he would have entertained one or more clients on each occasion. [ 40 ] Ms. Kondics argues that the onus is on Mr. Kondics and he has provided no evidence to establish the reasonableness of the expense. In recognizing that it is reasonable to assume that both Mr.

Kondics and Chantel incurred the expense, she submits that 50% should be added back. [ 41 ] I find that it is reasonable to infer that 25%, or $1,679.25, represents the personal benefit Mr. Kondics’ derived from the meals and entertainment. 3 Telephone [ 42 ] Mr. Kondics submits that approximately 20% of the telephone expense of $4,030 reflects personal use by him and Chantel, and that half of that, or 10%, should be attributed to him for personal use. [ 43 ] Ms. Kondics argues that Mr.

Kondics’ personal benefit should be assessed at 25% based on the premise that half of the expense is attributable to him, and that half of his use was for personal reasons. She submits that there is no real evidence as to how much of the expense reflects personal use, but points to the evidence that this was his only phone. She argues that it is reasonable to infer that he used the phone equally for personal and business purposes. [ 44 ] I find that it is reasonable to attribute 25%, or $1,007.50 to income as reflecting the personal benefit to Mr.

Kondics. 4 Business Use of Residence [ 45 ] The parties agree that the expense amount in relation to use of the personal residence for business purposes is $2,782.55. [ 46 ] Mr. Kondics argues that this is a proper and reasonable business expense. However, if the Court is inclined to find that it is

not reasonable, then only 50% should be considered to be a personal benefit. [ 47 ] Ms. Kondics responds that the residence expenses would have been incurred even if the house was not used for business purposes. She requests that if the Court finds that this expense includes a personal benefit, Mr. Kondics should be required to include this information in the regular financial disclosure. [ 48 ] The business operates primarily out of a commercial premises. Nevertheless, it is not surprising that a realtor would allocate space in the home for business use given the nature of the business.

While it is true that some house expenses would be payable in any event, it is reasonable to assume that other costs, such as electricity, may increase with business use. Further, it is reasonable to assume that space in the home allocated to business use is generally not available for personal use. [ 49 ] I find that 50% of the amount in issue, or $1,391.28, reasonably reflects a personal benefit to Mr. Kondics. Further, I order that Mr.

Kondics include this information in his regular financial disclosure. 5 Vehicle Expenses [ 50 ] The parties agree the amount for vehicle expenses in 2016 was $33,514. [ 51 ] The evidence establishes that the Corporation does not own the vehicles in question. Rather, the employees drive their own personal vehicles. They keep mileage logs for driving done for business purposes and are reimbursed by the Corporation for their mileage at a rate of $0.55 per kilometre. Mr. Kondics argues, therefore, that none of this expense reflects personal use of the vehicle. [ 52 ] Ms.

Kondics notes that the logs provided for 2014 and 2015 show that 60% of the vehicle expenses for those years were paid to Mr. Kondics. Further, she suggests that at least half of the use of the vehicle could be attributed to personal use and therefore 30% of the amount of the use of the vehicle should be attributed to his income. [ 53 ] Given the evidence that the parties log their mileage for business purposes, and are reimbursed only for business use of their personal vehicles, I find that none of this expense reflects personal use. D Rental Loss [ 54 ] Mr. Kondics owns two rental properties.

In paragraph 10 of his May 8, 2017 affidavit, he deposed that he incurred a loss in 2016 due to renovations to one property. He submits that losses, like income, in relation to rental properties should be taken into account in determining his income for support purposes. [ 55 ] Ms. Kondics applies to strike paragraph 10 of Mr. Kondics’ affidavit on the same basis that she objects to paragraph 8. She also takes the position that there is no evidence upon which to determine if the renovations were done to enhance the value of the house (i.e. the capital) or if they were necessary in order to earn rental income.

She points out that in 2014, the rental properties generated $37,500 gross rent but only $1,683 in income; in 2015, they generated $49,800 gross rent but only $79.99 in income; in 2016, they generated $49,200 gross rent and a loss of $8,843. She asks the Court to infer that Mr. Kondics incurred this loss to avoid showing income that would otherwise be available for child support. [ 56 ] As in relation to paragraph 8, I decline to strike paragraph 10 although I am mindful that Mr. Kondics provided this information a short time before the hearing and Ms. Kondics was unable to examine him on it.

However, even in the absence of his evidence, it is reasonable to expect that rental properties will require renovations from time to time. Further, while the Court can look to the past for a pattern, the evidence in this case shows that the rental properties have generated at best only nominal income over the past several years. I find that this loss is reasonable and therefore it will not be added to Mr. Kondics’ income for support purposes. IV

Section 7 Expenses [ 57 ] One of the children has been in counselling. Mr. Kondics is of the opinion that counselling is not in her best interests. [ 58 ] In my view, the counsellor is best placed to determine whether continued counselling is in the child’s best interests. So long as her counsellor confirms every three months that it is in the child’s best interests to continue with the counselling, this is a valid s 7 expense. [ 59 ] Mr.

Kondics is also concerned about being obliged in advance to pay for contacts and glasses, as he does not want to pay for expensive designer glasses or contacts. [ 60 ] Expenses for glasses and contacts fall under s 7. However, s 7 contemplates only reasonable expenses and eyewear can be costly. Consequently, Ms. Kondics must obtain Mr. Kondics’ consent if the cost of glasses or contacts for a child is anticipated to exceed the highest amount previously paid, which was approximately $500 according to the best information before the Court.

In the absence of his consent to a higher expense, he is only required to pay based on a cost of $500. [ 61 ] Finally, Mr. Kondics asks that his consent be required before all s 7 expenses are incurred. Ms. Kondics takes the position that this is unreasonable in relation to dental or prescription expenses which have been covered by insurance to date, but she agrees that Mr. Kondics should be consulted with respect to new extracurricular activities. I find it is reasonable for Ms. Kondics to seek Mr. Kondics’ consent before incurring the cost of new extracurricular activities.

V Conclusion [ 62 ] Ms. Kondics’ Guideline income is $49,438. [ 63 ] Mr. Kondics’ 2016 T4 income from the Corporation of $114,974.08 is adjusted to include $41,580 in pre-tax income, $1,679.25 of the meals and entertainment expense, $1,007.50 of the telephone expense, and $1,391.28 in relation to the business use of residence expense for a total 2016 T4 income from the Corporation of $160,632.11. The difference between his 2016 line 150 income of $130,116.02 and the salary paid to him of $114,974.08 is $15,141.94.

This must be added to his newly calculated income from the Corporation, resulting in a Guideline income of $175,774.05. [ 64 ] I order that Mr. Kondics include the business use of residence information in his regular financial disclosure. [ 65 ] Counselling is a valid s 7 expense so long as the counsellor confirms every three months that it is in the child’s best interests to continue. [ 66 ] Ms. Kondics must obtain Mr. Kondics’ consent if the cost of a child’s glasses or contacts is anticipated to exceed $500.

In the absence of his consent to a higher expense, he is only required to pay based on a cost of $500. [ 67 ] Ms. Kondics must also seek Mr. Kondics’ consent before incurring the cost of new extracurricular activities. VI Costs [ 68 ] The parties are invited to address costs, as was discussed at the hearing. Heard on the 22 nd day of June, 2017. Dated at the City of Edmonton, Alberta this 8 th day of August, 2017. R. Khullar J.C.Q.B.A. Appearances: Kate MacLennan Birdsell Grant LLP for the Plaintiff Teri Burant Emery Jamieson LLP for the Defendant