D.W. v. R.C., 2020 BCPC 5

Citation: D.W. v. R.C. 2020 BCPC 5 Date: 20200114 File No: 1854915 Registry: [Omitted for publication] IN THE PROVINCIAL COURT OF BRITISH COLUMBIA IN THE MATTER OF THE FAMILY LAW ACT , S.B.C. 2011 c. 25 BETWEEN: D.W. APPLICANT AND: R.C. RESPONDENT REASONS FOR JUDGMENT OF THE HONOURABLE JUDGE S.K. KEYES Appearing on their own behalf: D. W. Appearing on their own behalf: R. C. Place of Hearing: [ Omitted for publication], B.C. Date of Hearing: October 15, 2019 Date of Judgment: January 14, 2020

[ 1 ] D.W. and R.C. are the parents of H.W.C, who is almost 2 years old. Her parents had an on again, off again relationship and were not living together when she was born. H.W.C lives with her mother full time. D.W. seeks child support commencing September 1, 2018, which is the date she and R.C. ended their relationship. She filed her application for the same in December 2018. [ 2 ] R.C. is a mechanic whose permanent residence is with his parents, in [omitted for publication]. He lives there for free.

He is a mechanic who has typically worked in Northern BC repairing and maintaining machinery and doing pipeline decommissioning work. In 2017, he incorporated a company of which he is the sole shareholder and employee, through which he performs the same work for the same clients. R.C. claims his income for child support purposes should be fixed at $40,000 annually. [ 3 ] D.W. testified that when they were a couple, R.C. worked locally in [omitted for publication] as well as in Northern BC.

She says when they were a couple, he under reported his income by working “under the table,” working for payment in kind, over reporting his expenses and other subterfuges, in order to reduce his child support obligations to his children of a previous relationship, and that he continues to do so now, in order to reduce his child support obligations towards H.W.C. D.W. seeks to have the Court impute an annual income to R.C. of $97,000, because that is the income a full time heavy duty mechanic would earn if working no more than regular hours in [omitted for publication].

She asserts that tradesmen who work in Northern BC and Alberta earn much higher incomes for the same work. [ 4 ] The task for the Court on this occasion is to decide what R.C.’s income is for child support purposes. The Federal Child Support Guidelines contain a number of provisions dealing with how to calculate income for people whose income fluctuates or who are self-employed, as well as the circumstances under which it is appropriate to impute income. Pattern of income 17

(1) If the court is of the opinion that the determination of a spouse’s annual income under

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

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

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

Schedule III, and adjust the amount of the loss, including related expenses and carrying charges and interest expenses, to arrive at such amount as the court considers appropriate. Shareholder, director or officer 18

(1) Where a spouse is a shareholder, director or officer of a corporation and the court is of the opinion that the amount of 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 consider the situations described in

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

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

b) an amount commensurate with the services that the spouse 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 spouse establishes that the payments were reasonable in the circumstances. Imputing income 19

(1) The court may impute such amount of income to a spouse as it considers appropriate in the circumstances, which circumstances include the following: (

a) the spouse is intentionally under-employed or unemployed, other than where the under-employment or unemployment is required by the needs of a child of the marriage or any child under the age of majority or by the reasonable educational or health needs of the spouse; (

b) the spouse is exempt from paying federal or provincial income tax; (

c) the spouse lives in a country that has effective rates of income tax that are significantly lower than those in Canada; (

d) it appears that income has been diverted which would affect the level of child support to be determined under these Guidelines; (

e) the spouse’s property is not reasonably utilized to generate income; (

f) the spouse has failed to provide income information when under a legal obligation to do so; (

g) the spouse unreasonably deducts expenses from income; (

h) the spouse derives a significant portion of income from dividends, capital gains or other sources that are taxed at a lower rate than employment or business income or that are exempt from tax; and

(

i) the spouse is a beneficiary under a trust and is or will be in receipt of income or other benefits from the trust. Reasonableness of expenses

(2) For the purpose of paragraph (1)(g), the reasonableness of an expense deduction is not solely governed by whether the deduction is permitted under the Income Tax Act . [ 5 ] In ordinary circumstances, under S.16 of the Guidelines , R.C.’s income for child support purposes would be the income shown at line 150 of his personal income tax return. R.C. has filed in Court, two Form 4 financial statements which attach his 2015-2017 personal income tax returns and the 2018 financial statements for his company, which was incorporated in 2017.

During the hearing before me, at my direction, R.C. produced his 2019 corporate financial statements. He has not provided his 2018 personal income tax return, nor his 2018 or 2019 corporate income tax returns. [ 6 ] In determining the income available to R.C. for child support, it is helpful to consider his personal income in previous years. In 2015, R.C. declared employment income of $107,572.00 at line 150 on his tax return. He explained to me that he had many debts to pay that year and worked many hours of overtime. In 2016, his line 150 income was $70,574. In 2017, his line 150 income dropped to $53,539.00.

He was actively involved in his relationship with D.W. at this time and it is during this period that she testified he was bartering mechanical work for a local [omitted for publication] business in return for filling up his vehicle from their fuel tanks. She testified that R.C. told her “I don’t even want to think how much I spent in fuel from these people.” [ 7 ] I also note that R.C. testified that it was in 2017, that he incorporated and began working through his company, in addition to receiving his employment income as declared.

He testified that he began his self-employment in September 2017, and that his corporate net revenue of $107,231 represented the corporate earnings from only September 2017 through March 2018. His financial statements declare a salary to him of $25,000 for the corporate year ending in March 2018. He testified that he took a regular draw of $3,000/month from the corporation.

Thus, it would appear that the combination of his employment income and his self-employment income for 2017, even without taking into account whether all of his business expense deductions were proper for child support purposes, would add up to a 2017 income of approximately $65,539 for 2017. [ 8 ] During that year, he purchased a service truck for $75,672, in order to begin self-employment, and he told me he made a $10,000 down payment from his own funds on that vehicle. He declared a debt of $58,466 on that vehicle.

He deducted “motor vehicle expenses” of $13,412 as well as long term interest of $2,393 from his corporate net revenue. He explained those two expenses, combined, were equal to the cost of the payments on the service truck loan (both principal payments and interest.) He also claimed $11,319 in equipment expense, which covered fuel, insurance and repairs and maintenance. [ 9 ] I find the deduction of both the loan principle payments as well as the loan interest to be an improper deduction. Only the interest on the truck loan is properly deductible.

Payments of principle on capital assets are not deductible as expenses. Accordingly, I add back the “motor vehicle expense” amount of $13,412 to R.C.’s net income. [ 10 ] R.C. testified that he worked an “8 on, 6 off” shift while working in the North, and in between times he went home to [omitted for publication]. R.C. deducted rent of $6,600 from his corporate income for the six months the corporation was in operation in 2017/18. He explained that the rent amount was for the house he rented at $800/month in Fort St. John where he could live while working in the Fort St. John area.

He explained he also left his service truck there in the North, while he returned to the [omitted for publication] area in between shifts. R.C. testified that he lives free at his parents’ home when he returns to [omitted for publication]. Thus, R.C. wrote off, as a business expense, the only permanent residence he had, which was his monthly rental accommodation in the area where he works. If he were working for a salary he would not be able to deduct his residential accommodation from his income to reduce his income for child support.

The rental deduction of $6,600 will be added back into his income for 2017/18. [ 11 ] R.C. included meals expense of $4,189 for the six months his company was in operation in its first year, which adds up to approximately $700/month in food expenses. He explained the meal expense was from when he was living in hotels while working up north. Given that he was residing either free at his parents’ home or in his rented accommodation in Fort St. John most of the time, it appears to me that this meal expense is too high to have been incurred only while working and staying in hotel accommodation in Alberta.

I also note that he has declared $4,800 for food expenses annually in his personal financial statement. It is not clear to me whether the $4,800 is an additional amount, or is actually the same amount he has already declared as a corporate expense. In either case, regular income earners do not get to deduct the cost of their regular meals from their income for child support purposes, and I find that at least a portion of the amount declared is simply regular meals made and consumed at home.

Since he has declared $4,800 annually as his food cost, which works out to $400/month, I will add that amount per month back into his corporate income for the 2018 year end income, for a total of $2,400. [ 12 ] R.C. explained that he used his personally owned pickup truck to travel back and forth from Fort St. John and that the motor vehicle expenses for that vehicle were included in the Corporate equipment expense of $11,319. He declared a taxable benefit of $4,000 with respect to the use of the corporate vehicle in his filed Form 4 financial statement.

I therefore add $4,000 back to his income available for child support purposes. [ 13 ] Similarly, R.C. confirmed that the business cell phone expenses include his personal use of the cell phone. He declares that to be a taxable benefit in the amount of $1,800. I therefore add that amount to his available income for child support purposes. [ 14 ] In R.C.’s first corporate year (ending March 2018) the corporate financial statements indicate retained earnings of $7,407. R.C. gave no explanation for why these earnings were retained in the corporation instead of paid out to him in some fashion at year end.

R.C. testified that he was intending take out his retained earnings at some future point as dividends. I find that whether they have been paid out of not, the retained earnings are funds available to him for the purposes of child support, and must be added back into his income. [ 15 ] In

summary, I find R.C.’s corporate income available for Child support purposes for the year ending March 2018, is as follows:

SalaryMealsMotor vehicle expenseRentRetained earningsPersonal use of business vehiclePersonal use of business cell phoneTotal $25, 000$ 2, 400$13, 412$ 6, 600$ 7, 407$ 4, 000$ 1, 800$60, 619 [16] Apportioning that income equally between 2017 and 2018, I add back $30,308 to his 2017 employment income of $53,639, fora total income of $83,948. [17] R.C. is also half owner of a 3 bedroom house in [omitted for publication], along with his former spouse.

She resided in thathome and paid all the expenses until she moved out in 2017, after which, according to R.C., the home remained vacant until his cousinmoved into it three months ago. R.C. said he had hoped to buy out his former spouse’s interest in the house, but was unable to do so. Heprovided no explanation for failing to rent it out, if neither he nor his ex-spouse was using it, for approximately one year. D.W. suggestthat it was in fact rented out and R.C. has simply not declared the income.

D.W. also alleges that $1,000/month is not market rent for athree bedroom house in [omitted for publication] and submits that $1,500/month would be more appropriate. Although he acknowledgesthat the rent his cousin has been paying ($1,000/month) is not enough to pay the mortgage payments and other expenses for the house,R.C. argues that the house “needs work” and that $1,000 is appropriate market rent.

In any event, R.C. did not include any informationabout the operating expenses, debt due or equity in this home, nor did he claim any expenses with respect to it in his financial statement.I do not have enough information to make any finding about whether any net income should be imputed to R.C. with respect to thisproperty. [18] For 2018 (year ending March 2019), R.C.’s corporate net revenue was $156,252. His corporate net income, after expenses(including a salary to him of $22,824) was $11,873.

During that business year, R.C.’s company acquired several large assets (his oldpickup truck, a new pickup truck and a travel trailer) as well as R.C.’s personally owned tools and equipment, which he valued at$95,000. I will deal with these items separately. [19] R.C. had an old pickup truck, a 2000 F350 that he used to travel back and forth from the North. He valued the old truck at$15,000 when he rolled it into the company, because the tool box on it was valuable.

However, the old truck blew its engine, and thetool box on it was damaged by a tree falling on it and bending it in a separate incident, so he had to sell it for only $2,000. He testifiedthat he claimed depreciation (referred to as “amortization” in the corporate financial statement) in the amount of $13,000. I am rathersuspicious about the value of $15,000 that R.C. attributed to his almost 20 year old pickup truck. I do not believe that it would be worththat much, with or without a toolbox.

R.C. provided no objective evidence to support that valuation. [20] Similarly, in addition to the pickup truck, R.C. “rolled in” to the company his tools, valued at $95,000. Similarly, there is noevidence that the corporation actually paid R.C. $95,000 for his tools, and he certainly hasn’t declared having $95,000 among his assets.Accordingly, I would have expected to see the $15,000 for the old truck and the $95,000 for the tools (totalling $110,000) showing up asa loan due to R.C. as a shareholder.

However, only $45,447 shows up as owing to R.C. in the 2019 Financial Statement, with noexplanation of what happened with the other $64,553 that the company owes to him. [21] I note that the corporation purchased a new pickup truck (for R.C. to drive back and forth from work) as well as a travel trailer(to live in instead of paying rent), for a total increase in assets for 2019, of $187,789. The company then charged depreciation(“amortization”) of $70,205 on all of the assets, which had the effect of reducing the corporate net income by that amount.

I would haveexpected that the $70,205 amount would have shown up somewhere – as retained earnings or salaries or shareholder’s loan repayment,on the corporate financial reports, but it does not. However, the amount deducted from corporate earnings as depreciation is very close tothe amount of the missing payment down on the shareholders loan. I find that is no coincidence.

I conclude that R.C. withdrew thatamount from the earnings of the company (earned entirely by him,) but it is not shown as salary or wages. [22] As I have already mentioned, I find the loss of $13,000 on the pickup truck was not an actual loss; the new pickup truck is usedby R.C. as his personal vehicle, which is not normally deductible from a person’s income for child support purposes. Similarly, just asthe rent for the house in Fort St.

John was be added back into R.C.’s income for child support purposes in 2017, the purchase of a traveltrailer to be R.C.’s only permanent residence should not, in my view, be something R.C. can deduct from his income for child supportpurposes.

People who are not self-employed do not get to deduct the cost of their home from their income for child support purposes,and neither should R.C. [23] I recognise that these deductions from income may be perfectly legitimate for establishing corporate income for tax purposes,but that is not the same thing as establishing income available for child support under the Guidelines. In Baum v. Baum, (BC SC), Madam Justice Martinson said: [28] Valid corporate objectives may differ from valid child support objectives.

The purpose of s. 18 is to allow the court to "lift thecorporate veil" to ensure that the money received as income by the paying parent fairly reflects all of the money available for thepayment of child support. This is particularly important in the case of a sole shareholder as that shareholder has the ability to control theincome of the corporation. See Bhopal v. Bhopal, [1997] B.C.J. No 1746 (S.C.), Blackburn v. Elmitt (1997), 34 R.F.L. (4th) (B.C.S.C.)and McCrea v. McCrea. [24] Madam Justice Martinson’s remarks in Baum are entirely applicable to the circumstances of this case.

R.C. is the soleshareholder of his corporation and is able to manipulate its earnings and expenses to suit himself. R.C. is the sole employee of thecompany. Therefore the company gross earnings reflect exactly the same income earning capacity that R.C. had before he incorporated. Irecognise that he does have legitimate corporate expenses that must be paid in order for him to earn that living, but the salary paid toR.C. in no way reflects the income R.C. actually derives from the operation of the corporation.

[ 25 ] D.W. argued that income should be imputed to R.C. of $97,000, because that is what a heavy duty mechanic earns in [omitted for publication]. R.C. testified that he is not a heavy duty mechanic, but only an automotive mechanic, and that his earning capacity is much lower than D.W. suggests.

However, the notes to R.C.’s corporate financial statements describe his business as follows: “[omitted for publication] was incorporated under the Business Corporations Act of British Columbia and operates as a Heavy duty mechanic.” Regardless of R.C.’s actual qualifications, I find that R.C. is capable of earning an income commensurate with that of a heavy duty mechanic, since his own financial statements provide that is precisely how his income is generated.

Thus, I find that the lowest income R.C. is capable of earning is at least $97,000 as offered in the advertisement provided by D.W. [ 26 ] Having taken into account the pre-tax income of the corporation of $156,252 and the fact that services provided to the company by R.C. generated all of that income, but also taking into account the legitimate business expenses required to generate that income, I have determined that R.C. has income available to him for child support purposes in the amount of $105,000 annually, for 2018. [ 27 ] I make the following orders: 1.

R.C. is a resident of British Columbia and is found to have an income of $83,948 for child support purposes in 2017. 2. Based upon his income in 2017 of $83,948, R.C. must pay to D.W. the sum of $802 per month for the support of the child H.W.C. commencing September 1, 2018, until December 31, 2018. 3. R.C. is a resident of British Columbia and found to have an income of $105,000 for 2019. 4.

Based upon his income of $105,000 in 2018, R.C. must pay to D.W. the sum of $989 per month for the support of the child H.W.C. commencing January 1, 2019, for as long as H.W.C.is a child under the Family Law Act or until further Court order. 5. If she has not already done so, I direct D.W. to register with FMEP and report to them any child support already paid by R.C. Any child support already paid will be deducted from any retroactive amounts resulting from this order. 6.

For as long at H.W.C. is eligible to receive child support, R.C. must provide to D.W. copies of his personal income tax return on or before June 1 each year, as well as the corporate tax returns, and financial statements for [omitted for publication]. and any other corporation of which he is a majority shareholder, on or before September 1 each year, commencing in 2020. ___________________________ The Honourable Judge S. K. Keyes Province of British Columbia