C.M. v. P.M, 2019 NSSC 250

Supreme Court of Nova Scotia (FAMILY DIVISION) Citation: C.M. v. P.M , 2019 NSSC 250 Date: 2019-08-26 Docket: 1201-061669 Registry: HFX Between: C.M. APPLICANT v. P.M. RESPONDENT Library Heading Judge: The Honourable Justice Cindy Cormier Heard: January 28, 29, 30 in Halifax, Nova Scotia Submissions: January 30, 2019, and February 25, 2019 Written Decision: August 26, 2019 Subject: Prospective and retroactive table amount of child support. Prospective and retroactive special or extraordinary expenses. Determination of income.

Summary: 1 . Introduction The mother, Ms. M filed a Notice of Variation Application on September 17, 2015, pursuant to

section 17of the Divorce Act , R.S.C. 1985 (2 nd Supp.), c. 3, and applicable Guidelines , SOR 97/175 . Ms. M sought an increase in prospective child support paid for the children from the date of Application in September 2015. Ms. M sought a retroactive increase in the table amount of child support paid to her by the father for their children, J and M dating back to June 1, 2011. Ms. M also sought an increase in prospective child support paid for the children from the date of Application in September 2015. Ms.

M engaged the services of an expert to complete a Guideline Income Report to establish the payor father’s, Mr. M’s income for the years between 2011 – 2017. Ms. M asked the Court to consider the three different scenarios illustrated in the Guideline Income Report. The expert also commented about Mr. M’s approximate income for 2018. The parties two children, J and M lived primarily with their mother, Ms. M. M continues to live with Ms. M, J started University locally and he lived in residence throughout the 2018 /2019 school year. J spent considerable time at Ms. M’s home throughout the school year.

Their father, Mr. M has had regular parenting time with J and M over the years. The parties agree both children remain dependent. Mr. M indicated J had signed a rental agreement for an apartment starting May 1, 2019. On May 2, 2017 Ms. M filed an Amended Notice of Variation Application, pursuant to

section 17 of the Divorce Act , R.S.C. 1985 (2 nd Supp.), c. 3, and applicable Guidelines , SOR 97/175 . In addition to her claims under

section 3 of the Guidelines , Ms. M sought prospective and retroactive child support for special or extraordinary expenses pursuant

section 7 of the Guidelines , between June 1, 2011 to the date of trial. Ms. M. sought to have Mr. M pay his proportionate share of expenses incurred for special expenses such as psychological services, and dental services. In addition, she sought to share proportionately the cost of certain extracurricular activities or special expenses which were extraordinary. The other expenses to be addressed included post-secondary expenses for J. Ms. M mended her pleadings to clarify she was seeking costs

Issues: I must first consider Ms. M’s claim for an increase in prospective child support under

section 3 of the Guidelines , beginning September 17, 2015. I must then consider Ms. M’s claim for prospective child support under

section 7, of the Guidelines , certain special or extraordinary expenses from May 2, 2017 onward. Once I have dealt with Ms. M’s prospective claims, I must consider Ms. M’s claims for a retroactive increase in child support under

section 3, of the Guidelines from June 2011 to September 16, 2015. Finally, I must consider Ms. M’s claim for retroactive child support under

section 7, of the Guidelines , certain special or extraordinary expenses for the period between June 2011 through to May 1, 2017. I must determine Mr. M’s income in each year between June 2011 - 2019. The Nova Scotia Court of Appeal recently commented in Reid v. Faubert , 2019 NSCA 42 , at paragraph 24 about the starting point for an income analysis under s. 16. The Court was reminded that in Johnston v. Barker , 2017 NSCA 53 , Justice Hamilton found that “failing to start with a consideration of the payor’s line 150 income as directed by s. 16 may open a trial judge’s income determination to appellate review.

This is especially so where the reasons do not illustrate the judge’s rationale. Ms. M has asked the Court to consider if Mr. M has used his corporation to artificially reduce his income per

section 16, and to determine if Mr. M has proven why pre-tax corporate income should not be included, or if it is to be included, why it should be done at a lesser percentage than proposed. Result: I order Mr. M to pay to Ms. M forthwith: 1. Prospective child support pursuant to

section 3 of the Guidelines : October 2015 to December 2015 $928.83, 2016 $7518.60, 2017 $2743.32, January to August 2018 $20,520.00, September 2018 to February 2019 $12,333.00 for a total of $44,043.75 : 2 . Prospective child support pursuant to

section 7 of the Guidelines . For 2017 $234.51 and for 2018 $211.11 for a total of $545.62 . In addition, the parties will have to account for J’s post secondary expenses for 2018 / 2019, as detailed herein. 3 . Retroactive child support pursuant to

section 3 of the Guidelines : For 2011 $2801.76, 2012 $8,983.20, 2013 $8707.68, 2014 $6942.72, January to September 2015 $2786.49 for a total of: $30,221.85 4 . Retroactive child support pursuant to

section 7 of the Guidelines . The following amounts in special or extraordinary expenses between 2011 and 2016. $64.50, $139.96, $88.35, $148.80, $158.10, $27.90, $86.49, $117.65, $74.40, $245.88, $79.05, $1325.25, $478.95, $611.80, $186.00, $256.58, $198.54, $186.00, $256.58, $472.34, $174.00, $234.89, $240.02, $40.01, $184.00, $92.00, 253.82, $67.68, $248.30, $144.88, and $589.93 for a total of $7,472.65. THIS INFORMATION SHEET DOES NOT FORM PART OF THE COURT'S DECISION. QUOTES MUST BE FROM THE DECISION, NOT THIS LIBRARY SHEE SUPREME COURT OF Nova Scotia FAMILY DIVISION Citation: C.M. v. P.M. , 2019 NSSC 250 Date: 2019-08-26 Docket: 1201-061669 Registry: HFX Between: C.M. APPLICANT v. P.M.

RESPONDENT Judge: The Honourable Justice Cindy G. Cormier Heard: January 28, 29 and 30, 2019 in Halifax, Nova Scotia Written Release: August 26, 2019 Counsel: Michelle Axworthy for the Applicant William Leahey for the Respondent By the Court: [2] Ms. M applied to vary child support prospectively and retroactively. Her claims are under Sections 3 and 7 of the Federal Child Support Guidelines . [3] I must consider prospective changes to child support before retroactive ones: Staples v. Callendar, 2009 NSCA 49 , at paragraph 41 . [4] Mr.

M argued that the parties had an agreement regarding how his annual income for child support would be determined and that the agreement should apply. [5] Ms. M stated she had difficulty obtaining and understanding additional financial disclosure from Mr. M in order to establish his annual income for child support and for spousal support at the time of separation. Ms. M also stated that the “back and forth” asking for additional information was “costing her”, and she could not afford it at that time. Orders Minutes of Settlement Entered Into In 2004 [6] In 2004 the parties agreed to set Mr.

M’s annual income for child and spousal support at $150,000.00. As of October 1, 2004 Mr. M was ordered to pay child support of $1794.00 per month. [7] Mr. M was also ordered to pay Ms. M spousal support in the amount of $3,100.00 monthly, net of tax income, and to pay annually to Ms. M lump sum maintenance to compensate her for any income tax implications of spousal support. [8] In addition, Ms. M was found to be entitled to receive approximately $400.00 as a Child Tax Benefit, resulting in $3,500.00 per month being available to Ms. M. Mr. M was ordered to top up the monthly payment to Ms.

M to ensure she received $3,500.00 net of tax. [9] In 2004, Ms. M agreed to seek employment upon the parties’ youngest child, M commencing school in September 2007. [10] The Minutes of Settlement entered into by the parties in October 2004 contemplated a review of spousal support in October 2007; specifying that: the spousal support may be reviewed but not necessarily varied at that time. Neither party can predict what the result of the review will be at this time. Any variation of spousal support after October 2017 shall be made in accordance with s. 17 of the Divorce Act .

No one factor of s. 17 of the Divorce Act will take any precedence over any other factors in s. 17 . [11] Clauses 34 through 38 of the Minutes of Settlement entered into in 2004 specified: 34. Child support payments will be varied from time to time to reflect changes in the income of the Husband and the status of any special or extraordinary expenses for the children. The Husband shall be responsible for J’s current dental treatment. 35.

To facilitate the calculation of varied child support payments, the Husband will, on or before May 15 of every year, provide the Wife at her written request with the financial information referred to in the Federal Child Support Guidelines ,

Section 21, and the Wife will provide the Husband with current information about the status of any expenses referred to in the Guidelines ,

Section 7. If

Section 7 expenses are being paid, the Wife shall also provide her income information to the Husband . (my emphasis) 36. It will be the responsibility of each party to file his or her income tax returns in time to permit a May 15 compliance with this Agreement. 37. Each spouse’s annual income will be determined as provided in the Federal Child Support Guidelines ,

Section 16. (my emphasis) Child Support payable pursuant to this Agreement shall be adjusted at least annually in any given year to reflect the parties’ annual income after income tax information has been exchanged in a given year. [12] Despite the court order which was in place at the time Mr. M stopped paying spousal support in 2007. Ms. M stated that Mr. M took the position that she should be back at work, but she was unable to return to work at that time.

Corollary Relief Order [13] In June of 2009 a Corollary Relief Order was granted based on settlement discussions which took place in April and May 2009. [14] Ms. M stated that prior to their divorce being finalized in July 2009, Mr. M failed to provide all financial disclosure she requested. Ms. M indicated she was concerned about whether the expenses Mr. M was claiming for his business were “true expenses”. [15] The parties agreed Mr. M’s annual income for child support for 2007 would be set at $175,966.00, for a monthly child support payment of $1,041.84. Mr. M agreed to pay Ms.

M all outstanding child support arrears owing for 2007 by May 31, 2009. [16] The parties also agreed Mr. M’s annual income for child support purposes in 2008 would be set at $181,373.00, for a monthly child support payment under

section 3 of the Guidelines of $2,264.38 effective May 1, 2009, through May 31, 2010. Ms. M indicated that any other child related expenses were “not that significant”. [17] Mr.

M was ordered to pay spousal support in the amount of $1125.00 per month for the period from January 1, 2008 through April 1, 2009 for a total of $18,000.00, and ongoing spousal support of $1,500.00 per month effective May 1, 2009, through November 1, 2010, at which point spousal support would “terminate absolutely”. [18] I have considered that when: as a result of giving priority to child support, a spousal support order was not made, or the amount of a spousal support order is less than it otherwise would have been, any subsequent reduction or termination of that child support constitutes a change of circumstances for the purposes of applying for a spousal support order, or a variation order in respect of the spousal support order, as the case may be.

Spousal support was terminated absolutely in November 2010.

Section 15.3(3) (of the Divorce Act , R.S.C. 1985 (2 nd Supp.), c. 3, is presumed to have been applied properly at the time the Corollary Relief Judgment was granted. [19] Mr. M has argued that when negotiating the Corollary Relief Judgment the parties agreed to a specific formula for calculating Mr. M’s income.

He pointed to paragraph 11 of the Corollary Relief Judgement granted June 10, 2009, wherein the parties specified that effective June 1, 2010: child support shall be based upon the Petitioner’s Line 150 of his income tax returns, which includes the grossed up dividends received by the Petitioner, as well as dividends dispersed to any parties not at arms length to [Mr. M.].

Any adjustments to child support shall be made on June 1 st each year. [20] Paragraph 14 of the Corollary Relief Judgement dated June 10, 2009 specifies that clauses 34 through 38 of the Minutes of Settlement entered into in 2004 continue to be applicable (reproduced in paragraph 10 of this decision). I find the Federal Child Support Guidelines sections 15 – 25 apply when establishing Mr. M’s annual income for child support. [21] The Divorce Act R.S.C. 1985 (2 nd Supp.), c. 3, specifies at

section 16: 16. Subject to sections 17 – 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. … 17.

(6.1) A court making a variation order in respect of a child support order shall do so in accordance with the applicable guidelines. Settlement Order February 2011 [22] Ms. M filed an Application to Vary the Corollary Relief Judgement in Bridgewater Nova Scotia in August 2010. Once again Ms. M took the position that Mr. M was not disclosing all the income information necessary for her to determine his annual income for child support based on all the income available to Mr. M. [23] In 2010 Ms. M requested child support paid by Mr. M be increased from $2,264.00.38 to $4,085.00. Ms. M sought to have Mr.

M’s gross corporate receipts used to calculate the amount of child support payable each year. [24] A settlement conference was held in November 2010, Ms. M stated that she could not properly explain or understand the arguments to be made to assist in obtaining further financial disclosure to argue and then fairly determine Mr. M’s annual income for child support. Ms. M also argued she did not have the money to pay a lawyer to do the work.

She explained that she would have had to hire an accountant and a lawyer and she did not have the money to do so, and she could not afford to take the matter to trial. [25] The Court’s running file reflects that in August 2010 Ms. M filed her Application as a self represented litigant, and she appeared as a self represented litigant at the settlement conference held in November 2010, at which time the parties reached some agreements. Ms. M had not applied to vary any special or extraordinary expenses, however Mr. M did agree to cover the cost of day camps or other

special summer activities the children would engage in while in his care. (my emphasis) Mr. M agreed not to seek a contribution toward the cost of those activities from Ms. M. [26] Ms. M appeared with her new counsel for the continuation of the settlement conference in January 2011. The agreement reached by the parties at that time was confirmed by Ms. M’s legal counsel, and the Settlement Order was signed by Ms. M’s lawyer. [27] Ms. M explained that although the order was signed, she felt she had no choice but to agree that Mr.

M’s income for child support for the period June 1, 2010 through May 31, 2011 was $187,331.08. Mr. M was ordered to increase child support payments paid to the mother to $2331.00 per month. Mr.

M was also ordered to fund a testamentary trust for a minimum of $500,000.00 by maintaining a life insurance policy with the mother designated as a trustee. [28] The Settlement Order issued in February 2011dealt with both parenting issues and child support and it states in part: “in all respects the terms and conditions of the Corollary Relief Judgment, as amended by this Order, shall remain in full force and effect.” [29] Clauses 34-38 of the Minutes of Settlement entered into in 2004 continued to apply to the Corollary Relief Order dated June 2009, and I further find clauses 34-38 of the Minutes of Settlement entered into in 2004 (reproduced at paragraph 10 of this decision) continued to apply to the Settlement Order entered into in February 2011, and that the Federal Child Support Guidelines apply.

Ongoing questions about Mr. M’s income [30] Ms. M indicated that she approached several accountants in an ongoing effort to educate herself about how to interpret the financial disclosure she was being provided by Mr. M. Ms. M stated that she was advised to pay attention to expense items such as continuing education, to be alert to the money being received by Mr. M’s corporation from the partnership, and to be alert to any additional family trusts, or to accelerated payments of long term debt during “child support years”. Analysis Determination of Mr. M’s income [31] At paragraphs 20 – 25, in Reid v.

Faubert , 2019 NSCA 42 , the Honourable Justice Bourgeois stated: [20] The Guidelines set out a comprehensive scheme for determining the appropriate quantum of child support to be paid in a given situation. The objectives of the Guidelines are stated as follows: Objectives 1 The objectives of these Guidelines are (

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

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

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

d) to ensure consistent treatment of parents and children who are in similar circumstances. [21] For children under the age of majority, the Guidelines presume that the quantum of child support will be determined by the applicable table, and based on the paying parent’s income (s. 3(1)(a)). [22] Section 3(3) requires that child support be paid based on the table for the province in which the parent against whom support is sought, resides.

Here, the parties agree the Ontario tables are applicable. [23] One way in which the Guidelines strive to meet the above objectives is to provide a method for the determination of a parent’s annual income. Sections 15 through 20 set out a mechanism for determining income; however, only 16 through 18 are relevant to the issues before us. They provide: Calculation of annual income 16 Subject to Sections 17 to 20, a parent'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.

Section 16 replaced: O.I.C. 2000-554, N.S. Reg. 187/2000; amended: O.I.C. 2007-321, N.S. Reg. 294/2007. Pattern of income 17(1) If the court is of the opinion that the determination of a parent's annual income under

Section 16 would not be the fairest determination of that income, the court may have regard to the parent's income over the last 3 years and determine an amount that is fair and reasonable in light of any pattern of income, fluctuation in income or receipt of a nonrecurring amount during those years. Subsection 17(1) replaced: O.I.C. 2000-554, N.S. Reg. 187/2000. Non-recurring losses

(2) Where a parent has incurred a non-recurring capital or business investment loss, the court may, if it is of the opinion that the determination of the parent'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, Adjustments to Income, as adopted herein, 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. Shareholder, director or officer 18(1) Where a parent is a shareholder, director or officer of a corporation and the court is of the opinion that the amount of the parent's annual income as determined under

Section 16 does not fairly reflect all the money available to the parent for the payment of child support, the court may consider the situations described in

Section 17 and determine the parent'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 recent taxation year; or (

b) an amount commensurate with the services that the parent provides to the corporation, provided that the amount does not exceed the corporation's pre-tax income. Adjustment to 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 as salaries, wages or management fees, or other payments or benefits, to or on behalf of persons with whom the corporation does not deal at arm's length must be added to the pre-tax income, unless the parent establishes that the payments were reasonable in the circumstances. [24] The starting point for an income analysis is s. 16, often referenced as a determination of “line 150” income. In Johnson v. Barker , 2017 NSCA 53 , Justice Hamilton said: [23]

Section 16 of the Child Support Guidelines provides the starting point for determining the appellant’s 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.

Schedule III provides for adjustments, including those to neutralize the favourable tax rates for dividends and capital gains, as compared to other income, and to take into account non-cash expenses such as capital cost allowance. [24]

Section 17 provides that if the court is of the opinion that s. 16 does not provide the fairest determination of the appellant’s income, the court can determine an amount based on the spouse’s pattern of income over the last three years. See also M.C. v. J.O., 2017 NBCA 15 , at para. 14 ; Gosse v. Sorensen-Gosse , 2011 NLCA 58 , at paras. 90-91 ; and Bembridge v. Bembridge , 2009 NSSC 158 , at para. 9 . [25] Failing to start with a consideration of a payor’s line 150 income as directed by s. 16 may open a trial judge’s income determination to appellate review.

This is especially so where the reasons do not illustrate the judge’s rationale. [32] The parties both retained financial experts. Guideline Income Report, prepared by Ms. M’s expert [33] Nikki Robar, CPA, CA, CBV, (hereafter Ms.

R) was engaged by Ms. M and was qualified as an expert to give opinion evidence in relation to Mr. M’s annual income for child support and spousal support, specifically she was qualified as an expert: experienced in financial analysis including business evaluations of tangible and intangible assets and quantification of guideline income in family law matters for the purposes of child or spousal support, capable of giving opinion evidence on the subject of guideline income for support purposes (my emphasis). No objections were raised about the admissibility of her expert opinion evidence. I found Ms.

R’s evidence to be of assistance to the Court, and have relied on her evidence. WBLI v. Abbott and Haliburton . [34] When Mr. R was asked about the type of report she had prepared. she responded as follows: I am a chartered ... a CPA, a chartered accountant by ... by trade but I haven't prepared financial statements in a long time. My roll (sic) now is to prepare evaluation reports or a financial analysis for expert reports so it falls under the standards of, for our work, it falls under the standards of the Chartered Institute of Business Valuators, Canadian Institute, sorry, of Chartered Business Valuators.

And so this report falls under the expert report, the standard 310 which is expert reports under the standards of the CICBV. So it is not an audit, it is not a review, it's not a preparation of financial statements. Within our standards we have different levels of work that we would do, very similar to what you would do in the accounting world but this is sort of a stand-alone different type of report. As an expert report, we rely on the information provided to us.

If there is a reason not to rely on it or if we're given sufficient information to do extra, more robust analysis, we would do that analysis but typically we rely on the information provided as accurate and that's one of the key assumptions in our report. [35] Ms. R completed a Guideline Income Report, December 11, 2018 of Mr. M’s annual income for child support for the years

2011, 2012, 2013, 2014, 2015, 2016, and 2017. After reviewing additional disclosure received from Mr. M after the report was completed Ms. R also gave her opinion with regard to an estimate of Mr. M’s income for 2018. [36] Ms. R explained that in her Guideline Income Report she had outlined three different scenarios . In her direct examination Ms. R explained what the findings in the various schedules indicate:

schedule one is the calculation of guideline income and it follows the ... basically the guidance prescribed by the federal child support guidelines. The starting place, in accordance with the guidelines, is line 150 income. … It then follows through

schedule three adjustments and those

schedule three adjustments, in this situation, are annual dues and the dividends. So the annual union professional ... excuse me, professional or like dues come directly again from the individual's tax return and those are prescribed

schedule three adjustments to line 150 income. … I'm applying Sections 15 through 20. My process is typically to follow the guidelines as they go through so the layout of

schedule one would literally follow through the guidelines in terms of starting with line 150. We then make the 18(1)(

a) adjustment, again acknowledging that at the end of the day it's the discretion of the Court to make any adjustments from that, it's not the discretion of the expert. We then take into consideration

schedule 19 and we do that by ... in a couple of different ways. One is we take into consideration past experience and past case law, things that have come to our attention over the time of preparing multiple, multiple guideline income reports, again acknowledging that

Section 19 is completely at the discretion of the Court (my emphasis). … So the source of that information again is the individual's tax return, personal tax return. Then the dividends from taxable Canadian corporations,

schedule three suggests that you reverse out the taxable capital ... excuse me, the taxable dividends and replace with the actual dividends. So when dividends appear on an individual's personal tax return they've been grossed-up for tax purposes and then later in the tax return there's a ... there's a dividend tax credit. They're taxed differently from normal income. So that's why

schedule three prescribes that adjustment so that is the adjustment you see at rows seven and eight where we're taking ... we're deducting taxable which is the exact amount that would be in the person's tax return so that's the row three amount.

We're deducting that off of income and we're replacing it with the actual amount of dividends paid by the company . (my emphasis) … We do an adjustment later . (my emphasis) So based on case law and our experience, when an individual is able to have the discretion to pay dividends rather than salary from a company and thereby enjoy the benefits of a better tax rate typically on the dividends, the guidance is that the benefit of that gross-up or the tax credit that appears later in the tax return should be added to the individual's ... the individual's income and that's again an adjustment in accordance with

Section 17 of the guidelines where they get a preferred tax rate on those dividends . (my emphasis) …. So the gross-up again is removed and added back, that occurs at line ten and is explained in the report. (my emphasis) Lines 11 and 12 are the disability payments received and if you look through, under the notes column, you'll see that there's reference to a note four. Note four will then explain the sources of the disability payments received by [Mr.

M.] and this ... the sources of these information are various letters, information provided in the disclosure, etc. where we obtained the actual amount of payments that were received for disability by [Mr. M.]. These are not reported on the individual's tax return so these are sources of income but are not taxed. They've come from various letters that are referenced in our scope of work but not from any one place. … So in the preparation of guideline income, the objective that I always consider is we're trying to equate the cash, the pretax cash that the individual has with an employed person (my emphasis).

So if you've got a tax-free amount, that tax-free amount needs to be grossed-up to go into the guideline income to account for the fact that they don't then pay tax on it and by doing that, you would equate it to a person who's paying tax on their source of income. There are different ways to do it. You can take the effective tax rates and just gross it up using an effective tax rate. Given our marginal rate system that we have both in the province and in the country that's, you know, a bit more rounding than we like so we actually mock up the tax return.

In other words, we enter all the information into our tax preparation program and essentially calculate what would this person need to make as pretax income in order to have the same amount of cash at the end of the day as this individual had with their non-taxable income. So when we say we mocked up the tax return, that's what we literally recreated the tax return, and input that number until we got to the after-tax quantum that [Mr.

M.] would have had had he received a taxable amount. … At the preparation of this report, 2018 had not yet been completed so we wouldn't have had full 2018 information and we have not arrived at a conclusion, we've simply gathered the information that was available to us with regard to 2018 and included it herein . (my emphasis) In the preparation of the other years in the disclosure provided is understanding that [Mr. M.] would received $4,000 a month from Desjardins as long-term disability benefits so $4,000 a month times the 12 months in 2018 would get you to $48,000.

The RBC insurance premiums are a little bit different. They're about 7,000, I believe, plus another 1,000 for the first seven months of the year and that increases slightly for the remaining five months of the year. So that would be a calculation of the ... of a

year's worth of the disability benefits based on the letter that we observed from RBC. Commentary Report provided by Mr. M’s expert [37] Mr. M’s expert, Stuart Maclean CPA, CA, (hereafter Mr. SM) was qualified to give an opinion with respect to the preparation of financial documents, specifically: …the preparation and

interpretation of corporate financial documents (my emphasis) with respect to generally accepted Canadian accounting practices or standards for private enterprises. and Mr. SM prepared a Commentary Report on the PWC Report on Guideline Income of [Mr. M.], and a Retained Earnings Report for [Mr. M.] Dentistry Inc. [38] I accept Ms. R’s opinion evidence with regard to the various methods used to determine Mr. M' annual guideline income for child support, by “trying to equate the cash, the pre-tax cash that Mr. M has with an employed person”. [39] When asked about Mr. M’s income in 2017 Ms.

R stated in part: Yes, that was referenced in I believe it's the 2017 reconciliation of income that was prepared by Levy Casey Carter MacLean. They referenced that in 2017 the corporate income of [Mr. M.], that's the company, [Mr. M.] ... [Mr. M’s business] was reduced by a dividend ... excuse me, a bonus that was declared in 2017. So that reduces the corporate income in 2017 and essentially pushes that bonus to 2018 for the individual.

So when you declare a bonus in one year and it pushes into the next year, you get the benefit of the corporate deduction in the year it's declared but you don't pay tax on it until the year that it's received because individuals pay tax on a cash basis and companies pay tax on an accrual basis. … So we follow the guidelines as outlined in the report. We follow the federal child support guidelines and the guidelines indicate, at

Section 18 and it's in appendix C, that where a spouse, shareholder, director or officer of a corporation ... sorry, I'm looking at 18(1), it's 19 we should be looking at. Imputing income, so the Court may impute income to a spouse as it considers appropriate in the circumstances including attribution of income. I'm going to scratch that for one second, I'm supposed to be looking at 18(1)(a). Attribution of income first and then imputing income. So 18(1)(a), which is on page 16 of the report and appendix C: Where a spouse is a shareholder, director or officer of a corporation and the Court is of the opinion that the amount of the spouse's annual income is determined under 16,

Section 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

Section 17 and determine the spouse's annual income to include subsection (

a) all or part of the pretax income of the corporation and of any corporation that is related to that corporation for the most recent tax year. (my emphasis) So our starting point again for guideline income following through the guidelines is line 150 income. We then go make the

schedule three adjustments to the line 150 income. For purposes of corporation attribution, we will then consider the nature of the company but for a professional services corporation that doesn't have sort of a capital intensive nature, we would add back then all of the pretax corporate income. It's ultimately the Court's discretion but that's the number we would add to income to arrive at guideline income including a corporate attribution figure. (my emphasis) … So a professional services corporation is essentially a flow-through.

It's a mechanism in place for professionals like myself, like lawyers, like dentists, to be able to shelter, defer, otherwise have some ... the access to some tax deductions that an employed person might not . (my emphasis) So in a professional services practice you don't need a lot of equipment so the equipment used by the dentists and the accountants and the lawyers tends to be owned at the overall business level. In this situation, the equipment is owned at the Atlantic Dental level. The professional services corporation doesn't then have to buy that equipment.

It doesn't have to carry the receivables of the dental operations, much like a partner in any firm that has made the decision to incorporate. You then have the ability to manage your income a little bit better. You have access to certain tax deductions that again wouldn't be available to other individuals but there's not really ... there's not really an investment that that business has to make other than in its partnership interest in this situation . (my emphasis) [40] Ms. R. was asked if she made an adjustment to account for the dividend paid when attributing the pre-tax corporate income to Mr.

M, and she replied as follows: Yes, we have. So that's the issue with pretax corporate income. Pretax corporate income is then taxed and the accumulation of the after- tax amount is the number that dividends are paid from. So it retain and accumulates into retained earnings, retained earnings then have dividends come out of those. So if you include 100 percent of the pretax income and the dividends that are in line 150, you've effectively double counted that level of income. So we would always remove the dividends from the income so as not to double count what the company has been able to generate. (my emphasis)

Schedule 1 [41] Ms. R was then asked if in

Schedule one, she had attributed any deductions from pre-tax corporate income, or expenses of the corporation. Ms. R responded: It actually attributes all of the expenses . (my emphasis) So this, by including pretax corporate income, we are effectively accepting that all of the expenses reported by the company are bona fide business expenses. So none of them are personal in nature, (my emphasis) everything that has been deducted as an expense in the company, is then not available for corporate attribution. That's the assumption made on

schedule one. [42] Mr. R was asked if she had taken any steps to review specific receipts of the company or whether “Schedule 1” was assumed that the financial statements all reflect reasonable expenses for federal child support guideline purposes. Ms. R responded as follows: This assumes that it's all reasonable for federal child support purposes. We always will ask for details around any kind of discretionary or personal expenses that go through the company. So it's certainly a disadvantage of working for the non-business owning spouse and not having the opportunity to speak to the business owning spouse.

We did have the benefit of some receipts in this situation but again to look at a receipt for Moxie's and be able to understand what was the business purpose, who joined you for that dinner, was there a personal or discretionary element to that meal, you know, it's impossible for us to be able to do that analysis without access to speak to and obtain all of the documents and records.

So we've not made any adjustments for any personal or discretionary element of the expenses that were reported by the business for any of the years ... (my emphasis) So often when personal expenses are very intermingled with business expenses so, for example, if you did find out that Moxie's receipt was for taking the kids out for dinner and it was a $100 receipt or that's actually an expense that is discretionary in nature, notwithstanding the fact that CRA will allow that, under 19(2) of the federal child support guidelines, they're explicit in saying this is not a judgement of what CRA will allow or disallow, it's an assessment of the reasonableness of the expenses for purposes of the child support guidelines. (my emphasis) So that's the context that I would give.

To the extent that that meal is ... is a personal meal, that should be added back to guideline income . (my emphasis) … So our conclusion, our opinion, is ... is based on scenario one in the absence again of the information to be able to do a more thorough analysis of the nature of the expenses of the business. Scenario B [43] Ms. R then went on to discuss the scenarios where certain expenses were added back, including a discussion about the issue of amortization.

She stated in part as follows: So on page three of six of the schedules, again it's outlined at the top that this was an analysis that we were asked to prepared on the premise that certain of the expenses were personal in nature.

And so we went through the expenses that are reported by the company and sorry , not necessarily personal in nature but not ... not a function of actual cash expenses so amortization's a good example, (my emphasis) it's not really ... it's not a cash event that happens each year so we added back amortization and we added back to the pretax corporate income certain expenses that were reported in the fiscal years that may have a personal component to them.

And again, keeping in mind as a professional corporation, trying to distinguish between what are the expenses of Atlantic Dental versus what are the expenses of a corporation that's been set up as a conduit to manage the income of the individual partners . (my emphasis) [44] Ms. R then highlighted areas she would usually spend more time on when completing a guidelines income report, she stated in part: … So there are certain areas when we're doing guideline income reports that were the areas that we would certainly want to focus a little bit more time on.

Travel and continuing education are one of them. (my emphasis) If you decided to do a course in Vegas, could you have done the course at Dalhousie Dental School? So it's trying to understand is there a personal component. If you've got travel expenses, did you take your spouse with you on that trip? Was there a personal component to the travel? So trying to dig into those numbers a little bit, those are two keys areas that we would pick.

So in continuing education, you would accept that it is normal to have a certain level of continuing education undertaken each year so we selected what is the lowest reported number in those years which is about $800.00. (my emphasis) … We've assumed that that amount, if that amount was good enough for one year, that amount should have been suitable for all years would be the ... would be the assumption under this analysis. And so we've adjusted the continuing education number by the $800 as a

base level amount and that's adjusted at line nine. So continuing education was at line three on this page and at line nine we said you'd expect it to be $800 at least or on average. We've done the same thing, if I can skip down, to professional fees and professional fees were one area again, you know, this has been an ongoing matter, $9,000 in professional fees for a professional corporation that, you know, gets its income from a pretty predictable source.

You get the information from Atlantic Dental, to then pay that much to get your accounting and taxes done would be kind of unusual and we didn't have further details on, you know, why you have gone from $2,000 for example in 2012 to $9,300 in 2017 . (my emphasis) So again we've said $2,000, if that was the expenditure in 2012, that seems like a reasonable amount for the expenditure to be each year so at row ten we've ... sorry, at row six we've added back all of the professional fees but at row ten we've said $2,000 a year would seem to be a standard amount for a company like this to have their annual work done.

The other ones we added back, so continuing education and professional fees are the only two that we said, you know, a reasonable level of those might be an appropriate adjustment but there would be something, just not all of it. The other ... other areas in this analysis we've added back all of the amortization. We've added back all of the interest and bank charges.

Again, a professional corporation is a flow-through so it's really, you know, an extension of the individual if I can call it that so to the extent that you're paying your bank charges and your overdraft interest and you're able to get the deduction for them, an employed person would not necessarily have the benefit of that. The office expenses which would include telephone and such, that has been added back. (my emphasis) Again, the business of Atlantic Dental is operated separately from the business of [Mr.

M.’s business] so to incur that much in office expenses again for a professional services corporation seemed high. And, you know, without the details of what was in there, what the nature of them was, and some distinction between a personal discretionary amount and the ... a required amount to run again a professional services corporation, we've added that back. Travel and entertainment has been added back and we added the vehicle back . (my emphasis) … So this is ... effectively schedules two and three are a

summary of the financial statements of [Mr. M.’s business]. And the figures from those are derived directly from the financial statements and then feed into the analysis on the guideline income. … Interest and bank charges, line eight, I have added that back. Line ten from

schedule two I have not added back and line ten is the interest ... sorry, excuse me, interest on long-term debt. So that's the debt, I believe, from the original acquisition of the partnership interest and there's only interest on long-term debt in 2011, 12 and 13 but I did not adjust that out. (my emphasis). …. Because it was specifically for the acquisition of the investment so it wasn't ... it was for business purposes. Scenario C [45] Ms. R goes on to explain that in scenario C, all of the expenses of the corporation are disallowed.

As though there was “a true flow-through of the revenue of Atlantic Dental Center into the hands of [Mr. M.]”. Ms. R states: This scenario begins with revenue so this third scenario effectively assumes that the professional corporation is an extension of the individual and that all of the expenses have been added back effectively under this scenario.

And again, scenarios two and three are ones that we prepared for, I would say, illustrative purposes because we did not have the information specifically to do ... to do the adjustments that would be well thought out in terms of making a judgement or assessment around specific expenses so it's kind of a spectrum of adjustments. The first scenario we've included all of the pretax corporate income. The second scenario we've made specific adjustments to accounts, again without the details behind those numbers but specific adjustments to accounts.

And the third scenario is essentially every ... it's essentially treating the professional corporation as a flow-through where had ... had [Mr. M.] not been incorporated, he wouldn't have had the deductions (my emphasis). … …the most granular information we have would be the financial statements for [Mr. M.’s business]. There are, attached to a corporate tax return which we have for [Mr.

M.s business], you can sometimes find a little bit more detail around certain expenses but for all intents and purposes, the financial statements are the most granular level of information we have to support the numbers that ... that we've used in

schedule one. So this income statement is drawn directly from the financial statements. (my emphasis) … So again when we're calculating guideline income, you have to consider the type of business you're looking at. If you're looking a service-based business which is driven more by, you know, hours or some kind of flow-through but not heavy capital investment, then typically you would see a balance sheet not unlike this one where you've got maybe a small amount of capital equipment, small amount of working capital but essentially you're building up your retained earnings.

In this situation there's the investment in the partnership which again is not unusual so there's nothing really terribly unusual about this balance sheet in terms of a dental corporation.

There are some investments that have happened along time that have been ... have taken place within the business, that's a personal preference, and I'm referencing specifically the long-term investments when I speak of those . (my emphasis) No receivables, so again when you set up a professional corporation, you have the ability to defer your taxes on certain income so you can borrow money from the corporation on a tax-free basis so the notes receivable would ... would reflect that there's been money borrowed.

The ... we know that there's been a bonus accrued, for example, in 2017 so, you know, all of those things for an accountant are readily visible from this but there's nothing really unusual in this. The retained earnings in ... over time has ... has been confused as value by a Court, it's been confused as sort of available. I ... I wouldn't ... I wouldn't support that assumption or expectation. Retained earnings is

simply a residual amount of the difference between the assets and the liabilities. (my emphasis) So a balance sheet is not a reflection of value, it's not a reflection of worth, it's simply something that has ... that reflects a difference in ... in cash balances and working capital over a period of time and investments. So in looking at ... in this situation and looking at this balance sheet and I would compare it to a manufacturing environment, for example.

If you've got a business that has ... that's carrying on all of its business or even, for example, if we were looking at the balance sheet of Atlantic Dental, you've got a very different looking balance sheet. You've got all of your receivables from your patients or your insurance companies. You've got all of your payables, potentially payroll accruals. You've got all of the equipment that the practice owns.

So you've got all of those things that you need to continue to reinvest in and so there's a different measure of looking at a balance sheet of a capital-intensive business than there would be of a non-capital intensive business. In a capital-intensive business, you have to be thoughtful about the cash requirements and cash needs so you're going to do a different evaluation of how much realistically can this business take out, how much is available to the business owner .

It's a different exercise than looking at a professional corporation where, and when I say available I don't mean sitting in a chequing account, I mean it's essentially a flow-through of the income. (my emphasis) A manufacturing corporation it's not quite that easy. You do have to take into consideration a constant reinvestment in the business in order to make money in the future.

So it's ... it's a different exercise. … So I want to be careful in using the term value so in my mind, I would distinguish things that I'm looking at in the financial statements between income and worth . (my emphasis) So income is the revenue that you have, the expenses that you spend for the business in order to earn that revenue specifically, and then there's worth.

The partnership interest is a function of worth so when you're continuing to reinvest in that ownership of the partnership, that is a function of, you know, no different than investing in a life insurance ... a whole life insurance policy or what have you . (my emphasis) So it hasn't come into consideration other than the fact that by being a partner in the partnership, [Mr. M.] has access to income from that partnership. But when he sells his interest in the partnership, this ... this line item, this partnership interest, cannot be confused with the proceeds that he would receive on the sale.

So to the extent he continues to invest, he will receive the returns upon sale of that partnership interest. Those aren't things that I would take into consideration in guideline income unless he had already sold it and I would be tasked then with looking at how do the proceeds on sale impact the income of the individual in the future . (my emphasis) So I have not considered partnership interest in terms of calculating guideline income under the guidelines… ….

So again, in a professional services corporation, other than observing the balance sheet to ensure that it's not a capital-intensive type of business, I wouldn't give a lot of consideration to balance sheets, however, I did look at the long-term investment. There are two components. Again, that investment is a function of worth, that's value that cash has been used to invest in a long-term investment, it has created worth not necessarily income.

With the caveat that this long-term investment has created income, the income is reported in the company, it is part of the pretax earnings of the business and therefore it's part of corporate attribution. (my emphasis) … However, that investment, so my understanding of this investment in particular is that in February of 2015, [Mr. M.] began to set money aside. (my emphasis) My understanding from disclosure is that was for the education of his children so he saved $1,000 a month and then in January of 2018, that investment was cashed out.

So again it's a use of cash but it's not ... it's not something to take into consideration in guideline income other than the investment income that it generates. (emphasis) … This is what the cash, so generating cash and generating income are again two different things. So when the company's making money, presume ... presumably it's generating cash which it uses for various purposes. Part of the cash was used to make an investment. … No different than if you look at row four, part of the cash was used as a loan.

So the cash flow statement and the financial statement shows how cash is used but cash is used to invest ... cash is used ... generated from income and used for expenses so to that extent, it's part of the income calculation . That piece of cash goes into guideline income but cash is also used to generate worth or value and in terms of investments, in terms of the partnership interest, that's a function of worth not ... not income so that is not taken into consideration in the guidelines. (emphasis) [46] Ms.

R was then asked a question about bank indebtedness and she stated in part: Well again, we're talking about the sources and uses of cash. So our sources and uses of cash again are it's generated from revenue and it's spent on expenses, that's one stream. And then cash is used, for example, to make investments, to continue to invest in the partnership interest. … Cash is ... was used in this situation, there's a $26,000 note receivable so cash was loaned out.

So all of those things use up the cash of the corporation and may have led to bank indebtedness. … I believe the financial statements indicated that it was advanced to directors of the company during the fiscal year ended December 31, 2017.

… And that's not an uncommon thing to see. Again it's, you know, when you have the benefit of a corporation established, you have the added benefit of being able to manage your taxable income over a period of time and borrowing, CRA allows you to borrow money from a corporation for a discreet period of time on a tax-free basis so not uncommon to see that . (my emphasis). [47] Specifically in relation to long term debt, Ms. R stated: So current portion of long-term debt and long-term debt, so when we're looking at that it would be rows 15 and 17 and that, you would only see those figures in 2011 and 2012.

By the end of 2013 those had been repaid. So at row 15 we've got the current portion and at row 17 we've got the long-term portion. Together those would be long-term debt. The distinction of the current portion is that generally accepted accounting principles require that the amount due within the next 12 months be taken into consideration as a current liability. (emphasis) So if you were looking at a loan statement or a loan balance, you would add together these two figures to get to the actual long-term debt amount due. … The guidelines do not include any reference to adjusting for payment of debt.

Again, it's a function of worth. You make an investment, you borrow to pay for that investment, so you realize your return on that investment when you sell your investment. So long-term debt is not something we take into consideration in the guidelines with the exception of the interest portion which is an operating cost of holding a debt. That interest portion is a deduction under scenarios one and two of our guideline income so it's incorporated in the pretax corporate income that's been added to [Mr. M.’s] guideline income. (my emphasis) [48] Ms.

R goes on to talk about retained earnings, she states in part: So again, retained earnings is a residual, it's a mathematical difference between your assets and your liabilities. It's not a function of worth, it's not a function of value, not a function of cash available. It ... again, not unusually in a professional services corporation, it very much looks like the investment that you hold in the partnership. So if you look at the partnership interest in 2017, for example, you've got partnership interest at a book value I'll call it of $324,646 so that's how much you've actually invested.

Again, it's not what the value is if you were to sell it but it's how much you've invested in your partnership interest. And the retained earnings is 347,834 again in 2017. So any ... if you look at each year, those numbers are very similar and again not uncommon in a professional services corporation where the main asset you hold, the purpose for having a corporation, is to hold your partnership interest. The other things that happen around it are really ancillary ... ancillary items within a balance sheet. … [49] When Ms.

R was asked if she had reviewed the comments made about retained earnings in the commentary report completed by Mr. M’s expert, Mr. SM Ms. R responded that she had, and she stated in part: I would first like to distinguish it so it's corporate money. So again this is referencing cash flow, this isn't referencing income, this is referencing cash flow so this is not ... not the typical process you'd go through under the guidelines. The typical process under the guidelines again is going back to

Section 18. It's your ... your pretax corporate income, bearing in mind that there would be adjustments for that for the normal operations of a business. Again if this were a heavily capital-intensive business that had significant operations, had employees, had you know a premises where it paid rent and built machinery, you'd see much broader swings and required investment to stay in the business. So there's a different measure of the reasonableness of that pretax corporate income being attributed to the spouse. So that's kind of the process we go through.

It's not ... and on those questions of what cash might be there for distribution, that's got some nuances as well . (my emphasis) For example, if you've got a company that's traditionally paid for personal expenses, it's used its cash for different things. So the fact that it has no cash isn't necessarily a measure of whether it can manage the corporate attribution that's been included in the business owner's income. (my emphasis) So there are a lot of different considerations to that corporate attribution figure that aren't necessarily on paper. … If we go back to this

section so this

section specifically says corporate money so again it's measuring what cash is in the company to pay it out. Well, let's keep in mind this company's already used a lot of its cash to pay expenses. It's used its cash to give a shareholder loan or a director loan. It's used its cash to make investments in student loans. So it's used cash in a lot of different ways. That's not necessarily aligned to the process that you take when you're calculating corporate attribution . (my emphasis) If we go to this section, that first line ... that first line is the increase and the decrease in the partnership investment.

So again the partnership makes money, the Atlantic Dental makes money. The dentists take withdrawals from the amount attributed to them. The dentists have to leave money in their investment so that the dental practice can continue to operate. That amount's not dollar-for-dollar. If Atlantic Dental makes $100,000 a year and requires that you leave $10,000 in the business doesn't mean that, you know, that there's exactly $110,000 withdrawn. There's always going to be differences in the amount taken out and the amount left in and we can see across the top here, I have no dispute with the figures.

We have ... with the math behind the figures I should say. We see the change in the amount left in that investment and again that's a function of timing, a function of the difference between the income of Atlantic Dental and how [Mr. M.] takes his draws. (my emphasis) [50] Ms. R was asked again about Mr. M paying tax on a withdrawal and she replied in part:

except that because he's in an incorporated business, you can declare a bonus to offset that. So looking at this as a discreet item without looking at all of the ways that you can manage your taxable income as a professional corporate owner, it's the reason you would incorporate a professional practice, right, is to manage that income and manage your tax liabilities. So ... or tax obligations. So, yes, essentially he left an extra $12,000 in the business.

Because partnerships aren't taxed on their own, he would have paid tax on that $12,175 but for the fact that he declared a bonus, which then reduced the tax liability on the $20,000. … [51] In response to questions about money taken out by Mr. M in 2015 and in 2016 Ms. R responded as follows: That means he withdrew more than the partnership made. So in those years, he would have drawn out more cash than he left in. And these aren't big numbers really, in the overall scheme of things. The bigger numbers happen in, you know, the earlier years, 12, 13. In 2012 in particular, [Mr.

M.] bought out the interest of another dentist so ... so that's why you see some more left in the partnership. … I believe it was approximately a percentage but yes. So, you know, on an overall basis why you look at the fluctuations, if they were really large fluctuations that were going to heavily impact income, you might take those into consideration. If this is a longer term investment going into the future, I would take ... you know, be more likely to take that into consideration. Why I ... and I certainly wouldn't in terms of buying additional partnership interest.

Again these are functions of worth, these are not functions of ... of income necessarily. (my emphasis) So the other thing to consider is that my understanding is [Mr. M.’s] aspiring to sell his partnership interest so in the event that you're taking all of these fluctuations into consideration, at some point in time that's going to come to an end. [52] Ms. R was asked about the Assante investment and she responded in part as follows: I would consider that to be a discretionary use of funds, a discretionary use of the cash of the business. He happened to have it inside the corporation.

Had he carried that investment outside of the corporation, it wouldn't be an issue for discussion. [53] With regard to the repayment of debt Ms. R had the following to say: [Mr. M.] paid 27,000, in 2012 [Mr. M.] paid 31,000 and in 2011 [Mr. M.] paid 22,000 against his long-term bank debt? I would just like to confirm that that's only the principal portion, just give me one second. Yes, I'm not sure if that's the principal and the interest, long- term debt, but that would be a repayment of long-term debt.

It would certainly include the principal payment so again, not an adjustment you'd make in accordance with the guidelines. It's a function of worth. When he bought the partnership interest, he would have borrowed money in order to acquire his partnership interest. He would have repaid that money and by doing that, his net proceeds on the sale of his partnership interest would be maximized because he doesn't have debt to repay. So again it's, you know… ...

So in 2012 ... in 2012 we see from the balance sheet that there was a current portion of long-term debt of $12,443 and there was a long- term portion of $14,981. What you would expect to see in the subsequent year is that the long-term portion, either some or all, would become a short-term portion so it would be repaid over years. The total of the current plus the long-term portion of debt in 2012 was $27,424 and I get to that by adding the 12,443, a current portion of long-term debt to the $14,981 of long-term debt. [54] Ms.

R was asked, “is it that he was required to pay 11,564 in 2011 but he, in fact, did pay 22,868? And in 2012 he was required to pay 12,443 but he did pay 31,035? So in 2013 he would have been required to pay the current portion of 12,443. But he actually paid the full amount of 27,424? [55] Ms. R responded in part: Going backward. And so that ... that adjustment on Mr. MacLean's

schedule one, that is just the principal repayment of long-term debt and again the guidelines don't contemplate any adjustment for debt repayment. It's a function of worth not a function of income with the exception of the interest portion which we've left into ... in our ... in our calculations. [56] Ms. R was asked to consider the following: Where both spouses agree in writing on the annual income of the spouse, the Court may consider that amount to be the spouse's income for the purpose of these guidelines, if the Court thinks that the amount is reasonable having regard to the income information provided under

Section 21. … [57] Ms. R was then asked if she had reviewed the Corollary Relief Judgement issued in June of 2009 in the preparation of her report? And whether she considered the terms when applying Section 18(1) of the Federal Child Support Guidelines :

Okay. So 18(1) states that: Where a spouse is a shareholder, director, or officer of a corporation and the Court is of the opinion that the amount of the spouse's annual income as determined under

Section 16 does not fairly reflect all the money available to the spouse for the payment of child support, the Court may then consider the situations described in

Section 17 and determine the spouse's annual income to include and it goes on to list two situations. … [58] Ms. R was asked to consider section 18(1): Where a Court is of the opinion that the amount of the spouse's annual income, as determined under

Section 16, does not fairly reflect all of the money available to the spouse for the payment of child support. [59] Ms. R was asked to indicate if she interpreted section 18(1) “as meaning that if [Mr. M.] is required to make debt payments through his company, that he's contractually obliged to make, that that money that goes to pay the debt is therefore not available for the payment of child support or do you take a different approach to that notion?” [60] Ms. R responded as follows: The calculation of the 18(1) for me, it's pretax income.

So there is no ... there is no specific reference to the repayment of debt within again if I were looking a capital intensive where you have to borrow to have a building or you have to borrow to do certain investments that are required of the business, then I might take into consideration the amount of working capital or the amount of cash that has to be retained in the business to manage the ongoing operations of the business. That is separate and apart from discretionary choices or discretionary willingness to either pay for expenses or pay for debt, etc.

So if I were to look into this line item, I would also have to take into consideration a deeper dive into what expenses were paid in the corporation for personal benefit that were cash use for the shareholder and I haven't been able to do that either. So there is potentially a broader look but for me, with this company, it's an evaluation looking at the fact that as a professional corporation, it's a flow-through corporation that had [Mr.

M.] been owning it as an individual, he would have had different ability to make deductions and if I'm trying to create parity between the professional corporation income and employed ... employed person with the same level of income, if I'm trying to create parity between the guideline incomes of those two individuals, then debt would not be part of that calculation. (my emphasis). [61] Ms. R was asked if she would acknowledge the income was already used in the corporation for the purpose of repayment of certain debts. Ms.

R responded as follows: Expenses and debts but not necessarily expenses and debts as they had to be paid. So, for example, if we go back to the debt repayment, the debt repayment took place at a pace that was different from what it was required to take place at. So when you're looking at the discretionary use of cash in a business, it's ... it would be difficult to suggest that that debt either couldn't be refinanced to create cash or couldn't be paid out at a different rate.

So again, it's not like you're investing in a building where you're out the million dollars for the building and you've got cash of $800,000 to help pay for that and you have to take that debt repayment over an amortization of 20 years into consideration. First, the guidelines don't account for that, for that principal repayment, only the interest would hit guideline income.

And second, you would be doing a much deeper evaluation of the retained earnings and the assets and liabilities of the company. (my emphasis) … There's no direction for me as an expert to take into consideration, there's no guidance within the guidelines, for me as an expert to take into consideration repayment of debt. … Again, in a different structured company, it might be more relevant.

This is not a company that has a heavy capital burden and therefore you wouldn't expect it to have a heavy debt burden so it's not something I would have considered in this business . (my emphasis) It's not an analysis I prepared but if the Court chooses to make an adjustment for that, it's at the discretion of the Court, not at the discretion of the expert in my view. … This issue has come up in prior matters that I've testified in. There's no reference to repayment of long-term debt because again it's a worth ... it's a worth consideration, not an income consideration.

It is a use of cash but it's also potentially a source of cash so considering one without considering the possibility of the other is imbalanced in my view in terms of calculating guideline income. (my emphasis) Again it's no different if you were to look at the individual and you buy a house and you decide to pay cash for the house or you decide to finance the house.

Paying those mortgage payments, if you paid it all in one year and then had no obligation to pay principal for the next 20 years or for however long we hold our mortgages for, is it equitable to look at that in direct comparison to a person who's decided to pay cash for their house. In these particular circumstances there was no evidence of any need to consider the capital cost allowance anomaly referenced in Section 18(2), and

Schedule III, paragraph 11.

[62] Ms. R was then asked, “if [Mr. M.] was required to make a contribution to the partnership each month, was the money he contributed considered available to him for child support purposes?” [63] The question was clarified further “In other words, if the partnership decided to use Mr. M’s contributions in the partnership to pay expenses such as staff salaries, such as the purchase of dental chairs, such as the purchase of dental inventory, such as the purchase of leasehold improvements, was that money Ms. R would consider is available to Mr. R for the payment of child support?” [64] Ms.

R responded as follows: Again, that is a number that would be calculated within the change in partnership interest that we talked about earlier. Had the swings of that been much broader and more significant, then it might have been something we took into consideration but two things influenced our decision not to adjust for that. One is that the swings are positive and negative in fairly small amounts, year-over-year basis, and the second point is that we are aware or certainly it's available in disclosure that [Mr.

M.] is going to be selling his partnership interest. (my emphasis) At that point in time any of those swings would be crystalized. [65] In his commentary report, Mr. M’s expert, Mr. SM states: “That while I agree with the mathematical calculation of pretax corporate income adjusted, …I do not agree with the added description that it is available for distribution to [Mr. M.]”. Ms. R was asked if that is what she was saying. [66] Ms. R responded in part as follows: My calculation is under 18(1)(

a) where it says: All or part of the pretax income of the corporation, and of any corporation as related to that corporation, for the most recent tax year be added to the guideline income. So I did not have sufficient information regarding the actual expenses of the corporation to make an assessment as to the reasonableness and I would define reasonableness as it is defined under

Section 19, not reasonableness in terms of … of would CRA allow it but reasonableness in terms of was there a discretionary component to that that was necessary to the business . (my emphasis) So I didn’t have the opportunity to do that analysis on a fulsome basis which would have been a very different analysis from simply adding back pretax corporate income. And at the same time, that would have generated a different cash balance than essentially the company had because the cash wouldn’t have been spent on said discretionary expenses in the event that they were there.

Again without being able to do that analysis, it’s impossible to say what would have been available in a professional services corporation if you had the ability to do a full analysis of the expenses that were paid . (my emphasis) [67] It is important to remember, as noted in Kowalewich v . Kowalewich , 2001 BCCA 450 , “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 (my emphasis). It is to use available money as a measuring rod for the purpose of fixing annual income and thus the amount of child support”. [68] Ms.

R was then questioned further about the information she had available to her when she completed her report. [69] Ms. R was specifically asked whether Mr. M had disclosed financial information including his personal returns with attachments, his corporate returns with whatever attachments came with them for the period from 2011 to 2017, the family trust returns for each of the two family trusts, and corporate financial statements prepared for the partnership by Levy Casey Carter MacLean. [70] Ms.

R was then asked to confirm whether she was of the opinion that the income, the mathematical calculation of pre-tax corporate income adjusted for pre-tax value of dividends, was income available for distribution to Mr. M. [71] Ms. R responded in part as follows: No, the assumption would be that that’s income to be included in [Mr. M.’s] guideline income for purposes of calculating … for purposes of the Court’s consideration of calculation of his income . (emphasis) No, I’m saying that money should be taken into consideration in the calculation of [Mr. M.’s] guideline income for purposes of establishing support.

In any guideline income calculation, it’s, you know, this misnomer of every penny that goes into guideline income needs to be extracted from the business in order to pay support is exactly that, it’s a misnomer. (my emphasis) … So again, it’s there are two pieces of this that one would consider. One is what expenses were incurred by the business on a personal discretionary basis. We have no ability to calculate what those were. Regardless of the financial statement disclosure and, in fact, we saw copies of receipts. It doesn’t tell me, if you see $100 receipt from Moxie’s, who went, what was the business purpose.

CRA would require all those as well by the way in terms of allowing the deductibility, but it doesn’t tell me what the expenses that the company has actually expended could potentially have had a discretionary or personal use for purposes of calculating guideline income.

So in fact, I would consider scenario one is somewhat of a conservative calculation because I’m accepting effectively that all of the expenses that ran through the corporation were for business purposes, (my emphasis) And again, that inclusion of the amount of pretax corporate income, without positive or negative adjustment, is not an assumption that the company’s writing a cheque for that. It’s the … the expectation that because it’s a professional services corporation, that effectively flows through to the guideline income for purposes of the Court’s consideration for spousal support and child support. [72] Ms.

R was then questioned about the $81,327 in repayment of long-term debt from 2011 through 2013.

[73] Mr. M argued that whether he was paying the principal or the interest on the loan, that “if he’s contractually obliged to make that payment, to use an analogy, if he has to make the mortgage payment on the house, it doesn’t really matter what part of it’s principal and what part of it’s interest, he doesn’t have that money to pay child support.” [74] Ms. R responded as follows: That cash would have been used to repay long-term debt.

However, the complexity of debt is that what’s prohibiting him from then going and refinancing his partnership interest the next year and at, you know, 50 percent value you can bring $150,000 in. By the same logic, would one include that $150,000 in his income available to pay debt? It’s not income. … It’s an investment. It’s a function of worth. If we were valuing this practice, if you were dividing the asset of the business, that is a piece of that calculation that one would take into consideration. … We’re calculating … we’re calculating income.

The repayment of debt is not taken into consideration in the income. It’s not in the income statement of one’s tax return. It is not taken into … excuse me, taken into consideration in 18(1)(a). [75] Mr. M then argued that “Actually it says in 18(1)(

a) you’re to look at what income is available to the taxpayer for the payment of child support”. Mr. M argued that it appeared Ms. R was suggesting she knew better than Mr. M about how to manage his business and she was suggesting that he should go out and refinance at every opportunity in order to generate more cash flow. [76] Ms. R responded as follows: That’s not my suggestion at all. The point I am raising is that if one were to start taking repayment of interest … excuse me, repayment of principal of long-term debt into consideration, one then also needs to consider the access to cash.

If we’re only looking at cash flow, cash flow’s available in all kinds of different ways. Repayment of long-term debt, borrowing long-term debt, if we were to start building availability of debt into our guideline income calculations, we would have so many scenarios that we’d all be cross-eyed. [77] Mr. M argued that he purchased his partnership interest in ADC in 1998 and he borrowed money to do it at the time. He objected to the argument by Ms. M, that his purchase was “discretionary in the sense that he didn’t have to borrow the money”. Ms. R was asked if she agreed with Ms. M’s position. [78] Ms.

R responded as follows: I have not done a full cash-flow analysis of [Mr. M.’s] income, cash flow, availability to cash, back to 1998 so I cannot come to that conclusion. …. I’m not questioning the fact that the money would have to be repaid but I think it’s clear from the balance sheets that it was repaid in a different way than the debt would have been structured.

So again, if you look at what the current portion of long-term debt would have been in 2012, the choice in 2013 was to repay the current and the long-term portion so there is some discretion as to how that debt was repaid so it’s not like a, you know, like a mortgage where you’re paying the minimum payment for, you know, five years until you refinance it. There is some discretion on the pace at which that debt can be repaid but again, that is what creates the complexity of debt repayment as an adjustment to guideline income. There is discretion in debt. … If he were contractually obliged to

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