Warren v Warren, 2021 ABQB 213

Court of Queen’s Bench of Alberta Citation: Warren v Warren, 2021 ABQB 213 Date: 20210322 Docket: 4803 157986 Registry: Edmonton Between: Derek Lee Warren Applicant - and - Amy Leigh Warren Respondent _______________________________________________________ Memorandum of Decision of the Honourable Mr. Justice N. Whitling _______________________________________________________ 1. Introduction [ 1 ] The Applicant, Derek Lee Warren, seeks an Order retroactively adjusting his child support obligations for the three-year period of January 1, 2017, to December 31, 2020.

The basis for this application is that his income for child support purposes was deemed by Court Order to include the past fair market value of certain restricted share units (“RSUs”), which have since been greatly devalued. In other words, the Applicant argues that he was required to pay child support on the basis of deemed income that he never actually received. [ 2 ] The Maintenance Enforcement Program (“MEP”) currently holds some $107,006.24 to secure the payment of the Applicant’s child support arrears.

If granted, this application would result in most of that money being paid out to the Applicant. [ 3 ] The Applicant also seeks variations respecting his income levels for child support purposes and s. 7 obligations due to the changes in income he has experienced as a result of his loss of employment near the end of 2019. 2. Background Facts [ 4 ] The parties were married on January 3, 2009, and separated on April 17, 2010. There is one child of the marriage, who is

presently 10 years of age. [ 5 ] From 2016 to 2019, the Applicant was employed at a publicly traded oil and gas company. His compensation included a base salary, a bonus structure, RRSP matching, and the issuance of RSUs. For income tax purposes, the value of the RSUs on the date granted was deemed to be income and was included in the Applicant’s line 150 income. However, the Applicant’s ability to actually cash in or otherwise dispose of these share units was restricted. As an insider of the company, he could not trade in the company’s stock.

He was only permitted to cash in the number of shares required to pay the tax due on the deemed value of RSUs he received. [ 6 ] This matter came before Fraser J. of this Court on September 14, 2018. At that time, it was ordered that the value of the RSUs at the time of their issuance was to be included in the Applicant’s income despite the fact that that they had not yet been converted into cash. The RSU values included in the Applicant’s income pursuant to the Order of Fraser J. were substantial.

Although I am unable to reconcile the precise figures contained in the Applicant’s submissions, more than $100,000 in RSU value was included in the Applicant’s income for the years 2016, 2017, and 2018, and either $29,443 or $42,208.94 was included for the year 2019. The issue price of the RSUs was $1.25 per unit in 2016, $2.39 in 2017, and $1.57 in 2018. [ 7 ] The Applicant’s employment with the company terminated at the end of 2019, and he was required to cash in his RSUs within 30 days of his last day of employment. By that time, the RSUs’ value had dropped sharply.

The company’s shares had been consolidated 7-to-1, and were sold at $0.86 per share, which translates into a value of approximately $0.12 for each of the pre- consolidation share units. The total proceeds realized from the RSUs was only $9,450.63. [ 8 ] There is no suggestion that the drop in the company’s share values occurred as a result of any improvident or irresponsible behaviour on the part of the Applicant, and there is no suggestion that he caused this loss of value in order to evade his child support obligations.

Rather, the company became less profitable due to market changes in the oil and gas industry. [ 9 ] The Applicant remained unemployed for much of 2020. Late in the year, the Applicant obtained alternative employment and is now earning $109,600 per year. His 2020 income was approximately $29,967, which is comprised of unemployment insurance and two months of employment income. 3.

Should the Applicant’s income for child support purposes be adjusted for the years 2017, 2018, and 2019, to reflect the devaluation of the RSUs? 3.1 Applicable Legislation [ 10 ] In support of this application, the Applicant relies upon s. 17(2) of the Federal Child Support Guidelines , SOR/97-175 (the “ Guidelines ”), and the decision of the Alberta Court of Appeal in Ewing v Ewing , 2009 ABCA 227 . An initial question arises as to whether that provision, or some other, governs this application. [ 11 ]

Section 16 of the Guidelines provides the starting point for the determining income for child support purposes: Calculation of annual income 16 Subject to sections 17 to 20, a spouse’s annual income is determined using the sources of income set out under the heading “Total income” in the T1 General form issued by the Canada Revenue Agency and is adjusted in accordance with

Schedule III. [ 12 ] As the language of the above provision confirms, a spouse’s income for income tax purposes is to be adjusted in accordance with the rules contained in

Schedule III of the Guidelines . Those rules include ss. 6 and 7, which deal with “capital gains”, “capital losses” and “business investment losses”: Capital gains and capital losses 6 Replace the taxable capital gains realized in a year by the spouse by the actual amount of capital gains realized by the spouse in excess of the spouse’s actual capital losses in that year.

Business investment losses 7 Deduct the actual amount of business investment losses suffered by the spouse during the year. [ 13 ] Sub- section 17(1) of the Guidelines provides that the starting point contained in s. 16 may be departed from where the court concludes that it would not be the fairest determination of income: Pattern of income 17(1) If the court is of the opinion that the determination of a spouse’s annual income under

section 16 would not be the fairest determination of that income, the court may have regard to the spouse’s income over the last three years and determine an amount that is fair and reasonable in light of any pattern of income, fluctuation in income or receipt of a non-recurring amount during those years.

[ 14 ] As noted above, the Applicant relies upon s. 17(2) of the Guidelines in support of this application. That provision deals with the specific subject of non-recurring capital and business investment losses. Its language provides that if the starting point in s. 16 would not provide the fairest determination of annual income, then the court may choose not to apply ss. 6 and 7 of

Schedule III: Non-recurring losses 17(2) Where a spouse has incurred a non-recurring capital or business investment loss, the court may, if it is of the opinion that the determination of the spouse’s annual income under

section 16 would not provide the fairest determination of the annual income, choose not to apply sections 6 and 7 of

Schedule III, and adjust the amount of the loss, including related expenses and carrying charges and interest expenses, to arrive at such amount as the court considers appropriate. [ 15 ] In Kohlman v Bergeron , 2015 ABCA 410 , it was held that by the combined effect of ss. 16, 17(2) and s. 7 of

Schedule III (then s. 8 of

Schedule III), is that business losses permitted to be claimed for income tax purposes may be claimed in establishing child support obligations unless a judge concludes pursuant to s. 17(2) that doing so “would not provide the fairest determination of annual income.” The Court also provided guidance as to the considerations which inform that determination. However, the business loss at issue in Kohlman , being a failed restaurant venture, is unlike the RSU devaluations in the present case. [ 16 ] In my view, s. 17(2) does not apply to the present application. Here, the Applicant is not asking the court to choose not to apply either of the rules contained in ss. 6 or 7 of

Schedule III of the Guidelines to a non-recurring capital or business loss. Rather, he is asking the court to determine that his line 150 income for the years 2017, 2018, and 2019, is not the fairest determination of his income given the RSUs’ subsequent loss of value. Such an application is properly governed by s. 17(1) of the Guidelines . [ 17 ] Although I find that it is s. 17(1) and not s. 17(2) that governs this application, I do agree with the Applicant that this application is governed by the principles reflected in Ewing, including those contained in the following passage: 39 In

summary,

section 16 of the Guidelines is the starting point for determining income for the purpose of establishing child support orders.

Section 17 requires the court to ensure that

section 16 is the fairest means of determining income, and where it is not, to determine a fair and reasonable income. The principle of fairness, which guides the court in calculating income for the purpose of setting support, applies with equal strength to both prospective and retroactive orders, and there is nothing in the Guidelines that limits the application of

section 17 to prospective support orders. The chambers judge, therefore, performed the duty imposed on him by

section 17 , and did not err when he determined that

section 16 was not the fairest method of determining income. He was entitled to apply

section 17 to an application for retroactive child support, and his decision to average is owed deference. The mother's appeal is dismissed. 3.2 Case Law Respecting Shares, Stock Options, and RSUs [ 18 ] Applying s. 17(1) of the Guidelines and the principles reflected in Ewing to the application before me, it becomes necessary to determine whether or not the Applicant’s line 150 income for the years 2017, 2018, and 2019, “would not provide the fairest determination of the annual income”.

As noted above, the evidence indicates that the market value of the RSUs at the date of their issuance was included in the Applicant’s income for income tax purposes during those three years. [ 19 ] The case law pertaining to stock options, RSUs, and similar instruments indicates that their value ought generally to be included in a child support payor’s income after disposition: MacDonald v MacDonald , 1997 ABCA 409 at paras. 18-19 .

Where, however, such instruments have not yet been converted into cash, such that their disposition value cannot yet be determined, their inclusion as income may result in unfairness. In the illustrative case of McCaffrey v Dalla-Longa , 2008 ABQB 183 , it was argued that the market value of certain stock options ought to be included in the payor’s income for child support purposes notwithstanding the fact that the options had not yet been exercised or otherwise disposed of.

In rejecting that argument, McIntyre J. wrote: 141… Child support is to be based on the payor parent’s income or available means of providing support. It would be unfair to impute an income to the Respondent based on the market value of these options (whether historical or present) when the Respondent has not realized an actual gain. The notion of imputing a hypothetical income is unsettling. The stock market is by nature volatile. Options which are currently “in the money” may not be so in the future and should not be considered as income.

A payor parent should not be made to pay child support based on a gain which might occur in the future. Conversely, a payor parent who hold options that are trading at a loss cannot claim to have suffered a drop in income for calculating support. [ 20 ] Similarly, in Warren v Baird , 2015 ABQB 479 at paras. 18-20 , Kenny J. held that the value of certain stock options acquired by a payor were not to be included in the payor’s income for child support purposes.

Although stock options form part of Line 150 income, and are therefore presumptively to be included as income for child support, the stock options at issue in that case were non- recurring, varied greatly in amount, had never been disposed of, and were being saved by the payor for retirement purposes. [ 21 ] In the present case, the value of the RSUs at the date of their issuance was included in the Applicant’s Line 150 income, and was included as income for child support purposes in the Order of Fraser J., which was subsequently affirmed on appeal.

Since these units were later cashed in at a much lower value, the concerns raised by McIntyre J. in McCaffrey have been realized. That is, the Applicant was ordered to pay child support on the basis of deemed income that he never actually received due to a subsequent change of market value. 3.3 The Respondent’s Arguments in Opposition [ 22 ] The Respondent raises several objections to the retroactive adjustments sought by the Applicant. [ 23 ] Firstly, the Respondent emphasizes that the Order of Fraser J. reflects findings as to the Applicant’s income levels for the

years in question, and that the Order was affirmed on appeal. Since the Applicant did not successfully appeal those findings as to his income levels, it is argued that he is precluded from doing so now. I do not accept this argument. The present application is not an appeal, but rather an application for a variation based upon a material change in circumstance. The Applicant does not suggest that Fraser J. committed an error in issuing the Order.

Instead, it is argued that subsequent events have rendered the income levels used in that order to be unfair and improper. [ 24 ] Secondly, the Respondent argues that it would be unfair to make adjustments to the Order of Fraser J. now since that Order failed to deal with some $16,480 in additional arrears for the year 2015, and that the Respondent chose not to appeal that aspect of the Order. I do not find this consideration to be of significance to the present application.

Since this is not an appeal, I am unable to determine whether or not the Respondent ought to have been entitled to additional arrears pursuant to that Order. [ 25 ] Thirdly, the Respondent argues that the Applicant has failed to provide her with adequate disclosure throughout the history of their litigation, and that this failure weighs against the relief sought in this application. In particular, she argues that the Applicant has failed to provide his full income tax returns for the years 2019 or 2020. Again, I do not find that this consideration to be of significance to the present application.

The parties appear to be in agreement as to the Applicant’s income levels during the years at issue. Although the Respondent may well be entitled to additional disclosure, there is no application for disclosure before me, and the Applicant’s income levels are adequately supported by the available material. [ 26 ] In conclusion, I do not find that any of the considerations raised by the Respondent would render the relief currently sought by the Applicant to be unfair.

Given that a substantial portion of the Applicant’s arrears is attributable to obligations arising from Line 150 income that he never actually received, fairness requires an adjustment. 3.4 Conclusions [ 27 ] Applying the principles reflected in the cases above to the circumstances of the present application, I find, pursuant to s. 17(1) of the Guidelines , that the Applicant’s Line 150 income for the years 2017, 2018, and 2019, does not reflect the fairest determination of his income.

Since those income levels include the values of the RSUs on the dates that they were issued, and since the RSUs were later disposed of for substantially less, I find that the Applicant’s income for the years 2017, 2018, and 2019, should be adjusted to reflect the values of the RSUs when they were disposed of near the end of 2019. [ 28 ] As noted above, I have had some difficulty reconciling some of the figures contained in the Applicant’s submissions. If the parties are unable to agree on the necessary adjustment amounts, they may re-apply to me on the basis of written submissions. 4.

The Applicant’s Income for 2020 [ 29 ] As noted above, the Applicant remained unemployed for much of 2020, and only obtained new employment near the end of that year. His earned income in 2020 was approximately $29,967. He also cashed in some $90,000 in RRSP money, sold his vehicles and replaced them with less expensive vehicles, and sold a recreational cabin. He also paid some $1,000 per month in child support throughout 2020.

Through these payments and garnishment proceedings, the Respondent received a total of $21,135.03 during 2020. [ 30 ] In relation to setting the Applicant’s income level for 2020, the Respondent argues that the Applicant has provided an insufficient explanation for his termination from his former employer, and has also failed to explain his underemployment throughout 2020. I do not find there to be any legitimate basis to question the Applicant’s termination or his relative unemployment since termination.

There is no evidence that the Applicant has been deliberately underemployed for the purpose of evading his child support obligations, or that he is otherwise to blame for his termination from his former employer. [ 31 ] The Respondent also points out that the Respondent received some $48,312.62 from the sale of his recreational property and yet failed to apply that money towards his child support arrears.

However, given that the recreational property was sold at a loss, I do not find that this amount ought to be included in the Applicant’s income for the year. [ 32 ] Regarding the $90,000 in RRSP money withdrawn by the Applicant, RRSP income is included in taxable income. Consequently, it is presumptively to be included as income for child support purposes by operation of s. 16 of the Guidelines .

However, RRSP income may be excluded from income in certain circumstances, such as where a withdrawal was used to pay down joint family debt, or where it has already been accounted for in the division of family property: Fraser v Fraser , 2013 ONCA 715 at para. 97 ; McKenzie v Perestrelo , 2014 BCCA 161 at para. 82 . [ 33 ] In the present case, the Applicant used his RRSP withdrawals as one of his main sources of income for the year 2020, given his unemployment.

I note that a portion of his income during his years of employment with the oil and gas company included RRSP matching, and it has not been made clear to me whether those employer contributions have already been included in his income in previous years.

In any event, given that the $90,000 RRSP withdrawal appears to have been used as a substantial portion of his basic income for the year 2020, I find that it is appropriate to include that income for child support purposes. [ 34 ] I conclude that the Applicant’s income for child support purposes for the year 2020 shall be set at $29,967 plus $90,000 or $119,967. 5. The Applicant’s Income for 2021 [ 35 ] On a go-forward basis, the Applicant’s income for child support purposes shall be set at $109,600.

Section 7 Adjustment

[ 36 ] The Respondent acknowledges that there must be an adjustment of $3,600 in s. 7 obligations for the year 2020 due to unforeseen changes resulting from the COVID-19 pandemic. [ 37 ] The Applicant asks that, given the significant drop in income he has experienced since his termination, his obligation to pay $400 per month in advance for his s. 7 obligations ought to be terminated. I agree that this advance payment ought to be reduced to the amount of $250. 7.

Order Granted [ 38 ] The Applicant’s income for child support purposes for the years 2017, 2018, and 2019, is varied to reflect the values actually received for the RSUs at the time of their liquidation. [ 39 ] The Applicant’s income for child support purposes for 2020 is set at $119,967. [ 40 ] The Applicant’s s. 7 obligations for the year 2020 are to be adjusted downwards by $3,600. [ 41 ] The Applicant’s advance monthly payment of s. 7 expenses is reduced to $250. [ 42 ] The Applicant’s income for child support purposes for 2021 and going forward is set at $109,600. [ 43 ] The parties may seek adjustments respecting the years 2019 and 2020 by variation order or agreement once full tax returns become available.

Heard on the 1 st day of February, 2021. Dated at the City of Edmonton, Alberta this 22 nd day of March, 2021. N. Whitling J.C.Q.B.A. Appearances: Barry M. King for the Applicant Tammy L. Cameron for the Respondent