J.M. v. J.V.R., 2019 BCPC 159

Citation: J.M. v. J.V.R. 2019 BCPC 159 Date: 20190306 File No: 20902 Registry: Dawson Creek IN THE PROVINCIAL COURT OF BRITISH COLUMBIA IN THE MATTER OF THE FAMILY LAW ACT , S.B.C. 2011 c. 25 BETWEEN: J.M. APPLICANT AND: J.V.R. RESPONDENT REASONS FOR JUDGMENT OF THE HONOURABLE JUDGE G. LEVEN Appearing on their own behalf: J.M. Counsel for the Respondent: M. L. Brus Place of Hearing: Dawson Creek , B.C. Date of Hearing: February 01, 2019 Date of Judgment: March 06, 2019

[ 1 ] These are my reasons in the matter of J.V.R. and J.M. The parties are separated and have two children together. [ 2 ] J.M. filed an application respecting existing orders or agreements on August 29, 2017. That application sought to vary terms of a separation agreement and raised a number of issues. All of the issues except for prospective child support and special and extraordinary expenses were settled by consent. [ 3 ] The hearing proceeded before me on February 1, 2019.

J.M. and J.V.R. both testified in these proceedings. [ 4 ] Five exhibits were filed namely: 1) [omitted for publication] Adjusting Journal Entries; 2) Email and benefits package for J.M.; 3) Mileage log of J.V.R. for 2018; 4) T4 from [omitted for publication] for J.V.R. for 2018 and, 5) CanWest group benefit plan for J.V.R. ISSUES [ 5 ] The following issues are unresolved. 1. What should J.V.R.’s child support payments be considering that he is self-employed by a Company where he is a 50% shareholder and the other 50% shareholder is his new spouse? 2.

What portion of an upcoming $8,300 orthodontic bill should each of the parties pay? 3. Whose benefits plan should be used first for the children's medical or dental expenses and what proportion of fees over and above those covered by the two benefits plans should each party pay? [ 6 ] Each of the above issues is in part dependent upon what J.V.R.’s Federal Child Support Guideline (Guideline) income is found to be. Background [ 7 ] The parties were in a common-law relationship from August 2005 to May 2014.

Two children were born of that relationship, a daughter on [omitted for publication] 2006 and a son on [omitted for publication] 2010. J.M. also had a child from a previous relationship, a son born [omitted for publication] 2000. All three children have primarily resided with J.M. since the separation. [ 8 ] J.V.R. considers J.M.’s oldest son to be his child and had provided for him as a father. This child however, is no longer a child as defined in the Family Law Act , although, he may once again become a child, as defined by the legislation, if he chooses to attend a post-secondary program.

The parties have agreed to revisit support and payment of special and extraordinary expenses for him if and when he chooses to further his education. For the purposes of this hearing, child support and extraordinary expenses are only sought by J.M. for J.V.R.’s two natural children. [ 9 ] The parties entered into a separation agreement in June 2014 (the “Agreement”) which was filed with the court on February 20, 2015. [ 10 ] The Agreement stated that J.V.R. was to pay child support for three children of $2,200 a month and $400 in extraordinary expenses.

The parties subsequently agreed to vary the amount payable to account for the oldest child no longer meeting the definition of a child under the Family Law Act and to take into account J.V.R.’s travel expenses for exercising parenting time with the children. [ 11 ] Some arrears accrued under the Agreement and the parties agreed to fix arrears at $2,500 as of February 1, 2019.

On February 1, 2019, I pronounced an interim consent order fixing arrears at $2,500 and requiring J.V.R. to pay $50 per month towards those arrears beginning on March 1, 2019, and continuing on the first of each month thereafter until the arrears are paid in full.

Such payments are to be in addition to his regular monthly child support payments. [ 12 ] Prior to June 2017, J.V.R. worked as an employee for a large oil and gas company and earned incomes of approximately $181,600 in 2014; $128,300 in 2015; $125,700 in 2016; and, $101,600 in 2017 (figures rounded). [ 13 ] In [omitted for publication] 2017, J.V.R. relocated to Grand Prairie, Alberta, and incorporated his own company [omitted for publication] (the Company). He is a 50% shareholder and the person he is in a new relationship with (“V”), is the other 50% shareholder.

The Company was incorporated in June 2017 and immediately began generating income by providing oilfield services through J.V.R.’s expertise as an oil and gas field operator. The Company showed a gross income of $92,929 for the last six months in 2017 and $179,179 for 2018. THE EVIDENCE [ 14 ] J.V.R. testified that he relocated from Dawson Creek to Grand Prairie primarily to find new employment. He testified that he had experienced some personality conflicts within his previous employment environment.

His previous workplace had become an unpleasant environment and he felt his opportunities for advancement or transfer, were limited. It was put to him in cross-examination

that his motive for relocating to Grand Prairie was because he had started a new relationship there. He disagreed with this suggestion and stated that his primary reason for moving was employment related. [ 15 ] Since its incorporation, the Company has provided services to a single larger oilfield company. J.V.R. testified that he had the option of working as an employee for that company or as a contractor. He did not elaborate on how much he would have earned as an employee nor was he asked this question in cross-examination.

He testified that the larger company preferred to employ contractors over employees. [ 16 ] J.V.R.’s financial statement shows employment income from the Company of $75,000 in 2018. His T4 for 2018, filed as exhibit 4, shows an income of $76,201.84.

He explained that this slight discrepancy was because the T4 was not received by him until after the financial statement was filed. [ 17 ] The Company’s year-end statement of earnings and retained earnings for 2018, shows the following: Revenue $179,179 Expenses Advertising and promotion 1,938 Amortization 1,581 Business taxes and licenses 1,216 Fuel and oil 17,285 Insurance Interest and bank charges 186 5,412 Lease payments 14,462 Office 612 Professional fees 2,349 Rent 2,400 Supplies 2,439 Telephone 2,546 Travel 21,068 Vehicle 9,332 Wages and benefits 87,267 Work clothes 1,248 171,341 Earnings From Operations 7,834 675 Earnings Before Income Taxes 8,509 Income Taxes 1,006 Net Earnings for the period (2018) 7,503 Retained Earnings – Beginning of Period 18,564 Retained Earnings – End of Period (2017 & 2018) $ 26,067 [ 18 ] J.V.R. conceded that certain of the expenses written off against the corporate income should be viewed as benefits and included in his income.

He conceded that 11% of his vehicle expenses were for personal use, as were 11% of his telephone expenses. Adding 11% of these expenses to his T4 income yields a guideline income of $83,730 and this he argues, should be his guideline income for child support purposes. [ 19 ] J.V.R.’s financial statement includes a statement of earnings and retained earnings for the Company both for 2017 and 2018. [ 20 ] For the six months in 2017, the Company showed retained earnings after taxes of $18,564. For the twelve months in 2018, the Company showed retained earnings after taxes of $7,503.

The combined after tax retained earnings since the Company’s incorporation are $26,067. [ 21 ] The Company paid $2,813 in Taxes in 2017 and $1,006 in 2018. [ 22 ] J.V.R. testified about the categories of expenses on his year-end statement of earnings. He testified that his work involves a lot of travel and that he needs a reliable vehicle. He testified that he works from his home and has an average twelve hour workday. He travels daily, at times in excess of 500 km in a day.

He submitted a mileage log showing the total kilometres he travelled in 2018 which are divided between business and personal use. [ 23 ] He testified that the $2,400 for rent is for office space for the Company in his own home. He also testified that the telephone expense is for 100% of both his and V’s phone. The $21,065 in travel expense is a per diem expense he and V claimed for each day J.V.R. was required to travel. He also testified that he paid V about $500 each month to do bookkeeping for the Company.

He says this is a reasonable fee because it would cost him more to have an external bookkeeper. [ 24 ] In cross-examination, J.V.R. was asked about the $21,065 in travel expenses and why V was able to claim half of this expense. J.V.R. responded that the accountant advised him he was able to claim this amount. He was also cross-examined about why V could claim 100% of her telephone bill and again responded that the accountant advised him he could do this. [ 25 ] J.M. submits that J.V.R. should have accepted employment with the larger company because this would create more certainty for child support purposes.

[ 26 ] She questions the approximate $500 per month wage that V receives from the Company as a bookkeeper. She argues that many of the business deductions and, in particular, the entire amount for rent and the entire amount for the per diem travel should be added back to J.V.R.'s income. She objected to the mileage log filed by J.V.R. because it did not contain odometer readings and could not be compared to maintenance records for veracity. She says the mileage log does not meet the CRA requirements for a mileage log.

She argues that there was no way of telling what the actual mileage on the vehicle was and what percentage of the mileage was for business or personal use.

She says that a greater portion of the vehicle expense and fuel and oil expense than is conceded should be attributed back as income. [ 27 ] In Exhibit 1, the adjusting journal entries for the Company, there was a credit to the Company shown in 2018 of $17,645.92, which was questioned by J.M. [ 28 ] J.V.R. testified that he had saved this money and infused it into the company to pay out an existing vehicle loan and to put a down payment on a new vehicle. [ 29 ] J.M. cross-examined him about where this money came from and suggested he was accepting cash employment on the side.

J.V.R. denied receiving any additional cash and testified that the Company consumed him and that he had no time for cash jobs on the side.

J.M. questioned him about how he could possibly have that much money on hand while not meeting child support obligations and seeking to reduce them. [ 30 ] In cross-examination, J.M. conceded that she had no evidence that J.V.R. was working for cash in addition to his disclosed employment income. [ 31 ] J.M. argues that J.V.R. is inflating expenses and perhaps hiding income and that a figure between $100,000 and $125,000 would reflect a more realistic guideline income. [ 32 ] J.M. filed a financial statement declaring her income to be $55,700 in 2018; $57,500 in 2017; and, $52,600 in 2016 (figures rounded).

In cross-examination she conceded that her employment income for 2018 was $58,202.40 and that she received $16,800 in child support payments. These figures were from information she had included in her financial statement. [ 33 ] Both J.M. and J.V.R. have health benefits plans. [ 34 ] J.M.'s plan covers her and her children for $3,000 of extended benefits.

The email and benefits package filed as Exhibit 2 confirms that there is no specific amount allocated to each child and that $3,000 is the maximum aggregate benefit for the entire family. [ 35 ] J.V.R. filed a description of his health benefit plan as Exhibit 5. He testified that his plan covers himself and the two children but not his new spouse. He needs to pay for all claims upfront, submit receipts and then will be reimbursed.

Exhibit 5 does not specify the monetary limits of the plan, but I understood J.V.R.’s testimony to be that the maximum amount of coverage for each child is $750 annually. [ 36 ] It is common ground that one of the two children will soon require a significant amount of orthodontic work which will not be covered by either plan. The orthodontic work will cost about $8,300. J.M. says this expense should be split 60/40 with J.V.R. paying the larger portion. J.V.R. takes the position that the expense should be shared 50/50 and has offered to take out a loan to pay for the entire amount and later be reimbursed by J.M.

THE LAW Calculation of guideline income [ 37 ] The calculation of income for child support purposes is governed by sections 16 to 20 of the Guidelines. The relevant sections are as follows: 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 and adjusted in accordance with

Schedule III. 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. . . . 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.

(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. 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: . . . (

g) the spouse unreasonably deducts expenses from income: . . .

(2) For the purposes of paragraph (1)(g), the reasonableness of an expense deduction is not solely governed by whether the deductionis permitted under the Income Tax Act. [38] In Wiebe v. Treissman, 2017 BCSC 1523, Mr. Justice Kent wrote: [95] The burden of proving the reasonableness of deductions from business income, whether in the context of self-employment orwithin a wholly owned corporation, lies with the spouse making the deduction. [39] In Kowalewich v.

Kowalewich, 2001 BCCA 450 the court identifies some of the factors a court should consider undersection 18 of the guidelines: [43] In this regard, I find helpful the view Justice Martinson expressed in Baum v. Baum (1999), (BC SC), 182D.L.R. (4th) 715 at para. 28: Valid corporate objectives may differ from valid child support objectives. The purpose of s. 18 is to allow the court to “lift the corporateveil” to ensure that the money received as income by the paying parent fairly reflects all of the money available for the payment of childsupport.

This is particularly important in the case of a sole shareholder as that shareholder has the ability to control the income of thecorporation. . . . [54] The Guidelines allow a court to include all of the pre-tax income of a corporation for the most recent taxation year in a spouse’sannual income for Guideline purposes. They do not require it. I am not persuaded they make the inclusion of all pre-tax income thedefault position. . . . [58] It seems to me regard should also be had to the nature of the company’s business and any evidence of legitimate calls on itscorporate income for the purposes of that business.

Justice Drake cautioned about not killing the goose who lays the golden eggs.Monies needed to maintain the value of the business as a viable going concern will not be available for support purposes. . . . [59] I do not recite these factors to suggest this Court should tinker with a trial judge’s exercise of discretion, nor that a trial judgeshould second guess business decisions. I do say that a trial judge must have regard to the evidence of legitimate business needs indetermining what portion of pre-tax corporate income to include in annual income for Guideline purposes. [40] In Hausmann v.

Klukas, 2009 BCCA 32, Madam Justice Kirkpatrick adopts the following passage from Jeffry v. Motherwell,2006 BCSC 140 : “The onus is on the payor to provide the necessary evidence that the corporation's pre-tax income is notavailable to the payor” (para. 51 and 52). Special or extraordinary expenses [41] Section 7 (2) of the Guidelines state: The guiding principle in determining the amount of an expense referred to in subsection (1) is that the expense is shared by the spousesin proportion to their respective incomes after deducting from the expense, the contribution, if any, from the child.

ANALYSIS [42] I accept J.V.R.'s evidence that he relocated to Grand Prairie for legitimate employment purposes. I am not prepared to find thathe is purposely underemployed or that he lacked a good reason for leaving his previous employment.

I also accept his evidence that hesaved the $17,645 which he infused into the Company in 2018 to pay out an existing vehicle loan and to put a down payment on a newvehicle. [43] The issues I need to decide are whether the expenses he deducted from his corporate income are reasonable and what portion ifany of his Company’s earnings should be added to his guideline income for child support purposes. Business Expenses [44] For the most part, I accept J.V.R.'s evidence. He testified in a manner which was generally consistent with the financialinformation he provided.

I also find that he has not withheld any significant financial information. [45] I had some difficulties accepting the mileage log he filed as Exhibit 3 because it does not contain odometer readings and maynot be in a format accepted by CRA. He testified that he was unaware of the exact requirements of a mileage log and did his best. Iaccept his evidence on that point. [46] Going forward and for purposes of ongoing financial disclosure requirements, I would expect there to be no confusion aboutwhat a proper mileage log is and that it should contain odometer readings.

[ 47 ] He testified that he drives a significant distance for work purposes each day and this was not seriously challenged in cross- examination. J.V.R. conceded that 11% of his vehicle expenses can be attributed to personal use and I accept that his personal use of the vehicle is 11%. I accept counsel's calculations that if we add 11% of all the vehicle-related and telephone deductions to J.V.R.’s income, it raises his guideline income to $83,730. [ 48 ] With the exception of the expenses mentioned below, I accept that all of the Company’s claimed business expenses are legitimate.

J.V.R. testified that he pays $500 a month to V to be the bookkeeper for the company and that it would cost more than this to employ an external bookkeeper. This was not seriously challenged in cross-examination and I accept his evidence on this point. [ 49 ] He also testified and was cross-examined about the supplies expense. This category of expenses he says involves things required for his work such as rags, notebooks and office supplies. It amounts to about $200 per month, which I find reasonable. [ 50 ] I do not however, accept some of the claimed expenses.

I keep in mind that the burden of proving the reasonableness of deductions from business income lies with J.V.R.

I also consider section 19(2) of the Guidelines and that the reasonableness of an expense deduction is not solely governed by whether the deduction is permitted under the Income Tax Act . [ 51 ] I do not find that J.V.R. has met the burden of proving that the rent deduction, V’s portion of the telephone deduction, and the travel deduction are reasonable deductions from his employment income. [ 52 ] With respect to the rent expense of $2,400, I accept that J.V.R. has a room in his home which he uses as a home office. I also accept that he requires some space from which to conduct company business.

J.V.R. did not provide evidence that having this home office is creating any greater expense for him such as a higher mortgage or higher utility bills than if he did not have the office. I therefore attribute the entire $2,400 back to his income. [ 53 ] Regarding V’s portion of the telephone deduction, I did not hear any satisfactory evidence as to why V’s telephone expense is a legitimate business expense. J.V.R. testified that his accountant advised he could write off V’s telephone bill.

That may be the case but I do not find that this is a reasonable deduction for Guidelines purposes even though it may be allowed for tax purposes. I therefore attribute one half of the claimed telephone expense of $2,546 back to his income for an added amount of $1,273. [ 54 ] I am also not satisfied that the $21,068 in per diem travel expense deduction is an allowable deduction. While I accept that J.V.R. travels during the course of his employment, there is a burden on him to prove that any expenses incurred by him are legitimate business expenses.

He testified in cross-examination that the accountant advised him that he was entitled to a $100 per diem deduction split between he and V for each day he travelled. Again, although this may be an allowable deduction for tax purposes, there is no evidence that J.V.R. or V incurred any actual expenses in any amount over and above their regular daily living expenses. I therefore attribute the total amount of the travel expense deduction of $21,068 back to his income. [ 55 ] The company also paid $1,006 in taxes in

Section 18 of the Guidelines suggests that the pre-tax income of a corporation can be used to calculate guideline income.

Section 18 of the Guidelines suggest that I may, but not must, include all of the pre-tax income for a corporation for the most recent taxation year in a payor’s guideline income. The Guidelines consider pre-tax income to calculate personal guideline income and I see no reason why in these circumstances, I should treat J.V.R.'s company income any differently. I therefore attribute the $1,006 paid in taxes by the company in 2018 back to his guideline income. Pre-tax corporate income and legitimate business needs [ 56 ] There is also the question arising from Kowalewich v. Kowalewich , whether monies retained in the Company should be attributed back as income. Section 18(1)(

a) of the Guidelines allows me to include all or part of the pre-tax income of the corporation for the most recent taxation year. The retained earnings from the Company for 2018 are $7,503. The total retained earnings since the Company's creation in June 2017 are $26,067. I need to be mindful that one should not kill the goose that lays the golden eggs and that money needed to maintain a corporation as a viable going concern will not be available for support purposes. [ 57 ] I am also mindful of the principle from Hausmann v.

Kluskas that the onus is on the payor to provide the necessary evidence that all of the corporation's pre-tax income is not available to the payor. I heard evidence from J.V.R. that his company to date has provided services for a single larger oilfield company. I heard no evidence from J.V.R. about any specific investments or other expenditures the Company requires to maintain it as a viable going concern. J.V.R. has not met the onus of proving that this portion of the Company’s pre-tax income is not available to him.

Absent evidence to the contrary, J.V.R. is not entitled to use his Company to shield income to lower his child support obligations. [ 58 ] The Company showed significantly less expenses in 2017 than it did in 2018. Notably, there were no vehicle lease payments and no travel expenses claimed. I accept that J.V.R. requires a reliable vehicle for work purposes and given that I have already attributed the 2018 travel expense deduction back to J.V.R. as income, I will use the 2018 retained earnings figure only to calculate his guideline income going forward.

I therefore attribute only the Company's retained earnings for 2018 of $7,503 to J.V.R.’s guideline income. [ 59 ] By attributing the above expenses and company earnings back to J.V.R.’s income, I find his income for child support purposes to be as follows: Conceded Income $ 83,730 Rent Expense 2,400 V’s Phone 1,273 Travel Expense 21,068 Corporate Taxes 1,006 Retained Earnings 2018 7,503 Total $116,980 Special and extraordinary expenses

[ 60 ] Section 7(2) of the guidelines suggest that the expenses should be shared by the spouses in proportion to their respective incomes. With J.V.R. having a 2018 guideline income of $116,980 and J.M. having one of $58,202, J.V.R. is to pay 67% and J.M. 33% of all special and extraordinary expenses including the $8,300 orthodontic bill. [ 61 ] On the issue of whose medical plan should be used first, J.M. shall use her benefits plan to cover the first $1,000 in medical and dental expenses for the children. J.V.R. will then use his plan for $750 per child until his coverage is exhausted.

If necessary, J.V.R. will pay 100% of any portion of medical or dental expenses covered by his plan directly to the service provider and then seek reimbursement from his plan. J.M. will then use her plan again until her coverage is exhausted. Any medical or dental expenses for the children not covered by the respective plans shall be paid 67% by J.V.R. and 33% by J.M.

Each party will pay their respective portion directly to the service provider. [ 62 ] J.V.R. will pay to J.M. the sum of $1,692 for the support of the children commencing on March 1, 2019, and continuing on the first day of every month thereafter for as long as the children are eligible for support under the Family Law Act or until further court order.

Both parties shall deliver to the other financial information for the previous year as described on page 2 of the Form 4 Financial Statement of the Provincial Court (Family) Rules by June 1 of each year commencing in 2020. [ 63 ] The order I pronounced on February 1, 2019, respecting arrears will become a part of the final order. [ 64 ] Counsel for J.V.R. should draft the order. ___________________ George Leven, PCJ