British Columbia Family Law Blog

As Vancouver family lawyers and Fort St John family law and divorce lawyers, we are often asked what  BC courts do in shorter marriages in British Columbia that end in divorce both with respect to British Columbia spousal support and BC family asset division. We are also frequently asked what kind of BC assets are divided at the end of a marriage?  We advise people that the test is whether the assets were ordinarily used for a family purpose. If you have a specific question concerning BC family property division contact us as the courts have construed a family asset to include a wide variety of family property. Our BC family law lawyers can be reached toll-free throughout the province at 1-877-602-9900.

The recent British Columbia Court of Appeal decision applying the spousal support advisory guidelines and dealing with reapportionment of property in a seven-year marriage provide provides updated guidance in determining what is a short marriage for purposes of reapportionment of BC family assets and how it impacts on an award of entitlement and quantum of spousal support in British Columbia.

In the decision of Wang V. Poon [2008] B.C.J. No 2113 our British Columbia Court of Appeal dealt with a seven-year marriage with husband was 76 years old and his wife was 47 years of age some 30 years his junior. The husband brought the majority of assets into the marriage and his assets were used to purchase various condominiums. The husband's argument that a seven-year marriage was a short marriage for purposes of the Family Relations Act was rejected a number of assets were found to be family assets.

A savings plan in the name of the husband which was used by him to provide for him in his retirement but not an RRSP as we know it in BC, was found not to be a family asset. Had it been in RRSP it would have been a statutorily defined family asset regardless of whether it was used for a family purpose. A variety of British Columbia bank accounts in the husband's name which had been used to support the family were found to be family assets as they had clearly been ordinarily used for a family purpose. The husband had used these accounts to purchase the properties and since the trial judge had erred in concluding the bank accounts were not family assets the issue of whether the condominium purchased with the family asset bank accounts was remitted to the trial judge to make a new determination now that the error regarding the bank accounts being family assets had been corrected.

Of great interest in this case was the level of reapportionment in favour of the husband that was granted based on the Court’s following analysis:

    The trial judge found that it was appropriate to reapportion the home 90/10 in favour of Mr. Poon.  Ms. Wang submits that, in making this order, the trial judge treated the marriage as if it were a short term marriage.  Ms. Wang also submits that the trial judge wrongly emphasized Ms. Wang’s failure to contribute to the home as a significant factor in the reapportionment.

[46]            It is evident from her reasons for judgment that the trial judge was well aware that there is a presumption of an equal division of family assets upon the happening of a triggering event and that the onus is on the person claiming a reapportionment to establish that an equal division of family assets would be unfair.  In  my view, the trial judge’s conclusion that Ms. Wang was entitled to only a 10% interest in the home involved a weighing of the factors under s. 65(1) in which she gave relatively little weight to the length of the marriage (s. 65(1)(a)), and substantially greater weight to the fact that the home was acquired prior to the marriage (s. 65(1)(c)) and that Mr. Poon alone had been responsible for the acquisition, preservation, maintenance, and improvement of the home (s. 65(1)(f)).  She also considered the need for each spouse to become or remain economically independent and self-sufficient under s. 65(1)(e).  She noted that Mr. Poon was then 76 years of age and not in a position to earn income in the future, and that Ms. Wang was considerably younger (47) with the potential to better herself through employment, with the assistance of a share of the home and spousal support. 

[47]            I have reviewed the authorities with respect to reapportionment.  While each case must turn on its own facts, it is fair to say that a 90/10 reapportionment is usually reserved for short marriages where the spouse in whose favour reapportionment is made either brought the asset into the marriage and/or was primarily responsible for its growth, preservation, maintenance and/or improvement during the marriage.  The authorities referred to by the trial judge fall into that category.  Depending on the weight the trial judge gives to each of the factors under s. 65(1), however, the authorities reveal a broad range within which trial judges may exercise their discretion. 

[48]            With some hesitation, I conclude that it would not be appropriate to interfere with the exercise of the trial judge’s discretion in awarding Ms. Wang only 10% of the home.   While I would have given greater weight to the length of the marriage and Ms. Wang’s relative need to become and remain economically self-sufficient, I conclude that, absent an error in law or in principle, which I am unable to find here, the standard of review does not justify this Court in interfering with the result.

On the issue of spousal support our Court of Appeal noted the trial judge made an award below the Spousal Support Advisory Guidelines and increase the wife’s support for two more years as follows:

 In the result, I conclude that the trial judge erred in making an award of spousal support which did not reflect her stated intention of providing more generous support for Ms. Wang than was reflected in the SSAG, with the result that the award did not properly take into account Ms. Wang’s precarious financial circumstances arising from the breakdown of the marriage.  Taking into account the relevant factors under the Divorce Act, S.C. 1985, c. 3 (2^nd Supp.) and the FRA, the fact that Ms. Wang’s capital position will improve as a result of this decision, and the probability that she will be able to increase her hours of work in the future, I would make an order extending spousal support for a further two years at the rate of $600 per month up to and including September 1, 2012.  The effect of this award is to increase the spousal support award by $14,400.  I note that these payments are tax deductible to Mr. Poon and taxable in the hands of Ms. Wang.

The finalized version of the Spousal Support Advisory Guidelines was released in the fall of 2008 and I note the following revisions or clarifications that relate to BC high-net worth families in British Columbia Spousal Support cases:

1. a new exception that recognizes a payor’s inability to deduct spousal support for income tax purposes if his or her income is mostly or entirely from legitimately non-taxable sources;

This is a critical exception for spouses who are working abroad in a regime where no taxes are paid or where taxes are paid but no deduction is allowed by the foreign state.  Where the take-home pay of the payor is substantially higher as a result of no tax being taken off, Courts will routinely gross up the non-tax paying spouse’s income to reflect what a gross income in Canada would have to be to net the same amount of take-home pay in the non-tax paying jurisdiction.  However, it is critical that the Court be made aware that the Spousal Support Advisory Guidelines take into account the substantial tax deduction that is available to the paying spouse and that tax is paid by the receiving spouse. 

In cases where there is no tax deduction available to the payor, it is questionable whether the recipient will pay tax in Canada on such an amount.  There are options for lawyers to be creative with respect to lump-sum payment maintenance to ensure that neither the recipient nor the payor are affected by the tax deduction tax inclusion regime.

2. a clarification that “indefinite” spousal support means support with a duration that is not specified – not permanent or infinite support;

It is important to note that maintenance Orders are never final and are always subject to being changed if there is a substantial change in circumstances in the income or asset position of the paying or receiving spouse.  Given the current economy with job losses at an all time high, it is not improbable that an indefinite Order for maintenance might last only a few months.

3. a new exception that recognizes the possibility in B.C. of reapportionment of property on spousal support grounds by allowing the amount of spousal support to be reduced below the ranges where a large reapportionment order has been made;

British Columbia is the only province in Canada that allows for a Court to divide property other than equally between the spouses when taking into account the financial needs of a spouse.  As this unequal division relates substantially to the same issue as economic disadvantage suffered by a spouse that would qualify them to receive spousal support a special exception for British Columbia to prevent double recovery had to be instituted.  In my opinion, some judges erroneously nearly add a notional interest component to the property value above half that a spouse receives when they receive more than half when in fact they should be dividing the capital as well as the interest that capital can produce over a certain number of years to reduce dollar for dollar the Spousal Support Advisory Guidelines calculated amount after factoring in the property is tax free money. 

4. a recognition that it is open to counsel to argue for an exception in high-property, high-income cases;

My firm handles a substantial number of high-net worth cases.  At a certain point when the asset pot that is divided becomes so high it becomes clear that the spouse with a lower income should not be provided with spousal support as there was no disadvantage suffered during the marriage and there is no real need.  For example, if a spouse obtains 4 million dollars in assets in a property division, most cases would suggest that no spousal support be payable.  The issue becomes if no spousal support is payable on 4 million dollars of assets, what spousal support should be payable if the spouse receives 2 million.  Surely, there should be some reduction of support to reflect the advantage of the assets attained from the marriage.  This topic requires a separate article which I will produce at a later date.

5. an exception allowing for an increase in the duration or amount of spousal support under the with child support formula after child support that limited the amount left over for spousal support pursuant to s. 15.3 (priority of child support) ends.

Finally, the issue of what happens to spousal support under the with child formula when the children become adults is a topic of considerable complexity.  There must be a transition of child support from the with child formula to the without child formula when the last child no longer receives child support.  It is critical that this be taken into account on any settlement or any Court argument as spousal support under the with child formula provides the spouse with an amount that is leftover after child support is paid.  As the child support declines, unless the spousal support increases, there will be an uneven standard of living in the paying and receiving spouse’s household. 

If you have a situation like this, please do not hesitate to call me.

Our BC Court of Appeal recently reiterated the test for retroactive awards of British Columbia child support in Hinds v. Hinds [2008] BCJ No. 2540 where the Court reviewed the law.

Shortly after the trial in this case, the Supreme Court of Canada addressed the issue of retroactive support in D.B.S. v. S.R.G., L.J.W. v. T.A.R., Henry v. Henry, and Hiemstra v. Hiemstra.  In D.B.S., the Court reiterated the principle that parents have a joint obligation to support their children commensurate to their income.  Where a non-custodial parent has failed to meet that legal obligation, Bastarche J., for the majority, identified the following factors to consider in determining whether a retroactive award would be appropriate in the circumstances:

i)                    The reasons why the recipient did not apply for support earlier;

ii)                   Any blameworthy conduct by the payor that privileges the payor’s own interest over his or her children’s right to an appropriate amount of support;

iii)                 The circumstances of the child both at the time the support should have been paid and at the time the application for retroactive support is made; and

iv)                 Any hardship that might be occasioned by a retroactive award.

40     In determining the amount of a retroactive award of child support, the court must decide the date which the retroactive award should commence, and the amount of the retroactive support that would adequately quantify the payor's deficient obligation.

41     In regard to the former, the court in D.B.S. suggested that the date of "effective notice" of a request for appropriate child support would be the starting point in determining the date to which the award should be made retroactive. In the absence of "blameworthy conduct", the court indicated that date should be, for practical and hardship reasons, no more than three years in the past. This retroactive fixed date of three years past is to be weighed against any blameworthy conduct by the payor that belies his or her belief that the child's needs had been met, regardless of their failure to provide appropriate support.

42     The second factor in determining the quantum of a retroactive award is to ensure that the amount awarded is consistent with the applicable statutory scheme. In this case, that scheme is based on the Guidelines, which permits the consideration of any undue hardship that a retroactive award might have on a payor.

43     In regard to the date of "effective notice," the appellant first asked the respondent in 2001 to make financial disclosure and to pay interim child support pursuant to the divorce action. In response, he filed a Property and Financial Statement on December 6, 2001, deposing that his 2001 income was $8,385.57. In fact, his 2001 reported income was $18,595. The respondent also failed to disclose his half-interest in real property in Vernon as an "asset" in Part 3 of his 2001 Property and Financial Statement.

44     In November 2002, the appellant issued a second demand for an up-dated Property and Financial Statement from the respondent. The respondent did not respond to that demand. Again, in March 2003 the appellant made a third demand for an up-dated Property and Financial Statement, which included an application that the respondent be fined for non-compliance with her earlier demand.

45     During the periods of these repeated demand for financial disclosure (between 2001 and 2003), the respondent continued to pay the monthly $181 pursuant to the FRA Order. Given the amount of his reported income in 2001 and 2002, the Guidelines support would have been comparable to the amount he was actually paying. However, his financial circumstances materially improved in 2003, 2004 and 2005, when his income increased to $37,609.87, $46,501.14, and $60,999.53, respectively. During this period, the child was entitled to share in the benefit of his improved financial circumstances; yet the respondent failed to increase his child support payments until February 2005. This behaviour, in my view, amounts to "blameworthy conduct" that warrants an order for retroactive child support.

46     In the result, I would vary the order to include an order for retroactive child support. The date to which the retroactive order would commence should coincide with the material improvement in the respondent's financial circumstances in 2003; the period of retroactivity would continue until 2005, when he voluntarily increased the child support. It should be noted that this period of retroactivity is within the three-year limit suggested in D.B.S., recognizing the concerns relating to practicality and hardship that retroactive awards can create.

49     I appreciate that the respondent may experience some hardship in having to pay this amount. However, ignoring requests for financial disclosure and failing to increase child support upon a material increase in Guidelines income, especially following a request for financial disclosure, should not be rewarded by permitting the payor parent to avoid their legal obligation to contribute to the support their child in a manner commensurate with their income.

Our BC Court of Appeal provided recent guidance on the conceptual basis for awarding BC spousal support which is the first part of a two step test to deciding spousal support.  First, a Court must determine the issue of entitlement and only after a finding of entitlement is established does the Court move on to decide how much (“quantum”) and for how long.  We have the Spousal Support Advisory Guidelines in British Columbia that provide a mathematical formula for determining how much should be paid and for how long. 

In Hinds v. Hinds, entitlement to spousal support is conceptually based on three models:  compensatory, non-compensatory, and contractual.  See Moge v. Moge and Bracklow.  The objectives of a spousal support order under the Divorce Act, R.S.C. 1985, c. 3 (2nd Supp) are set out in s. 15.2(6) and reflect both the compensatory and non-compensatory models:

An Order made under subsection (1) that provides for the support of a spouse should…

a)      recognize any economic advantages and disadvantages to the spouses arising from the marriage or its breakdown;

b)      apportion between the spouses any financial consequences arising from the care of any child of the marriage over and above any obligation for the support of any child of the marriage;

c)      relieve any economic hardship of the spouses arising from the breakdown of the marriage; and

d)      in so far as practicable, promote the economic self-sufficiency of each spouse within a reasonable period of time.

51     With respect, I am of the view that the trial judge erred in law in failing to consider the appellant's claim for compensatory support and in making an unreasonable finding that she had not led sufficient evidence to support her claim for non-compensatory support.

52     In my view, the circumstances of the parties' marriage and its breakdown gives rise to a compensatory spousal support award based on the objectives outlined in s. 15.2(6) of the Divorce Act.

53     During the marriage, the appellant was the primary caregiver to the parties' child and continues to assume that role. Her child-rearing responsibilities permitted the respondent to work outside the home and, in particular, permitted him to focus on the pesticide business, which was the parties' primary source of income. The respondent's work obligations often required him to travel outside the community in which the family resided. He could only do so because of the appellant's assumption of the primary care for their child.

54     I am also of the view the appellant had established a claim for non-compensatory spousal support. The trial judge's reason for dismissing the non-compensatory aspect of her claim was her failure to provide a medical report detailing a prognosis for her partner's recovery, assuming such a report was available. However, her partner had testified at trial that he had been unable to work since September 2004 due to health problems. He outlined the nature of his health problems, and identified the doctors who were treating him and the medication he was prescribed for his health issues. The trial judge made no adverse findings of credibility concerning his evidence; however, he negated the appellant's otherwise valid claim for non-compensatory support because of a failure he deemed essential to that claim, namely a medical report on the prognosis of her partner's recovery. In my view, that was not a reasonable basis for rejecting the non-compensatory aspect of the appellant's claim for spousal support.

55     Throughout the marriage, the appellant was financially dependent upon the respondent. She established that she was unable to work because of the debilitating headaches she had suffered from childhood. Her medical condition was not disputed and is unlikely to improve. After the breakdown of the marriage, the appellant experienced economic hardship; she no longer shared in the income derived from the family's pesticide business and, instead, had to rely on her much lower disability allowance for support. Her new partner had not been able to contribute to her support since September 2004, and appeared to be unable to do so at the date of trial. The trial judge did not appear to take issue with this evidence. If the trial judge had a basis for believing her partner's health and financial circumstances would improve in the future, it was open to him to order a review on that issue at some specified date in the future. In my view, the appellant demonstrated at trial that she had a clear financial need for support.

56     The determination of the amount and duration of that support is another issue. I would remit this issue back to the trial court to determine after each party has made the requisite financial disclosure.

It has been said that non-disclosure in family law cases that involve child support, spousal support, and family property division cases is the “cancer” of matrimonial law litigation.  The recent case from our British Columbia Court of Appeal in Hinds v. Hinds [2008] BCJ No. 2540 summarized the law on what must be proven to establish an adverse inference against the non-disclosing party.

Paragraph 30 of the Hinds decision the court held the following:

In support of her position she relies on the following authorities: Matwichuk v. Stephenson 2007 BCSC 238; Nielsen v. Nielsen 2007 BCSC 306; and Cunha v. da Cunha (1994), 99 B.C.L.R. (2d) 93 (S.C.).  These cases provide that, once a party raises a prima facie case of non-disclosure, the burden shifts to the non-disclosing party to show that he or she has made full disclosure.  If the non-disclosing party fails to meet that burden, the appellant submits the court is permitted to draw an adverse inference and impute additional income to that party.  In support of the making of an adverse inference in these circumstances, the appellant relies on the following authorities: Matwichuk; Cunha; Whitaker v. Whitaker 2007 BCSC 116; Wilson v. Desrochers [2006] O.J. No. 2863 [Ont. Sup. Ct. Jus.]; and Wallace v. Wallace 2002 BCSC 949.

The person accusing the other party of non-disclosure cannot simply make the allegation of non-disclosure but must raise at least arguable proof of same for the onus to shift to the opposing party.  Suspicious documentary evidence, missing documents in a chain of documents, budgets that exceed claimed living expenses, and bank deposits that exceed the tax return declared income are a but a few  examples Lorne MacLean and the Maclean Family Law Group have dealt with on this issue.

Lorne N. MacLean (left) and Justin M. Werb (right) celebrate Lorne's 25 years in practice as a family law lawyer in British Columbia.

British Columbia

Child Support and Spousal Support Guidelines Update – High Net Income Cases for Self-Employed Spouses

For a number of years, the writer has been involved in cases involving the proper calculation of income available to paying spouses who run their own businesses.  The important feature of these cases is that we must make sure the paying spouse fairly allocates his income to his own living expenses as well as the living expenses of his separated spouse and children who may be living with that spouse whether on a full-time or shared custody basis.

It is important to note that when a person is a self-employed professional or business person that their tax return may not always accurately reflect the true income that is available to fairly pay for spousal and child support. 

In the recent British Columbia case of Hausmann v. Klukas, an application for retroactive correction of child support payable by a husband who ran his own business for the benefit of his children was brought by his ex-wife.  The husband had failed to provide timely disclosure of his finances as ordered in past Court decisions.

The Court viewed section 18 of the Child Support Guidelines which indicates that a Court may depart from using the Tax Return line 150 income of a paying parent when that guideline income figure does not fairly reflect all of the money that may be available to that spouse to fairly pay child support.  The case also dealt with when retroactive support for children should be payable and focused on the concept of there being some fault on behalf of the paying spouse.  In this case, the Court found the fault was his failure to produce financial disclosure as had been ordered in past cases.

The Court of Appeal also looked at section 18 of the Child Support Guidelines which allow the Court to look at the pre-tax profit of a professional or business to determine what the true money available to the person in controlling the company or professional practice was.  It is important to note that you must add back the wages and management salaries paid to the person controlling the company to the pre-tax profit in order to determine what the true money available to the paying spouse was.

Further, if legitimate business reasons require money to be kept in the company to maintain the business in tough economic times or to purchase inventory or other property to expand the business, not all the pre-tax profit will be allocated as available for paying spousal or child support. 

In the case of Hausmann, the BC Court of Appeal dealt for the first time with the issue of who bore the onus of showing a need for the pre-tax profit to be retained in the company for legitimate corporate purposes as opposed to having all the money from the pre-tax profit being used by the Court to calculate a maximum amount payable for child and spousal support.

The Court found that the following test should apply:

• The onus is on the payor to provide the necessary evidence that the corporation’s pre-tax income is not available to the payor.  The Court should not have to ferret out the necessary information from inadequate or incomplete financial disclosure.  While Bart Kowski says the evidence of the payor must be compelling, I prefer to use the word “clear” when discussing the necessary evidence of business circumstances as the former word might be taken to suggest a higher standard of proof than is called for by Kowalewich.

The Court noted in the current case the husband had not tendered any evidence that would substantiate a clear need to retain monies in the company.  Based on these facts, the Court of Appeal attributed all of the pre-tax corporate income to the husband for the purposes of the calculation of child support.

The Court of Appeal also pointed out that it was not a correct calculation to use the increased and retained earnings of the company as a measure of what profits were available to the company in addition to the tax return income of a payor for purposes of the calculation of spousal and child support.  The Court indicated that the pre-tax income being the profits of the company after management and salaries to the owner but before corporate taxes and any dividends paid to the owner was the proper approach to take. 

31]           There has been limited appellate consideration of s. 18 of the Guidelines.  See, for example:  Nesbitt v. Nesbitt, 2001 MBCA 113 (CanLII), 2001 MBCA 113, 2001 MBCA 113 (CanLII), [2001] 8 W.W.R. 635, 19 R.F.L. (5th) 359 [“Nesbitt” cited to W.W.R.]; Kowalewich v. Kowalewich, 2001 BCCA 450 (CanLII), 2001 BCCA 450, 92 B.C.L.R. (3d) 38, 19 R.F.L. (5th) 330 [“Kowalewich” cited to B.C.L.R.]; Grossi v. Grossi, 2005 BCCA 47 (CanLII), 2005 BCCA 47, 38 B.C.L.R. (4th) 247, 10 R.F.L. (6th) 28; Wildman v. Wildman 2006 CanLII 33540 (ON C.A.), (2006), 82 O.R. (3d) 401, 33 R.F.L. (6th) 237 (C.A.); Miller v. Joynt, 2007 ABCA 214 (CanLII), 2007 ABCA 214, 422 A.R. 150, 48 R.F.L. (6th) 256 [cited to A.R.]. 

[32]           In Kowalewich, Madam Justice Huddart comprehensively analyzed s. 18 and the related sections of the Guidelines.  In particular she commented on the purpose and application of s. 18:

[43]      In this regard, I find helpful the view Justice Martinson expressed in Baum v. Baum 1999 CanLII 5387 (BC S.C.), (1999), 182 D.L.R. (4th) 715 (B.C.S.C.) 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 corporate veil” to ensure that the money received as income by the paying parent fairly reflects all of the money available for the payment of child support.  This is particularly important in the case of a sole shareholder as that shareholder has the ability to control the income 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.

…

[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’s annual income for Guideline purposes.  They do not require it.  I am not persuaded they make the inclusion of all pre-tax income the default 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 its corporate 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.  In my view they should not be included in determining annual income.  In Hollenbach v. Hollenbach, 2000 BCCA 620 (CanLII), 2000 BCCA 620 (B.C.C.A.), the trial judge recognized the need for a reserve for depreciation as an appropriate factor to be considered in a real estate business.  Justice Dorgan recognized Mr. Kowalewich’s business expansion plan as a valid business purpose in a retail business.

[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 judge should second guess business decisions.  I do say that a trial judge must have regard to the evidence of legitimate business needs in determining what portion of pre-tax corporate income to include in annual income for Guideline purposes.

[51]           While the purpose and application of s. 18 were outlined in Kowalewich, this Court has not heretofore established an onus test.  Some post Kowalewich authorities from this province, however, have concluded that there is an “emerging presumption” that pre-tax corporate income will be assumed to be available to a payor unless evidence is led to the contrary.  These authorities state that the onus in the circumstances is on the payor.  As discussed in Jeffery v. Motherwell, 2006 BCSC 140 (CanLII), 2006 BCSC 140, 36 R.F.L. (6th) 377, at para. 13: 

Kowalewich has been applied on other occasions by judges of this court and is binding authority.  One of those cases Bartkowski v. Bartkowski 2003 BCSC 490 (CanLII), (2003), 37 R.F.L. (5th) 242 (B.C.S.C. [In Chambers]), albeit dealing with very different factual circumstances in that the payor contended that his line 150 income was inflated to take advantage of tax benefits, the court said this about the authorities post Kowalewich:

I am of the view that these cases reveal an emerging presumption that the corporation's pre-tax income will be assumed to be available to the shareholder payor for the payment of child support unless compelling evidence is led by the payor spouse to support the conclusion that re-investment is necessary to sustain the company as a viable enterprise. ... (para. 51)

The onus is on the payor to provide the necessary evidence that the corporation's pre-tax income is not available to the payor.  The court should not have to ferret out the necessary information from inadequate or incomplete financial disclosure.  While Bartkowski says the evidence of the payor must be compelling, I prefer to use the word clear when discussing the necessary evidence of business circumstances as the former word might be taken to suggest a higher standard of proof than is called for by Kowalewich.

[52]           I respectfully agree with the above comments in Jeffery v. Motherwell.

[53]         In contrast to British Columbia, courts in Manitoba have applied an onus test since 2001.  In Nesbitt, the Manitoba Court of Appeal concluded that in circumstances where a payor spouse has retained earnings in his company, and has failed to provide any explanation for the necessity to retain corporate earnings, the onus is on that spouse to convince the court there are valid business reasons for doing so. 

[54]           In Nesbitt, the court stated it was in “entire agreement” with the following comments cited at para. 19: 

Particularly helpful is Professor James McLeod's annotation to the decision in Fost v. Hood 2000 NSCA 34 (CanLII), (2000), 2 R.F.L. (5th) 399 (N.S.C.A.), in which the author comments on the decision of Adams v. Adams 2000 ABQB 153 (CanLII), (2000), 5 R.F.L. (5th) 9, 2000 ABQB 153 (Alta. Q.B. [In Chambers]), and opines (at 401):

One of the more common allegations made by payees to convince a court to impute income is that a payor has retained earnings in his or her business that he or she refuses to take as income in order to reduce child support.  In Adams v. Adams . . ., Rowbotham J. noted that retained earnings represent money that the business has earned and the shareholders can take out as income.  A spouse who controls the business and chooses to leave the money in the business must be prepared to explain why his or her decision is reasonable from a business point of view.

Sometimes a company's creditors insist that the business retain a minimum amount of money as security for financing, or a company may carry on substantial cash operations and require a business “float” to maintain access to liquid funds.  Whatever the reason alleged for retaining earnings in a business, most courts assume that a spouse should take as much money as is available as income from his or her business and a spouse who does not do so is trying to avoid his or her family obligations.  The onus is on a payor who has retained earnings in his or her company to convince the court that there are valid business reasons for leaving the money in the company.  In Adams, Rowbotham J. was satisfied that the husband could justify leaving part but not all of the retained earnings in the company for business reasons and imputed income pursuant to the Guidelines.

[55]           In Nesbitt, the payor’s complete control of the entire income of the corporation was not in dispute.  The cash reserves of the corporation had more than doubled in a three-year period, however, the payor failed to provide any explanation as to why all of the corporate income should not be attributed to him (para. 22).

[56]           Relying on s. 17 of the Guidelines and the need to determine an amount that was “fair and reasonable” in the circumstances, the court found it was appropriate to consider the last three years in order to average the amounts to determine the imputation of income under s. 18 (para. 25).

[57]           The onus test set out in Nesbitt was recently applied by the Manitoba Court of Appeal in Verwey v. Verwey, 2007 MBCA 102 (CanLII), 2007 MBCA 102, 220 Man. R. (2d) 52, 41 R.F.L. (6th) 29, and more recently in Dyck v. Dyck, 2008 MBCA 135 (CanLII), 2008 MBCA 135.  In Verwey, decided under the Manitoba Guidelines, the payor’s appeal was dismissed on the basis that the father’s inadequate financial disclosure was an appropriate basis for the trial judge to impute additional income, since he did not discharge the onus of explaining why it was necessary to leave his money in the corporations in which he held shares.  In Dyck, the Court of Appeal did not interfere with the trial judge’s holding with respect to pre-tax corporate income, since the payor spouse tendered some evidence in regard to the need to retain earnings, and the wife was not able to show that the trial judge erred (the court noted that she herself had not tendered any evidence on the issue). 

[65]           Mr. Mynett’s suggestion is not without precedent.  Many cases indiscriminately refer to pre-tax corporation income and retained earnings and look to retained earnings in an application under s. 18 of the Guidelines.  The error in that approach was discussed in Miller v. Joynt:

[27]      In my view the judge erred in utilizing the annual net change in retained earnings as his starting point, rather than the corporation’s pre-tax income.  Retained earnings are the result of subtracting from pre-tax earnings income tax and shareholder dividends, and other changes to the capital accounts.

[28]      As the Mother points out, section 18(1)(a) refers to pre-tax earnings.  Likewise, Schedule I of the Guidelines uses pre-tax (Total Income from Line 150 of the T1 General form) income: s. 16.  This suggests that Parliament intended pre-tax earnings to provide the starting point for determining income under the Guidelines, subject to any allowable deductions pursuant to Schedule 3 of the Guidelines.

[29]      While there are cases where retained earnings have been used as the starting point for determining the amount to attribute to the payor’s income (see e.g., Broumas, Rattenbury v. Rattenbury, 2000 BCSC 722 (CanLII), [2000] B.C.T.C. 326; 2000 BCSC 722, and Cook v. McManus reflex, (2006), 301 N.B.R. (2d) 372; 783 A.P.R. 372; 2006 NBQB 138, there has generally been no explanation given for the use of retained earnings.

[30]      The Father’s submission that the use of retained earnings by the judge was tantamount to ascribing only part of the pre-tax income to the Father (as permitted by section 18(1)(a)) cannot be accepted.  If that was the judge’s intention, he should have said so.  Absent such an explanation, the judge erred in principle in using the corporation’s retained earnings rather than its pre-tax income as a starting point for his calculations.

[66]           I respectfully agree with the approach described in Miller v. Joynt.  As this Court recently stated, “retained earnings” in a company’s financial statement represent equity in the company, not “cash”:  Chutter v. Chutter, 2008 BCCA 507 (CanLII), 2008 BCCA 507, at para. 114.  In the case at bar, to impute all of the pre-tax corporate income to Mr. Klukas would not be contrary to the joint venture agreement.  As can be seen, the retained earnings balance in each of the years in question exceeds the restricted balance.

[67]           Having regard to the onus referred to above, the evidence, the absence of a clear explanation of the legitimate calls on Pioneer’s pre-tax corporate income, and the chambers judge's acceptance of Mr. Mynett’s evidence as to the available income, I would impute to Mr. Klukas all of the pre-tax corporate income of Pioneer for the purpose of s. 18.

This is an extremely complex area of law that requires an experienced counsel to review corporate, tax returns, and financial records often with the assistance of a certified business evaluator.

If you have a case involving a professional practice or business, please do not hesitate to contact me for assistance.

BC Spousal Support and Alimony Update 2009

I recently had the pleasure of appearing in front of the Supreme Court of Canada in the infamous spousal support and spousal misconduct decision of Leskun.  That case involved the principles to be applied to deciding the quantum and duration of spousal support in British Columbia and Canada, and in what circumstances it is appropriate to review spousal support.

The recent decision of Enemark provides a nice review of what the court should look at when it orders a review of support.  Generally speaking, these reviews are most useful in cases where a judge either does not believe that the spouse has a guaranteed path to economic self-sufficiency, or in those where the paying spouse may be facing some kind of financial uncertainty.

The case also provides a nice summary for the layperson of how the concept of spousal support is applied in Canada.  In simple terms, the court can look at what one partner gave up economically during the marriage as result of his or her role.  Even if said partner did not give up anything economically during the marriage, the court can use a "Robin Hood" approach when making its decision by looking at both his or her needs and lower income (in comparison to that of a spouse with a much higher income).

[42]            In the case at bar my original order was predicated on the compensatory and non-compensatory support principles set out in s. 15.2(6) of the Divorce Act.  With respect to compensatory and non-compensatory grounds for spousal support, Madam Justice Rowles, in the recent decision of Chutter v. Chutter, 2008 BCCA 507, said this at para. 49:

[49]      Although the compensatory and non-compensatory grounds for spousal support are animated by different models of marriage, the case authorities hold that there is no single basis of support or objective under the Divorce Act that supersedes the other, and that many claims involve aspects of both compensatory and non-compensatory principles (Bracklow, at para. 27; Moge, at 852).  A court is not called upon to decide on one basis for support to the exclusion of the other but rather to “[apply] the relevant factors and strik[e] the balance that best achieves justice in the particular case” (Bracklow, at para. 32).  Moreover, the doctrine of equitable sharing is the overarching principle that must be borne in mind (Moge, at 864).

[43]            In the Chutter decision, Madam Justice Rowles went on to consider, in detail, compensatory and non-compensatory support commencing at para. 50 through to 61.  It is my view that these most recent statements of the law are apropos to the case at bar, and I will set them out in their entirety:

[50]      Compensatory support is intended to provide redress to the recipient spouse for economic disadvantage arising from the marriage or the conferral of an economic advantage upon the other spouse.  The compensatory support principles are rooted in the “independent” model of marriage, in which each spouse is seen to retain economic autonomy in the union, and is entitled to receive compensation for losses caused by the marriage or breakup of the marriage which would not have been suffered otherwise (Bracklow, at paras. 24, 41).  The compensatory basis for relief recognizes that sacrifices made by a recipient spouse in assuming primary childcare and household responsibilities often result in a lower earning potential and fewer future prospects of financial success (Moge, at 861-863; Bracklow, at para. 39). In Moge, the Supreme Court of Canada observed, at 867-868:

The most significant economic consequence of marriage or marriage breakdown, however, usually arises from the birth of children.  This generally requires that the wife cut back on her paid labour force participation in order to care for the children, an arrangement which jeopardizes her ability to ensure her own income security and independent economic well-being.  In such situations, spousal support may be a way to compensate such economic disadvantage.

[51]      In addition to acknowledging economic disadvantages suffered by a spouse as a consequence of the marriage or its breakdown, compensatory spousal support may also address economic advantages enjoyed by the other partner as a result of the recipient spouse’s efforts.  As noted in Moge at 864, the doctrine of equitable sharing of the economic consequences of marriage and marriage breakdown underlying compensatory support “seeks to recognize and account for both the economic disadvantages incurred by the spouse who makes such sacrifices and the economic advantages conferred upon the other spouse” (emphasis added).

[52]      The Court in Moge discussed the relevance of the parties’ standards of living in the context of compensatory support at 870:

Although the doctrine of spousal support which focuses on equitable sharing does not guarantee to either party the standard of living enjoyed during the marriage, this standard is far from irrelevant to support entitlement….  As marriage should be regarded as a joint endeavour, the longer the relationship endures, the closer the economic union, the greater will be the presumptive claim to equal standards of living upon its dissolution.

[Emphasis added, internal citations omitted.]

[53]      In W. v. W., 2005 BCSC 1010, 19 R.F.L. (6th) 453, a frequently cited decision in trial decisions in British Columbia, Justice Martinson made the following helpful observation about the interpretation in this province of the emphasized portion in Moge:

[11]      In British Columbia this comment in Moge has been interpreted to mean that in long marriages the result will likely be a rough equivalency of standards of living.  Doing so recognizes that the longer a marriage lasts, the more intertwined the economic and non-economic lives of the spouses become.

[12]      Throughout the marriage, each spouse makes decisions that accommodate the economic and non-economic needs of the other. The decisions include the way in which child care and other family responsibilities will be handled and the way careers will develop. These decisions can have a significant impact upon the income earning ability of each at the time of separation.  Yet it is not easy to determine exactly the relationship between these decisions and the consequent benefits and detriments to each spouse. The rough equivalency of standard of living approach has operated as a workable substitute to assess compensatory claims.  See for example, Dithurbide v. Dithurbide (1996), 23 R.F.L. (4th) 127 (B.C.S.C.); Rattenbury v. Rattenbury, 2000 BCSC 722; Rinfret v. Rinfret, [1999] B.C.J. No. 2945 (S.C.); O'Neill v. Wolfe (2001), 14 R.F.L. (5th) 155 (B.C.S.C.); Walton v. Walton, [1997] B.C.J. No. 1089 (S.C.); Ulrich v. Ulrich, 2003 BCSC 192; and Carr v. Carr (1993), 46 R.F.L. (3d) 326 (B.C.S.C.).