2013 NBCA 65, 2013 NBCA 65

COURT OF APPEAL OF COUR D’APPEL DU NEW BRUNSWICK NOUVEAU-BRUNSWICK 126-12-CA DAVID ALEXANDER McNEIL APPELLANT DAVID ALEXANDER McNEIL APPELANT - and – - et - KELLY MARGARET McNEIL RESPONDENT KELLY MARGARET McNEIL INTIMÉE McNeil v. McNeil, 2013 NBCA 65 McNeil c.

McNeil, 2013 NBCA 65 CORAM: The Honourable Justice Larlee The Honourable Justice Robertson The Honourable Justice Quigg CORAM : L’honorable juge Larlee L’honorable juge Robertson L’honorable juge Quigg Appeal from a decision of the Court of Queen’sBench: August 27, 2012 Appel d’une décision de la Cour du Banc de la Reine: Le 27 août 2012 History of Case: Historique de la cause : Decision under appeal: 2012 NBQB 268 Décision frappée d’appel : 2012 NBQB 268 , 2012 NBBR 268 Preliminary or incidental proceedings: N/A Procédures préliminaires ou accessoires : s.o.

Appeal heard: September 11, 2013 Appel entendu : Le 11 septembre 2013

Judgment rendered: November 21, 2013 Jugement rendu : Le 21 novembre 2013 Reasons for judgment by: The Honourable Justice Robertson Motifs de jugement : L’honorable juge Robertson Concurred in by: The Honourable Justice Larlee The Honourable Justice Quigg Souscrivent aux motifs : L’honorable juge Larlee L’honorable juge Quigg Counsel at hearing: For the appellant: Grant M. Ogilvie and Jennifer Hanson For the respondent: Allison Whitehead, Q.C. Avocats à l’audience : Pour l’appelant : Grant M. Ogilvie et Jennifer Hanson Pour l’intimée : Allison Whitehead, c.r. THE COURT The appeal is allowed.

The decision below is varied by deleting, from the appellant’s 2005 annual income, the capital gain of $1,383,750. Consequently, for purposes of determining retroactive child support, the appellant’s income for 2005 is fixed at $302,513. Having regard to the appellant’s failure to disclose fully his income for the years in question and his failure to raise the issue of the capital gain with the motion judge, the appellant is not entitled to costs on the appeal.

LA COUR Accueille l’appel et modifie le jugement du tribunal d’instance inférieure en retranchant du revenu annuel de l’appelant, pour 2005, le gain en capital de 1 383 750 $. En conséquence, pour le calcul de la pension alimentaire rétroactive à verser au profit des enfants, le revenu de 2005 de l’appelant est fixé à 302 513 $. Vu le défaut de l’appelant de communiquer en entier son revenu des années en question et de soulever la question du gain en capital devant la juge saisie de la motion, il n’a pas droit aux dépens de l’appel.

The judgment of the Court was delivered by ROBERTSON, J.A. [ 1 ] Having regard to the appellant father’s blatant failure to disclose all sources of income for the years 2005 to 2010 inclusive, the motion judge granted the respondent mother’s motion for retroactive child support. The arrears totaled $232,604. Of that amount, $195,120 is attributable to the arrears for 2005. Correlatively, much of that amount is attributable to an undisclosed capital gain of $1,383,750 arising from the exercise of employee stock options.

This appeal raises a question of law not put to the motion judge: whether that capital gain should have been included in the father’s 2005 income for purposes of determining child support. Having regard to the Federal Child Support Guidelines , SOR/97-175, and the jurisprudence, the answer is “no”. The general understanding is that such “non-recurring” gains are excluded from income. Indeed, as the law presently stands, even the ultimate gain

realized on the subsequent disposition of the shares so acquired might not qualify as income for support purposes. [2] The essential facts of this case are as follows. The parties were married in 1994 and have twochildren (born 1993 and 1996 respectively). They separated in 2001 and were divorced in 2004. The order for corollary relief providedfor child support in the amount of $860 per month based on the father’s accepted income of $66,000. On October 18, 2006, the partiesconsented to a variation. Child support was set at $2,368 per month.

This amount was determined by averaging the father’s income overthe previous three years. The agreed figure was $187,251. However, in 2005, the father exercised employee stock options, therebyacquiring 56,250 shares, at 60 cents per share, with a market value of $25 per share. [As to whether unmatured stock options acquiredfrom an employer during a marriage constitute “marital property”, see Miller v. Miller, 2003 NBCA 37, 259 N.B.R. (2d) 132.]Apparently, the gain was reported in the father’s Income Tax Return as a taxable capital gain of $1,383,750.

The record does not revealwhether all or a portion of the gain was “deferrable” under the Income Tax Act then in force. Excluding the capital gain, the father’sdeclared income for 2005 was $302,513. [3] For 2005 and subsequent taxation years, the father did not provide the mother with a copy ofhis annual tax return. Instead, he provided her with a copy of his annual Notice of Assessment.

In 2011, the mother filed a motionrequesting that the father: (1) be found in contempt for failing to produce his 2009 Tax Return; (2) pay support based on his Guidelineincome; and (3) pay his share of educational expenses for one of the children. At the hearing held on July 14, 2012, it was agreed thefather would pay monthly support of $2,303, based on an income of $181,563. However, once the motion judge became aware of theemployee stock options that had been exercised in 2005, she adjourned the matter. Subsequently, the mother amended her motion tomake an additional request for retroactive support.

Before the scheduled hearing date, she retained a chartered accountant to conduct anaudit of her former spouse’s “actual income” for the years 2005 to 2010, inclusive. For each of the years in question, the father’sdeclared income did not match his “actual” annual income. [4] The motion judge accepted the accountant’s evidence and declared that the father owed$232,604 in retroactive child support. Of that amount, $195,120 pertained largely to the 2005 capital gain. As well, arrears for 2011 and2012 were assessed. This brought the total arrears to $242,722.

It is also apparent the father sold some shares in 2006 and 2008.Apparently, the father also exercised stock options in 2009 and 2010. In any event, the mother’s accountant included the incomegenerated from any share disposition for the year in which the gain was actually realized. And, as noted earlier, the accountant’s figureswere used to calculate the arrears for 2005 to 2010 inclusive. [5] The issue raised on this appeal is limited to the motion judge’s decision to award retroactivesupport in regard to the 2005 taxation year and the “unrealized” capital gain of $1,383,750.

The father’s contention is that the motionjudge erred in principle in awarding retroactive child support by including that amount as a source of income for that year. The argumentand legal analysis begins with s. 16 of the Guidelines. That

section provides that, subject to ss. 17 to 20, a spouse’s annual income is to bedetermined using the sources of income set out under the heading “Total Income” in the T1 General form issued by the Canada RevenueAgency. That form includes income arising as a capital gain. Pursuant to s. 17, the motion judge retains the discretion to consider anamount other than the amount determined in accordance with the T1 form. Section 17(1) reads: 17.

(1) If the court is of the opinion that thedetermination of a spouse’s annual income undersection 16 would not be the fairest determinationof that income, the court may have regard to thespouse’s income over the last three years anddetermine an amount that is fair and reasonable inlight of any pattern of income, fluctuation inincome or receipt of a non-recurring amountduring those years. 17.

(1) S’il est d’avis que la détermination durevenu annuel de l’époux en application del’article 16 ne correspond pas à la déterminationla plus équitable, le tribunal peut, compte tenu durevenu de l’époux pour les trois dernières années,déterminer une somme équitable et raisonnableen fonction de toute tendance ou fluctuation durevenu au cours de cette période ou de toutesomme non récurrente reçue au cours de celle-ci. [6] The father’s argument is not complicated. He submits it is not fair to compute his 2005 incomeby adding the $1,383,750 capital gain to his otherwise disposable income of $302,513.

The gain falls within the category of “a non-recurring amount” as provided for under s. 17(1) of the Guidelines. Moreover, while the motion judge retains the discretion to decidewhat amounts qualify as income, the gain does not equate with a true source of disposable income. Instead, the exercise of the stockoption creates a potential tax liability which may or may not be deferred, depending on the provisions of the Income Tax Act in force atthe time the option is exercised.

Moreover, a strict application of the table amount leads to an award of child support equal to $214,488($17,874 per month) which equates to approximately 70% of the income which the father actually received in 2005. Not only is thefather’s fairness argument compelling, but it is also compatible with the jurisprudence. There are two relevant cases. Each can be dealtwith handily. [7] In Arnold v. Washburn, (ON CA), [2001] O.J. No. 4996 (C.A.) (QL), therespondent father was ordered to pay child support based on an income of $377,000. The order took effect on February 1, 2000, the date

of the application. On appeal, the appellant mother sought to increase the monthly award to reflect in the respondent’s full income for the1999 taxation year. The total income included an additional $3.1 million realized on the disposition of shares in Nortel Inc., which shareshad been acquired through stock options granted by the father’s employer. Applying the Guideline tables, the total income would haveproduced a support award for two children of $37,000 per month.

The mother had asked the trial judge to average the father’s incomeover the three years, including those where the stocks were sold and to recognize that the respondent payor retained stock from which hewould presumably profit in future years. The trial judge had exercised his discretion not to incorporate the $3.1 million into income onthe basis of s. 17(1)(

c) as it then read. His reasons for decision were reproduced by the Court of Appeal: The appropriate calculation of the respondent's "annual income" for the purposes of the Support Guidelines begins with

section 16.Looking at the "total income"

section of the respondent's 1999 T1 return for income tax yields a very large figure because of theinclusion of the appropriate portion of the proceeds of his 1999 sale of shares. Without that latter element, his income is comprised of hissalary, a substantial bonus, and income from his investment portfolio. Because the amount of bonus varies and the investment yield willvary somewhat as well, I adopt $377,000 as an amount counsel for both parties were in essential agreement on as the respondent's"annual income" without direct inclusion of monies received from the sale of shares.

I say "direct" inclusion because those monies areinvolved indirectly in that they produce the investment income element of the annual income. I do not think inclusion of part or all of proceeds of the sales of shares in 1993 or 1999 in the "annual income" would produce the fairestdetermination of the respondent's annual income from his employer, and I rely on my authority in paragraph 17(1)(

c) of the SupportGuidelines to exclude all of these amounts. They are large amounts, which do not form a pattern of "income" and otherwise skew in amajor way what pattern does emerge. Moreover, the wealth from those sales contributes to the respondent's annual income through theyield from the investment portfolio. [para. 7] [8] The Court of Appeal observed that there was no substantive difference between the old andnew provisions of the Guidelines in that both give the judge the discretion to exclude, in whole or part, a non-recurring amount whencalculating a payor’s annual income.

The Court concluded: In the present case, the trial judge’s decision to exclude the income from the sale of the shares from his determination of therespondent’s annual income was an exercise of discretion that reveals no error in principle. He could have attributed the share income orsome portion of it for Guideline purposes, but chose not to, observing that some of the investment income was derived from the proceedsof the share sales. [para. 9] [9] In the present case, the appellant father maintains that his case is all the more compelling. InArnold v.

Washburn the Courts refused to factor in the $3.1 million profit realized on the disposition of shares, for purposes ofdetermining child support, because of blatant unfairness. The appellant father insists that the unfairness is magnified in those caseswhere the shares acquired pursuant to an employee stock option plan have yet to be sold. While the acquisition of those shares hasgenerated a paper gain, it has not generated further disposable income from which child support might be paid.

Of course, to the extentthat those shares generate investment income, that income is properly included in the father’s annual income. [10] The other decision cited in support of the exclusion of the unrealized capital gain from incomeis Ewing v. Ewing, 2009 ABCA 227, [2009] A.J. No. 712 (C.A.) (QL), leave to appeal to SCC refused, [2009] S.C.C.A. No. 386. Thiscase has been favourably cited in several decisions throughout the country: P.M.R. v. M.H.R., 2013 BCCA 378, [2013] B.C.J. No. 1846(QL); Vincent v. Vincent, 2012 BCCA 186, [2012] B.C.J. No. 818 (QL), at para. 40; DeWolfe v.

McMillan, 2011 NSSC 301, [2011]N.S.J. No. 418 (Fam. Div.) (QL), at para. 29; Pollitt v. Pollitt, 2010 ONSC 1617, [2010] O.J. No. 5905 (QL). [11] In Ewing v. Ewing, in 2003, the parties agreed to vary child support such that the father wouldpay $6,000 per month, based on an annual income of $750,000. When the mother learned that the father’s income for the 2002 to 2005years had exceeded $1 million, the mother applied for a retroactive variation. The father argued the increase in income resulted fromnon-recurring gains from the sale of business assets.

The chambers judge averaged the father’s income for 2005 through 2007 becausethe highest figure was “out of line” with the father’s earnings in all other years. Next, the chambers judge awarded retroactive supportand set the monthly obligation at $13,776. Next, he reduced the father’s ongoing support obligation to $8,986 per month. The Court ofAppeal did not fault the trial judge for averaging incomes because of the exceptional fluctuation in income caused by the non-recurringgains.

However, the Court held that the chambers judge had erred in failing to consider whether the Table amount was “appropriate” having regard to s. 4 of the Guidelines and the Supreme Court’s decision in Francis v. Baker, (SCC), [1999] 3 S.C.R.250, [1999] S.C.J. No. 52 (QL).

Section 4 deals with the application of the table amounts in cases where the income of the payor exceeds$150,000. In such circumstances, the judge must set the appropriate amount of support having regard to the condition, means, needs andother circumstances of the children who are entitled to support and the financial ability of each spouse to contribute to the support of thechildren.

Section 4 reads:

4. Where the income of the spouse against whom a child support order is sought is over $150,000, the amount of a child support order is (

a) the amount determined under

section 3; or (

b) if the court considers that amount to be inappropriate, (

i) in respect of the first $150,000 of the spouse’s income, the amount set out in the applicable table for the number of children under the age of majority to whom the order relates; (ii) in respect of the balance of the spouse’s income, the amount that the court considers appropriate, having regard to the condition, means, needs and other circumstances of the children who are entitled to support and the financial ability of each spouse to contribute to the support of the children; and o (iii) the amount, if any, determined under

section 7. 4. Lorsque le revenu de l’époux faisant l’objet de la demande d’ordonnance alimentaire est supérieur à 150 000 $, le montant de l’ordonnance est le suivant :

a) le montant déterminé en application de l’article 3;

b) si le tribunal est d’avis que ce montant n’est pas indiqué : (

i) pour les premiers 150 000 $, le montant prévu dans la table applicable, selon le nombre d’enfants mineurs visés par l’ordonnance, (ii) pour l’excédent, tout montant que le tribunal juge indiqué compte tenu des ressources, des besoins et, d’une façon générale, de la situation des enfants en cause, ainsi que de la capacité financière de chaque époux de contribuer à leur soutien alimentaire, (iii) le cas échéant, le montant déterminé en application de l’article 7. [ 12 ] In Francis v.

Baker , the Supreme Court acknowledged that while the evidence must be clear and compelling that the table amount would be inappropriate, the entirety of the evidence need only be sufficient to “raise a concern” about the appropriateness of the table amount. The Court also recognized the difficulty a “payor” may have in collecting evidence that is in the hands of the “payee”. In Ewing v. Ewing , the Court of Appeal held the chambers judged had erred in describing the onus placed on the father as “formidable” when the law holds that the evidence need only be sufficient to raise a “concern”.

The judge also erred in failing to examine the actual means, needs and circumstances of the children. Finally, the judge erred in failing to engage in any analysis about why the father’s evidence failed to raise a concern that the Table amounts were inappropriate “considering that support is to be neither a functional wealth transfer to the other parent nor spousal support” (para. 55). [ 13 ] In the present case, the motion judge was not asked to consider and apply s. 4 of the Guidelines and the Supreme Court’s decision in Francis v. Baker .

Most certainly, the father did not lead evidence regarding the needs of his children. Instead, he emphasized that the Table amount of child support, based on an income of $301,321, is $3,680 per month, a figure that climbs to $17,874 if his 2005 income is fixed at $1,686, 263, having regard to the $1.3 million capital gain.

This evidence alone leads one to ask whether child support based on the Table amount is inappropriate in the sense that the amount leads to a functional transfer of wealth or further spousal support. [ 14 ] Although no evidence was led with respect to the application of s. 4 of the Guidelines and the Supreme Court’s decision in Francis v. Baker , the facts of the present case support the common sense understanding that the inclusion of the capital gain in calculating the father’s 2005 income must surely exceed the needs of the children.

Correlatively, the inclusion would surely result in a transfer of wealth to the mother or provide her with additional lump sum spousal support. In any event, it is readily apparent that the inclusion of the $1.3 million capital gain in the father’s income for 2005 would not be the fairest way of fixing his annual income in accordance with s. 17. The gain is a non-recurring amount that did not generate disposable income from which child support could be paid. This conclusion is not undermined by the mother’s principal argument: the father is guilty of blameworthy conduct.

Admittedly, the father’s blatant failure to disclose all sources of income over the years in question has frustrated her attempts to ensure compliance with his obligation to pay child support in accordance with the Guidelines . However, that failure is not a valid basis for including the capital gain in the father’s income. Even if the $1.3 million gain had been disclosed to the children’s mother, the father would not have been obligated to include that amount in his 2005 income for purposes of determining child support.

As for the father’s failure to honour his disclosure obligations, it must be remembered that judges possess the discretion to award solicitor/client costs in cases where one of the parties is guilty of inexcusable conduct.

[ 15 ] I would allow the appeal and vary the decision below by deleting from the appellant’s 2005 annual income the capital gain of $1,383,750. Consequently, for purposes of determining retroactive child support, the appellant’s income for 2005 shall be fixed at $302,513. As the respondent did not cross-appeal the $5,000 award of costs on the motion, that award must stand.

However, having regard to the appellant’s failure to disclose fully his income for the years in question and his failure to raise the issue of the capital gain with the motion judge, I would not award the appellant costs on the appeal. ____________________________________ J.T. ROBERTSON, J.A. WE CONCUR: __________________________________ M.E.L. LARLEE ___________________________________ KATHLEEN A. QUIGG, J.A.