Docket: CACV2145 Holly Noella Marie Labrecque (Petitioner) Appellant - v. -, 2014 SKCA 59

THE COURT OF APPEAL FOR SASKATCHEWAN Citation: 2014 SKCA 59 Date: 2014-05-15 Between: Docket: CACV2145 Holly Noella Marie Labrecque (Petitioner) Appellant - and - Claude Philip Joseph Labrecque (Respondent) Respondent Coram: Richards C.J.S., Ottenbreit and Herauf JJ.A. Counsel: Sean M. Sinclair for the appellant Patrick H. Loran for the respondent Appeal: From: 2011 SKQB 260 Heard: March 27, 2014 Disposition: Allowed in part

Written Reasons: May 15, 2014 By: The Honourable Mr. Justice Herauf In Concurrence: The Honourable Chief Justice Richards The Honourable Mr. Justice Ottenbreit Herauf J.A. I. Introduction [ 1 ] This is an appeal from the judgment of a justice of the Court of Queen’s Bench pronounced on June 30, 2011 (See: 2011 SKQB 260 ).

The appellant appeals the findings of the trial judge relating to the personal circumstances of the parties’ oldest child, the method of accounting used to calculate child support, the failure to include any of the Hardrock Farms Ltd. (“Hardrock”) pre-tax income for purposes of calculating child support and the refusal to award retroactive child support. [ 2 ] The parties acknowledge the trial judge erred in permitting what, in effect, was a double deduction of the inventory payments of Hardrock by deducting those payments out of after-tax income of the corporation when the evidence establishes that the payments were already made out of the pre-tax income of the corporation.

Other than correcting this error, there is no merit to the remaining grounds of appeal. II. The Facts [ 3 ] Holly and Claude Labrecque (“the appellant” and “the respondent”) were married in 1985. They separated in 1999 and divorced in 2002. They have three children: Riley, born in 1990; Jenai, born in 1992; and Braden, born in 1994. The parties agreed during the course of the trial that support for Riley would terminate on December 31, 2013 and support for Jenai terminated on August 31, 2010. [ 4 ] The respondent works as a farmer.

In 2003, he incorporated his farming operation as Hardrock Farms Ltd., of which he is the sole shareholder and director. Hardrock’s income is derived primarily from grain production. When Hardrock was incorporated, the respondent transferred some grain inventory to it. Hardrock is gradually paying the respondent back in a manner akin to a wage by way of so-called “inventory payments”. [ 5 ] The last order made with respect to child support was made in May of 2009.

This order fixed, by agreement, the respondent’s income at $54,600 gross per annum and the appellant’s at $23,300 gross per annum. [ 6 ] Additional facts will be set out when dealing with each ground of appeal. III. Decision of the Court of Queen’s Bench [ 7 ] Various issues relating to child and spousal support were the subject of a five day trial before the trial judge. [ 8 ] The most contentious issue was whether or not the respondent had income retained in Hardrock that should be available for child support.

After an analysis of the financial state of Hardrock, including the opinions of two expert witnesses, the trial judge determined there was no additional income available in Hardrock for child support purposes in the years 2008, 2009 and 2010. [ 9 ] In reaching this conclusion, the trial judge accepted the opinion of the respondent’s expert and proceeded to determine Hardrock’s income on a cash basis rather than an accrual basis as promoted by the appellant’s expert.

Because of the large year-to-year variation in Hardrock’s pre-tax income, the trial judge took a three year average, arriving at a yearly figure of $33,533. From this amount, she deducted the amount “akin to a wage” being paid to the respondent through the inventory payments and concluded that none of Hardrock’s pre-tax income was available for the purposes of child support.

For reference, the trial judge found that the inventory payments paid to the respondent for the 2008, 2009 and 2010 taxation years were $40,140.00, $46,429.00 and $48,610.00, respectively. [ 10 ] The trial judge dismissed the appellant’s application for retroactive child support to either July 1, 2007 or November 1, 2008.

She found a retroactive award of child support was “neither appropriate nor warranted.” The trial judge determined March 1, 2010 was the appropriate date to vary child support as that is the date the appellant initiated the current application for variation. [ 11 ] Finally, the trial judge dismissed the appellant’s application to reinstate spousal support. This aspect of the decision has not been appealed. IV. Grounds of Appeal and Analysis [ 12 ] The appellant raised four grounds of appeal. Each ground of appeal will be dealt with in turn. (

i) Did the trial judge err in making findings on matters of fact in regards to Riley that were made unnecessary by virtue of an agreement reached by the parties during the trial? [ 13 ] The appellant did not address this ground during oral submissions so extensive reasons need not be provided. During the course of the trial and after certain evidence was presented, the parties came to an agreement whereby child support for Riley would terminate on

December 31, 2013. In her written reasons, the trial judge canvassed the evidence concerning Riley, including his medical condition, prior to ordering that child support would cease as per the parties’ agreement. [ 14 ] For some reason, the appellant takes issue with the trial judge setting out the evidentiary background in the trial judgment prior to giving her approval to the agreed upon arrangement. The appellant has not appealed the decision ordering child support for Riley to cease on a fixed date but has appealed the reasons for the decision as set out by the trial judge.

The simple answer is that the right of appeal lies from the decision and not from the reasons for the decision. [ 15 ] Furthermore, the trial judge cannot be faulted for providing the factual background that permitted her to accept the agreement advanced by counsel. Judges do not simply rubber stamp agreements relating to child support proposed by counsel. As noted in paras. 30 to 32 of the trial judgment her acceptance and endorsement of the agreement was based in part upon the evidence relating to Riley presented at trial. There is simply no basis for appellate intervention relating to this ground of appeal.

I would not give effect to this ground of appeal. (ii) Did the trial judge err in law in adopting the cash method of accounting for determining the income available to the respondent to pay child support rather than the accrual method? [ 16 ] Income for child support purposes must be determined in accordance with ss. 15 to 20 of the Guidelines . The trial judge determined the respondent’s individual income pursuant to s. 16 of the Guidelines . As required, the trial judge then focused on s. 18 of the Guidelines since the respondent is a shareholder and director of Hardrock.

Section 18 of the Guidelines reads as follows: 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. [ 17 ] The trial judge correctly identified the test to be utilized in a s. 18 analysis as one of fairness.

At para. 50 of the trial judgment she noted: To determine whether s. 18 of the Guidelines applies, the test to be utilized is one of fairness. It is not necessary to find any wrongdoing on the part of the parent who is involved in the corporation (See: Kowalewich v. Kowalewich , 2001 BCCA 450 , 19 R.F.L. (5th) 330 at para. 40 ) nor is the issue whether the pre-tax income of the corporation is being used for legitimate purposes (though that may be a factor in the analysis).

Rather, the question for determination is whether it is fair and reasonable that some or all of the pre-tax corporate income should be attributed to the parent involved in the corporation in determining a fair level of child support. [ 18 ] She also noted that the respondent, as the sole shareholder of Hardrock, has the onus to establish that some or all of the pre-tax income of the corporation is not available for child support purposes and in this case the onus will be a heavy one since the respondent is the sole shareholder. [ 19 ] Each party called an expert witness on the issue of the proper accounting method.

Mark Hoffart, on behalf of the appellant, testified the accrual method of accounting is the most accurate measure of a corporation’s performance and reflects what money is available to the respondent from Hardrock for child support purposes. Mr. Hoffart noted the accrual method of accounting is the preferred method for preparing financial statements in accordance with generally accepted accounting principles.

He also noted, and this is uncontroverted, that the cash method of accounting may be subject to manipulation as income can be deferred, inventory stockpiled and expenses postponed or prepaid. [ 20 ] In his opinion, all of Hardrock’s pre-tax income should be attributed to the respondent for child support purposes. [ 21 ] Richard Altrogge testified on behalf of the respondent. Mr. Altrogge has been the respondent’s accountant for a number of years and is very familiar with the operation of Hardrock.

He noted the Canada Revenue Agency accepts the cash method of accounting for farmers because it realizes grain inventories for one year will likely be sold and become taxable the following year. [ 22 ] Mr. Altrogge acknowledged that the cash method of accounting can be used to manipulate income but testified this is not occurring with respect to Hardrock.

He found, and the financial records verify this, that all the grain produced is sold in the crop year it is produced, no income is deferred and no expenses are pre-paid. [ 23 ] He also testified that the capital cost allowance being deducted by Hardrock is very reasonable and likely reflects an underfunding with respect to replacement of equipment, that Hardrock is not retaining large amounts of cash, and that Hardrock is actually experiencing a shortfall of cash after payment of its legitimate commitments.

He testified in all likelihood Hardrock would have to borrow in order to pay the respondent any more money. [ 24 ] The trial judge accepted the evidence of the respondent’s expert, Mr. Altrogge, as to the preferred accounting method and calculation of pre-tax income. At para. 75 of the trial judgment she stated: This Court accepts Mr. Altrogge's detailed analysis with respect to the operations of Hardrock Farms Ltd. I find that the fairest

determination of what money is actually available in the company for child support purposes is set out in

Schedule II attached to Mr.Altrogge's report, that is, the company's pre-tax income calculated using the cash method of accounting as opposed to the accrual methodof accounting. [25] The trial judge made the following findings as to why she came to this conclusion: (

a) she found as a fact there was nomanipulation of income to distort the true financial picture and the respondent was receiving reasonable remuneration via his inventoryagreement for sale with Hardrock; (

b) child support should be based upon money actually available for that purpose. In this case, usingthe accrual method of accounting results in pre-tax income that includes significant grain inventories. The grain inventories do notrepresent money actually available to Hardrock or the respondent. See: Sjogren v. Pipchuk (1997), (SK CA), 34 R.F.L. (4th) 280 (Sask. C.A.) at para. 3; (

c) even though Hardrock’s retained earnings have increased significantly the trial judge foundthat the increase was due to grain inventory for the most part which does not represent income available to the shareholders. See: Miller v. Joynt, 2007 ABCA 214, 48 R.F.L. (6th) 256 at paras. 27 and 28. [26] For these reasons, the trial judge found calculating income using the accrual method includes significant grain inventories that havenot been converted into cash and thus, does not accord with the provisions of s. 18 of the Guidelines.

As a result, she found the moreaccurate reflection of money available to the respondent in the corporation “to be taxable income calculated on a cash basis.” [27] Farmers and fishermen are permitted to utilize the cash method of accounting for income tax purposes. The appellant submits thecash method of accounting is not a fair method of determining the amount available to the respondent for child support purposes.According to the appellant the nature of the farming business is such that there is a substantial amount of value in the assets of thefarming corporation in the form of land and inventory.

As well, the retained earnings that appear on the corporate financial statements ofHardrock steadily show an increase. Because of this, according to the appellant, the accrual method of accounting represents a better andmore accurate method of determining the respondent’s income for child support purposes. As noted, the respondent is the soleshareholder and director of Hardrock. The company’s income is derived primarily from grain production.

The respondent receives farmincome in the form of payment from Hardrock for grain inventory sold by the respondent to the corporation. [28] The nub of the appellant’s argument is that the trial judge, by endorsing the cash method as opposed to the accrual method, has leftit open for the respondent to manipulate his income so as to reduce his child support obligations.

Furthermore, according to the appellant,upholding the trial judge’s decision in this regard sets a precedent whereby all farming corporations will now be permitted to use the cashmethod of accounting when determining income pursuant to s. 18 of the Guidelines. [29] I respectfully disagree with the appellant’s submissions for these reasons. First, it is the function of the trial judge, when faced withcompeting opinions from professional witnesses, to accept or reject all or parts of the evidence.

This Court made this point in Kolibab v.Tenneco Canada Inc., (SK CA), [2000] 1 W.W.R. 590 at para. 8 where it was stated: Given the trial judge's acceptance of the expert testimony of Mr. Purton and Mr. Hamm, the principle articulated by the SupremeCourt of Canada in Lapointe v. Hôpital Le Gardeur, (SCC), [1992] 1 S.C.R. 351 is relevant. In that case the Court heldthat the privileged position of the trier of fact and the applicable standard of review extends to expert witnesses. This is made clear inthe following passages at pp. 358 - 9: The Role of an Appellate Court . . .

The privileged position of the trier of fact extends not only to the testimony of ordinary witnesses, but of expert witnesses. In thisrespect, Spence J. wrote in Joseph Brant Memorial Hospital v.

Koziol, (SCC), [1978] 1 S.C.R. 491, at 504: I am strongly of the view that it is not the function of an appellate court to reconsider that evidence whether it be upon facts or a matterof professional opinion and come to a different conclusion, unless it could be shown that the evidence reasonably could not result injustifying the conclusion made by the trial judge. [Emphasis added.] [30] As previously noted, the trial judge accepted Mr. Altrogge’s detailed analysis of the financial situation involving Hardrock FarmsLtd.

She provided thorough and cogent reasons as to why the cash method of accounting was appropriate and represented the fairestmethod of reflecting the money available from the corporation for child support purposes. See: Kowalewich v. Kowalewich, 2001 BCCA450, [2001] 9 W.W.R. 626 at para. 40. [31] Second, the trial judge was cognizant of the heavy onus upon the respondent, the sole shareholder of Hardrock Farms Ltd., toestablish that some or all of the pre-tax income of the corporation is not available for child support purposes. See: Nesbitt v. Nesbitt,2001 MBCA 113, 19 R.F.L. (5th) 359 at para. 21; Beeching v.

Beeching, 2006 SKQB 542, 290 Sask. R. 298 at para. 18 and Jeffrey v.Motherwell, 2006 BCSC 140, 36 R.F.L. (6th) 377 at para. 13. [32] Once again, in this particular case, the trial judge was satisfied based upon the evidence and full disclosure of the financial recordsof Hardrock, that the respondent had met the onus. [33] Third, s. 18 of the Guidelines does not mandate a particular accounting practice. Rather, it demands an assessment of the portion ofa corporation’s pre-tax income that may be available for child support purposes. This Court, albeit in obiter, in S.G.I. v.

Schmitz, 2009SKCA 62, [2009] 12 W.W.R. 1 at para. 12 noted the following: Furthermore, Poff [Poff v. Fenell (1998), (SK KB), 173 Sask. R. 275] and the other cases referring to it fallfar short of setting down any legal principle that the accrual system of accounting must in all circumstances be used to calculate farmincome. A careful reading of all of the cases makes it clear that determination of income is a question of fact and must depend, in eachcase, upon the evidence presented to the court.

[ 34 ] More recently, Danyliuk J. in Heidell v. Heidell , 2013 SKQB 8 , 411 Sask. R. 149, at para. 19 stated: The accrual method of income calculation is not a panacea. It may work in some cases for the determination of a farmer's income, but not in others. Our Court of Appeal has written on this point, holding that the accrual method is not one of universal application. Determination of a farmer's income is a question of fact. As such, resolution of that issue depends heavily on the evidence before the Court. See Saskatchewan Government Insurance v. Schmitz , 2009 SKCA 62 , 331 Sask.

R. 273, at paragraphs 11 and 12 . Suffice it to say that in the case at bar, the accrual method is not being blindly accepted. Rather, it is the best calculation method in the unique circumstances of this case. [ 35 ] To reiterate, the decision of the trial judge to endorse the cash method of accounting in this particular case was well reasoned and supportable based upon the evidence before her. The appellant’s concern that the cash method of accounting will always be used to determine the income of farming corporations for the purposes of s. 18 of the Guidelines is put to rest by these reasons.

As noted in S.G.I. v. Schmitz , the determination of income must be decided “upon the evidence presented to the court” in each case. I would dismiss this ground of appeal. (iii) Did the trial judge err in failing to add to the personal income of the respondent the amount to be determined to be corporate income of the corporation as required by the Federal Child Support Guidelines , in the calculation of child support? [ 36 ] The parties acknowledge the trial judge made an error when she deducted the inventory payments from the after-tax income of the corporation.

At para. 83 of the trial judgment she stated: Given the significant fluctuation in the corporation's farming income over the past three years, I find that s. 17 of the Guidelines should be applied and a three-year average taken. That average amounts to $33,533 per year. From that income would have to be deducted Mr. Labrecque's inventory payments which are reflected as farm income on his tax returns and are paid out of the after-tax income of the corporation. The amounts paid to Mr. Labrecque were $40,140.97 in 2008; $46,479.78 in 2009 and $48,610 in 2010. It is obvious that the amounts paid to Mr.

Labrecque exceeded the money actually available in the corporation. As such, I am satisfied that no additional money is available in the corporation for child support purposes. [ 37 ] The evidence is undisputed that the inventory payments made to the respondent were made out of the pre-tax income as a deduction in determining the taxable income of Hardrock. The obvious result is that by deducting the inventory payments again out of the after-tax income of Hardrock, the trial judge deducted these payments twice from Hardrock’s income.

Not surprisingly, the appellant submits the $33,533 must be added back to the respondent’s income in determining the appropriate amount of child support. On the other hand, the respondent contends the error does not affect the trial judge’s conclusion, since she explicitly accepted Mr. Altrogge’s opinion that Hardrock could not pay the respondent any more without borrowing, which would jeopardize its viability. [ 38 ] I agree with the appellant’s submission. I am not convinced that the trial judge would have come to the same conclusion if she had not made the double deduction.

I need only to look to the strong statement from the trial judge that a shareholder and sole proprietor should be treated the same and a sole proprietor operating the same type of business “will have their child support obligation determined using their pre-tax business income.” I agree with this statement.

In my view this leads to the logical conclusion that the entire $33,533 corporate income should be attributed to the personal income of the respondent for the purposes of calculating his child support obligations. [ 39 ] I am further bolstered in this view by the statement of the trial judge at para. 55 of the trial judgment where she stated: The attribution of pre-tax corporate income to a shareholder parent pursuant to s. 18(1)(

a) of the Guidelines does not "strip" the corporation of that income. Attribution does not require the removal of the pre-tax income from the corporation. Rather, it results in income being attributed to the parent solely for the purpose of establishing a fair level of child support. (See: Kowalewich , supra , at para. 41 ). [ 40 ] Allowing the appeal on this ground will result in increased child support for the period in question. I accept the calculations as set out in paras. 87 and 88 of the appellant’s factum.

Child support for three children from March 1, 2010 to August 1, 2010 will be $1,508 and for two children from September 1, 2010 to September 1, 2012 will be $1,158. I am not prepared to go beyond September 1, 2012 as that is the date of the last child support variation order and there is no appeal of that decision before this Court. Any adjustments must take into account credit for payments the respondent has already made.

The parties appear to agree on the calculations but any dispute on the total sum owing can be returned to this panel for resolution. (iv) Did the trial judge err in law in failing to award retroactive child support dating back to either July 1, 2007 or November 1, 2008? [ 41 ] The appellant alleges the respondent failed to provide financial disclosure and/or misled her in regards to his true income.

According to the appellant, this entails blameworthy conduct and the trial judge erred in not ordering retroactive child support to either July 1, 2007 or November 1, 2008. [ 42 ] The trial judge identified the leading case from the Supreme Court on the issue of retroactive variations of child support, D.B.S. v. S.R.G.; L.J.W. v. T.A.R.; Henry v. Henry; Hiemstra v. Hiemstra , 2006 SCC 37 , [2006] 2 S.C.R. 231.

She then set out the four factors mentioned by the Supreme Court in D.B.S. when considering applications of this nature, namely, delay in seeking child support, conduct of the payor, circumstances of the child, and hardship to the payor.

[ 43 ] After an examination of the evidence in conjunction with these factors, the trial judge concluded “the evidence does not support a finding that Mr. Labrecque intentionally (or unintentionally) misled Ms. Labrecque with respect to his income” (trial judgment para. 91). The trial judge also made a specific finding of fact that the appellant was in possession of the respondent’s personal and corporate tax returns as well as the financial statements of Hardrock Farms Ltd.

She held that the appellant was not “prejudiced or misled” as to the respondent’s financial circumstances. [ 44 ] In order for the appellant to succeed she would have to convince this Court the trial judge made an overriding and palpable error with respect to a material finding of fact. This the appellant has not done. The transcript of evidence and particularly the cross- examination of the appellant reveals her acknowledgement she had received disclosure of the corporate financial statements for Hardrock.

This evidence certainly supports the findings of fact of the trial judge as it relates to the specific ground of appeal. The trial judge correctly identified the law on retroactive variations of child support, applied the law to the evidence and made specific findings of fact in her ultimate conclusion not to award retroactive child support to the dates in question. The appellant has failed to identify any error that would justify appellate intervention and this ground of appeal is dismissed. V.

Conclusion [ 45 ] The appeal is dismissed in relation to the findings of the trial judge respecting the status of Riley. The appeal is dismissed with respect to the finding of the trial judge that the income of the respondent’s corporation for purposes of calculating the money available to the respondent to pay child support is based upon the cash method of accounting and not the accrual method.

The appeal is dismissed with respect to the trial judge’s determination that retroactive support will not be payable from either July 1, 2007 or November 1, 2008. [ 46 ] The appeal is allowed with respect to adding the $33,533 corporate income to the respondent’s personal income for the purposes of his child support obligations as set out in these reasons. [ 47 ] Since there was divided success, there will be no order as to costs. DATED at the City of Regina, in the Province of Saskatchewan, this 15 th day of May, A.D. 2014. “Herauf J.A.” ____________________ Herauf J.A.

I concur. “Richards C.J.S.” Richards C.J.S. I concur. “Ottenbreit J.A.” Ottenbreit J.A.