M.N. v. T.C. Date:, 2012 BCPC 140

Citation: M.N. v. T.C. Date: 20120515 2012 BCPC 0140 File No: F45846 Registry: Kelowna IN THE PROVINCIAL COURT OF BRITISH COLUMBIA IN THE MATTER OF THE FAMILY RELATIONS ACT , R.S.B.C. 1996 c. 128 BETWEEN: M.N. APPLICANT AND: T.C. RESPONDENT REASONS FOR JUDGMENT OF THE HONOURABLE JUDGE R.R. SMITH Counsel for the Applicant: Ari Wormeli

Counsel for the Respondent: Trevor Hande Place of Hearing: Kelowna , B.C. Dates of Hearing: 6, 7, 8 March 2012 Date of Judgment: 15 May 2012 THE FACTS [ 1 ] T.C. is the father and M.N. is the mother of H.C. This is the mother’s application for increased child support, including retroactive child support. She has abandoned any claim for extra-ordinary expenses. [ 2 ] The parties resided together between 1994 and 1999 and their son H.C. was born [DOB]. The parents separated in 1999 when the mother moved out with age one H.C.

Since that time, in spite of all the parties continuing to reside in Kelowna, the father has not sought any contact with H.C., although the paternal grandparents have maintained a distant relationship with H.C., seeing him three or four times a year. [ 3 ] By way of a written agreement made 22 October 1999, the father agreed to pay child support in the amount of $300 per month. This was less than the $445 per month that his disclosed guideline income of $52,352 would have required.

This arrangement was made in part because the father had other children for which he owed child support and also in part because in 1999 the mother had started a new common law relationship with Mr. T, who was a man of considerable wealth. [ 4 ] The father (T.C.) faithfully paid the $300 per month child support, albeit at times a bit late with his payments. The mother chose not to apply to increase the child support given her common law Mr.

T was earning as much as two million dollars in his best year and the child was growing up in a home where frequent exotic vacations out of country were the norm and the child was participating in almost more activities than was humanly possible, including soccer, guitar lessens, boating, wake boarding, skiing, football and basketball. [ 5 ] T.C. was the sole shareholder and sole controlling person for a limited company involved with real estate development. This company was in a joint venture with a company controlled by T.C.’s father. T.C. received both employment income and dividend payments from his company.

Over the years, his combined income and dividends from his land development company began to significantly increase such that his income far exceeded the $52,352 amount he was receiving at the time of the child support order in 1999. By 2003 this total revenue as reported on the tax returns was as follows: YEAR INCOME DIVIDENDS TOTAL 2003 $50,924 $72,000 $122,924 2004 $50,924 $25,000 $ 75,924 2005 $50,924 $88,750 $121,924 2006 $50,924 $77,000 $127,924 [ 6 ] Similarly, the mother’s 2003 gross income reported on her tax return was $120,486.

This income was primarily derived from income splitting, as she was providing some work for Mr. T’s company. For 2004 the mother’s reported income was $128,700. All of that changed in 2005 when she separated from Mr. T. Her 2005 reported income was only $36,400, which had been paid earlier in 2005 before the separation. In 2006 her reported income was $41,836 and that amount was primarily spousal support paid by Mr. T. The mother’s reported income in 2007 was $50,433 which was primarily derived from cashed in RRSP’s.

In 2008 her reported income was $32,109 which again was primarily derived from the last of her cashed in RRSP’s. In 2009 her reported income was $4,543 which was derived from her part time work as a hair dresser. Similarly in 2010 her reported income was $4,969. Despite the mother’s decrease in income, she was not living in impoverished circumstances, given she had moved on to live in another relationship. Also, since June 2007 she was receiving $1,168 per month in child support from Mr.

T. for the child H.C., in addition to the $300 per month in child support from T.C. [ 7 ] Between June 2007 and February 2008 the mother was living common law with Mr. R, who had a nice home and owned a successful mechanical business in Kelowna. Mr. R allowed the mother to use his hummer to drive H.C. to his various activities. Mr. R also paid for the mother and H.C. to join with him in a trip to Hawaii. [ 8 ] In January 2009 the mother started dating Mr. J and in June 2009 she commenced a common law relationship with him.

He is also a successful local businessman, who owns a roofing company and earns $150,000 to $220,000 per year. The mother and H.C. to this day continue to live with Mr. J and he contributes to the lifestyle H.C. is able to enjoy, including putting a roof over their head, and payment for two trips to Mexico, one to Hawaii and one to Las Vegas since 2009. Given Mr.

J’s contributions, the mother has had sufficient disposable income to be able to currently be in a lease of a BMW car for $700 per month. [ 9 ] For the two years leading up to the real estate crash of July 2008, the land development company of T.C. became increasingly lucrative. In 2004 the joint venture purchased real estate near Shannon Lake in West Kelowna which overlooks Okanagan Lake. After developing the land, they sold lots in a package where they would also exclusively build the homes on the lots. Some 33 of these homes were sold by mid 2009.

Since the July 2008 crash of the real estate market, the joint venture is sitting on this valuable asset,

but they have only been able to sell and build between three to five homes per year and most of the wealth of the company is tied up inraw lots that have not been sold. [10] T.C. has five children and all five children have a different mother. On February 23, 2007, after a contested hearing, I orderedthat T.C’s child support obligations to the oldest child would be increased retroactively, based on guideline income, as determined byline 150 of his tax return, plus the actual dividends received. That decision is recorded at 2007 BCPC 42 , 2007 BCPC 0042.

The calculations for guideline income and resulting arrears in that case were as follows: Tax Year Income Owed Paid Arrears 2003 $122,924 10,812 3,000 7,812 2004 $ 75,924 7,224 3,000 4,224 2005 $121,924 10,728 3,514 7,214 2006 $127,924 13,570 9,168 4,402 TOTALS: $23,652 [11] At the time this February 23, 2007 order was made, that oldest child J.O. was two months away from turning age 19 and thefile was primarily dealing with retroactive child support variation, as opposed to prospective child support payments and how to defineincome.

I believe that shortly after that February 2007 order was made, agreements were also reached regarding T.C.’s second andfourth child. The fifth child J.C. continues to live with T.C. and T.C.’s current wife. The only child for whom the child supportobligations have not been fully resolved involves this matter of the child H.C. currently before the court. H.C. turns 15 this month, sochild support obligations will at least be ongoing for another four years. [12] M.N. has abandoned any request for a variation of the child support order which would be retroactive before her separationwith Mr. T. in 2005.

As stated earlier, she has also abandoned any claim for extra-ordinary expenses. The mother’s final resolve of theSupreme Court case regarding Mr. T. factored into her decision to abandon any further retroactive claim or claim for extra-ordinaryexpenses. [13] The protracted Supreme Court case between the mother and Mr. T. lasted many years and was finally dealt with on 28 April2009 by a consent dismissal. The parties had reached a written agreement settlement where Mr. T. did three things for his step-sonH.C.: First, he paid the mother $300,000 cash as lump sum child support for H.C.

Second, he paid $35,000 into an irrevocable trustaccount for the education of H.C. Third, he agreed to pay ongoing child support for H.C. in the amount of $1,500 per month. This wasan increase in the $1,168 amount of ongoing child support Mr. T had been paying under the June 2007 interim child support order. Themother states that calling the $300,000 cash payment child support was a misnomer, given the money primarily went to pay the mother’s$74,000 in credit card debt, her substantial legal fees and to pay out the balance owing on her new car, which she had purchased in 2008.She testifies that the only way Mr.

T. would agree to a settlement was to call that $300,000 payment child support. Regardless, theagreement she ultimately signed did not label the $300,000 payment as division of assets or lump sum spousal support. It was lump sumchild support for H.C. RETROACTIVITY [14] It is trite law to say that when calculating ongoing child support, the natural father is to pay the full guideline amount and thestep-parent is to pay the “topped up” amount. However, when determining whether to apply child support retroactively, the court musttake into consideration this $300,000 lump sum payment of child support.

The court must take a “holistic approach” and “must considerall the relevant circumstances” when exercising its “authority to make retroactive orders” (C.A.R. v. G.F.R., 2006 BCSC 1407, perMartinson J., at para. 7). I am to consider the reasonableness of the excuse for delay in making the application, the conduct of thepaying spouse, the circumstances of the child, and any hardship caused by making a retroactive order. [15] On July 15, 2010 Judge Hogan made an interim order imputing $250,000 income to T.C. and ordering him to pay increasedchild support of $2,082/mo retroactively to Jan 1, 2008.

The father had failed to attend court that date. I have now listened to the DARSrecording of what the mother told Judge Hogan under oath on July 15, 2010. Noteworthy is the fact that she failed to make any mentionof the $300,000 lump sum child support payment, the $35,000 education fund payment or the ongoing $1,500 per month child supportshe was receiving from the step-father. That would have been critical information for Judge Hogan to hear before making any retroactiveorder against the natural father.

Judge Hogan commented, “As soon as I grant this order, he will come to court” and the motherresponded, “Well, it is a way to get him here.” At the very end of making the order Judge Hogan stated, “I’m sure he will be back incourt after this.” Those words were prophetic because once the father learned of the order being retroactive to January 1, 2008 he did getthe matter brought back to court. [16] I have no doubt but what the father buried his head in the sand for many years regarding communicating to the mother hisincreased income.

This intentional act was made easier by the fact that he had absolutely no contact with his son. [17] The mother equally put her head in the sand regarding seeking more child support from the father. In this unique case, themother was in several subsequent relationships with wealthy men. That can particularly be said of her relationship with the millionaireMr. T. It is therefore understandable why she did not attempt to obtain increased child support from T.C.

Another reason she had notsought to get an increase of child support from T.C. was because of the potential emotional trauma that could be caused by potentiallybringing T.C. into the life of their son. Her Supreme Court action with Mr. T ended on April 28, 2009. The mother strategically waiteduntil December 15, 2009 (after the action with Mr. T had ended) to file this application for increased, retroactive child support from T.C.

[ 18 ] The court would be hard pressed to find that the circumstances of the child, who in April 2009 was nominally the recipient of a $300,000 lump sum child support payment from Mr. T., along with the $35,000 payment to the boy’s education and payment of $1,500 per month in child support, was some how hard done by with regards to child support. [ 19 ] In my view, the applicant’s request for retroactive payment of $338,254.53 for arrears is in no way a realistic request for child support, but rather, a retroactive request for division of assets or spousal support in another form.

As the trial progressed, she abandoned a significant portion of that claim for retroactivity, but continued to push for retroactivity back to the time in 2007 when she separated from Mr. T., notwithstanding the $300,000 lump sum child support she had received from the step-father in April 2009. [ 20 ] I find the application for retroactive child support must fail. While it is true that the father’s conduct in not disclosing the details of his increased income was improper, the mother was aware that the father’s income was significantly increasing. Her lawyer Mr.

Ihas on September 18, 2002 wrote to T.C., complaining of the failure of T.C. to make some of his maintenance payments on time. Her lawyer also added in that letter: As well, our client has advised that your income has increased substantially since the time of the Agreement. In our view, such an increase amounts to a material change of circumstances justifying a variation of the child support amount. Our client is currently considering commencing a variation proceeding in order that the child support amount paid may be adjusted to the appropriate figure.

If you continue to refuse to pay the outstanding amounts, and continue to fail to make future payments at the required time, our client will be left with no option but to proceed. [ 21 ] On March, 2007 T.C. made full disclosure of his financial situation by way of filing an affidavit containing that disclosure, in the Supreme Court action between the mother and Mr. T. She testifies that she never received a copy of that disclosure, yet it is date stamped in that Supreme Court file.

This filing was in addition to the letter sent by T.C.’s lawyer to FMEP in 2006, asking that they advise M.N. that T.C.’s financial circumstances had changed for the better. No question T.C. engaged in blameworthy conduct prior to 2007, but it can not be said that conduct continued thereafter. He seemed to have learned his lesson with my February 23, 2007 written decision involving his oldest child. [ 22 ] The mother intentionally did not seek any retroactive child support increase from the father until December 15, 2009. Their son was in no way hard done by, given all of the increased payments from Mr.

T and also increased financial benefits from the subsequent men in his mother’s life. [ 23 ] I understand that since Judge Hogan’s order was made, the father has prospectively paid the increased child support ordered ($2,082/mo), but he has not paid the $58,256.29 arrears accumulated from the retroactive portion of Judge Hogan’s order. I vary the order of Judge Hogan made December 15, 2010 such that it will not be a retro-active order, but rather an order commencing the first of July 2010 and continuing on the first day of each month thereafter.

In effect, assuming the father has in fact faithfully made the $2,082/mo payments since Judge Hogan’s Order was made, this variation order today results in a finding of no arrears owing as of today’s date. CALCULATING INCOME [ 24 ] Another big issue to be determined in this hearing is the method of calculating the income of T.C. for future child support purposes.

All parties agree that the traditional method of just applying the line 150 amount of the father’s prior year’s tax return in determining his guideline income is not a fair way of calculating his income for child support purposes. [ 25 ] Back in February of 2007 when I made the child support order involving T.C.’s oldest child, I applied the formula of combining both line 150 income and 100% of actual dividend income received in order to calculate T.C.’s guideline income. The father asks that I continue with a similar type formula for calculating his guideline income in the case at bar, with some modifications.

In 2007 the circumstances of T.C.’s company was considerably different than today. For example, his current spouse is now an employee of the company in circumstances where, for legitimate tax reasons, income splitting is in place, but a portion of her wages will need to be included in T.C.’s guideline income calculations. [ 26 ] Both parties agree that a proper formula now for calculating the father’s income for child support purposes will also include the wages the company pays to his current wife, less $25,000.

Both lawyers agree I should also add back into the father’s income for guideline purposes a portion of the auto and telephone expenses of the company, although they do not agree on what percent of those expenses should be added back in to his income. [ 27 ] Both lawyers agree that the father is to continue disclosing a complete copy of his prior year’s tax return by the 30 th of June of each year (including a copy of both his individual tax return and the return for any company for which he is a shareholder).

Counsel also agree that given the fiscal year end of the real estate development company in question is January 31 st of each year (which is close to the December 31 st calendar year end of the prior year), all child support calculations will be based on the fiscal year end instead of the calendar year end. [ 28 ] The biggest dispute surrounds the mother’s request that I calculate the father’s guideline income based upon the earnings of the company before income taxes (as opposed to just adding back in the dividend income he receives in addition to the wages he is paid).

Counsel for the mother asks the court to calculate the fathers guideline income for child support purposes using the following formula:

a) All wages paid to the father during the fiscal year;

b) All wages paid to father’s current spouse during the fiscal year, less $25,000;

c) All pre-tax earnings of the company during the fiscal year; d) 50% of the telephone expenses for the company during the fiscal year; e) 50% of the auto expenses of the company for the fiscal year; and

f) All of the amortization of the company for the fiscal year that was written off for tax purposes. [ 29 ] Applying the mother’s requested formula, the results would be as follows: Year Wages Pre-Tax Auto(50%) Phone(50%) Amort Income 31 Jan 2011 80,476 197,471 5,449 1,197 10,475 295,068 31 Jan 2010 80,586 189,765 7,353 1,448 9,433 288,585 31 Jan 2009 84,501 762,460 9,019 1,354 6,575 863,909 [ 30 ] Counsel for the father asks the court to use a modified formula based in part on the reported income of the father, but then adding in a portion of the pre-tax income of the company as follows:

a) All wages paid to the father during the fiscal year;

b) All wages paid to his current spouse during the fiscal year, less $25,000 per year;

c) The full amount of all dividends paid to the father during the fiscal year;

d) Up to10% of the company auto expenses; e) 10% of the company telephone expenses;

f) None of the company amortization on building. [ 31 ] Applying the father’s requested formula, the results would be as follows: Year Wages Dividends Auto (10%) Phone (10%) Income 31 Jan 2012 $75,324 $92,737 $1,100est $250est $169,411 31 Jan 2011 $80,476 94,000 1,090 234 175,800 31 Jan 2010 $80,586 135,000 1,470 290 217,346 31 Jan 2009 $84,501 102,500 1,804 271 189,076 [ 32 ] By Judge Hogan’s July 2010 order, the income imputed to the father was $250,000.

The father is not seeking any recalculation of the amounts he has already paid under that order (although the table below shows that if I apply the father’s requested formula for calculating income, he slightly overpaid child support since July 2010): [ 33 ] Section18 of the Child Support Guidelines reads: 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. [ 34 ] The parties have provided a plethora of cases showing how other courts have defined “income” for child support purposes. In the end, the best method to be applied will depend on the specific facts of any given case, after considering the applicable law.

There is unquestionably a trend in the direction of including pre-tax profit calculations into “income” for child support purposes if there is reason to believe that the payer has more potential income available for calculating child support. [ 35 ] As pointed out by our BCCA, starting at paragraph 53 of the Hausmann decision ( 2009 BCCA 32 ), the onus is on the payer to provide an explanation for the necessity to retain corporate earnings for valid business reasons.

T he payer can not simply keep building up capital in the company and rolling it over into retirement, without giving his children there proper child support. [ 36 ] The case before me is not a case where T.C. is intentionally rolling money over in his company in order to avoid paying child support. The significant reduction since July 2008 in the gross revenue of the company has nothing to do with some strategizing by T.C. It has everything to do with the tanking of the North American real estate market in July 2008. To date that market has yet to recover.

Basing the income of T.C. on the speculative value of unsold lots is not a proper way of calculating income for child his support obligations. [ 37 ] I can understand the concern that given T.C. has no contact with his son, once his son is of adult age, T.C. may attempt to eventually divide his assets in an inappropriate manner among his children. That is an estate planning issue, and any such unfairness is better addressed in “trust law” applications or “Wills Variation” applications. Child support is primarily derived from “income” and not from “assets”.

The court, and in particular the Provincial Court, should be careful not to indirectly address division of assets through the back door of “child support”. [ 38 ] When calculating “income” for child support, the so called “piercing of the corporate veil” should only occur when it is clear that more income is available for the payer from the company but the payer is somehow manipulating the equity in the company in a way which improperly limits the “income” for child support guideline purposes. In those cases, the pre-tax income of the corporation ought to be added into the payer’s income.

In the case at bar, there is no hidden cash amount. The money is tied up in the real estate. When the real estate market returns to better health, then the gross revenue of the company will reflect that increase, and in theory that should be reflected as increased “income” for T.C., either in the form of actual income or dividend income.

Currently, the most accurate method of calculating T.C.’s income for child support purposes is to add back into his line 150 income the full amount of any dividends received, in addition to adding back in 20% of the corporate auto and phone expenses and all but $25,000 of the wages currently paid by the company to his wife. [ 39 ] Lastly, I turn my mind to the request of adding back into income all of the amortization of the company office that is being written off for corporate tax purposes. Currently, that amount is about $3,500 per year, but the amount is decreasing each year.

Counsel has referred me to Egan v. Egan ( 2002 BCCA 275 ) and P.M.R. v. M.H.R. , ( 2011 BCSC 1621 ). I have considered the law in this regard. Perhaps with the right fact pattern, the payer’s corporation’s tax allowed amortization of real estate should be added back in the payer’s personal income, to reflect the fact of the land (as opposed to the building) is appreciating in value. However, in our current post July 2008 real estate market, such appreciating (as opposed to depreciating) is not the case.

I find that the tax allowed amortization is a good estimate of the amortization that ought to be allowed for calculating “income” for child support purposes. It is simply a situation where the Income Tax Act deduction and the child support guideline deductibility coincide. DECISION [ 40 ] To give effect to Judge Hogan’s July 15, 2010 order only being prospective and not retrospective, this court cancels all arrears that had accumulated under that retrospective order.

The result is that Judge Hogan’s order continues prospectively from August 1, 2010 through June 1, 2012, requiring T.C. to pay M.N. child support for H.C. in the amount of $2,082 per month, on the first day of each month. I believe those payments have already been made and there is now no arrears. [ 41 ] For the future, the income for T.C. for child support purposes (regarding the child H.C.) is to be calculated as including the following as reported in T.C.’s prior year’s personal tax return:

a) All wages paid to T.C.;

b) All wages paid to T.C.’s current spouse (from the company), less $25,000 per year;

c) The full amount of all dividends paid to the father; d) 20% of the company auto expenses; e) 20% of the company telephone expenses;

f) None of the company amortization on building. [ 42 ] Starting July 1, 2012, the guideline income for T.C. for child support purposes is $177,124.00. (This amount is calculated using the 2011 personal tax return of T.C., which attached the January 2011 fiscal year end statement of the company). Commencing July 1, 2012 and continuing on the 1 st day of each month thereafter, T.C. is to pay, for the support of the child H.C., $1,528.00 per month ($1,323 plus .74% of $27,712 = $1,528 total). [ 43 ] The next review and variation will take effect July 1, 2013. T.C. must disclose a copy of his prior year’s tax return by June

30 th of each year, commencing with providing a copy of his 2011 tax return by June 30, 2012. The file is to be registered in the recalculation program to insure the next annual review occurs for July 1, 2013 calculations. ________________________ R.R. SMITH, P.C.J.