Supreme Court

SUPREME COURT OF Nova Scotia

family division

Citation: Ward v. Murphy, 2023 NSSC 370

Date: 20231124

Docket: SFSNMCA,  No 096620

Registry: Sydney

Between:

Paul Ward

Applicant

v

Coralie Murphy

Respondent

 

 

 

Judge:	The Honourable Justice Theresa M Forgeron
Heard: Last Submissions:	June 12, 13, 14 and 15, 2023, in Sydney, Nova Scotia June 29, 2023 and July 11, 2023
Decision	November 24, 2023
Counsel:	Paul Ward (Applicant), Self-Represented Theresa O’Leary, counsel for the Respondent, Coralie Murphy

By the Court:

Introduction

[1]             This decision concerns Paul Ward’s application to vary, retroactively and prospectively, the amount of child support that he pays to Coralie Murphy for the benefit of their nine-year-old son.

[2]             Mr. Ward states that the judges who previously determined his support obligation incorrectly imputed income to him. His current support obligation is based on an imputed income arising from two sources – employment and EI income, and rental income. Mr. Ward is the sole shareholder of a company which owns and operates rental properties. Mr. Ward states that the company doesn’t earn the income that was previously attributed to him. He states that he and the company experience undue hardship. He therefore asks me to reduce his support obligation.

[3]             In contrast, Ms. Murphy states that Mr. Ward’s circumstances are virtually unchanged. She argues that Mr. Ward’s income must include all the pretax corporate income (PTCI) of the rental company. In determining the PTCI, Ms. Murphy urges me to add back many of the expenses which the company deducted for Canada Revenue purposes. In addition, Ms. Murphy seeks to gross up some of the deducted corporate expenses because of the favourable tax treatment associated with such deductions.

[4]             Despite Mr. Ward’s attempts to have me address other issues, this decision will only focus on the corporate income because this is a rehearing of Mr. Ward’s variation application. Thus, I must follow the directions stated in Ward v. Murphy, 2022 NSCA 20.

Issues

[5]             In my decision, I will answer the following questions:

•        Should the PTCI be increased by adjusting any of the corporate expenses?

•        Should any of the corporate expenses be subject to a gross up?

•        What portion, if any, of the PTCI should be included as Mr. Ward’s income when calculating child support?

•        What PTCI is available for 2023 and forward?

•        Should child support be varied retroactively?

•        What is the appropriate retroactive and prospective child support order?

Background Information

[6]             Mr. Ward and Ms. Murphy are no strangers to the litigation process. In 2016 and 2017, the parties appeared before Gregan J for an 11-day contested hearing on parenting and child support issues. On April 4, 2017, Gregan J released his decision, PW v. CM, 2017 NSSC 91, which confirmed that Ms. Murphy was the primary care parent and ordered Mr. Ward to pay monthly child support of $994. Child support was based on Mr. Ward earning an annual income of $120,000 - $60,000 imputed from the rentals and $60,000 imputed from employment and EI income. The order issued on July 12, 2017. Mr. Ward did not appeal.

[7]             From September 2017 to 2018, Mr. Ward filed several applications on various issues, which were concluded by Gregan J.  

[8]             In September 2018, Mr. Ward filed the current variation application. Ms. Murphy opposed the application. A contested hearing was held over six days in 2020 and 2021. On April 13, 2021, MacLeod-Archer J released her decision in PW v. CM, 2021 NSSC 127. In her decision, prospective child support was calculated on an imputed annual income of $103,845, which resulted in a monthly child support obligation of $883.  On June 15, 2021, in another decision, Ward v. Murphy, 2021 NSSC 207, MacLeod-Archer J ordered Mr. Ward to pay costs of $20,688.

[9]             Mr. Ward appealed. On March 16, 2022, the Court of Appeal released its decision, Ward v. Murphy, supra, remitting the s. 18 analysis and costs award to the judge who would be assigned to the rehearing. Pending decision, Mr. Ward was ordered to pay monthly support of $512, which was calculated without reference to the rental income.

[10]         The parties next participated in several conferences before O’Neil ACJ, as he then was. Unfortunately, they remained at an impasse.

[11]         In December 2022, the matter was assigned to me. Early hearing dates were scheduled which were adjourned at Mr. Ward’s request so that he could gather income information. Pre-trial conferences were also held to review disclosure requests and to provide directions about procedure and evidence, including expert evidence. Mr. Ward’s request to have an appellate judge’s questions and remarks labelled as expert evidence was denied.

[12]         The hearing proceeded on June 12, 13, 14, and 15, 2023. Evidence was received from Mr. Ward, together with many exhibits entered by consent, including the evidence from the 2020 and 2021 variation proceeding. On June 29, 2023, and July 11, 2023, post trial submissions were received to augment previous submissions. I reviewed all evidence and submissions prior to reaching my decision.

Analysis

[13]         Should the PTCI be increased by adjusting any of the corporate expenses?

Position of the Parties

[14]         Although they were at odds over most issues, both parties nevertheless agreed that I should conduct a fresh s. 18 analysis independent of the factual findings and conclusions reported by MacLeod-Archer J in PW v. CM, supra. I agree with the parties’ interpretation of the Court of Appeal’s directions in Ward v. Murphy, supra. I will thus conduct a fresh analysis to determine the amounts, if any, by which the corporate expenses should be adjusted to increase the PTCI. 

[15]         For his part, Mr. Ward states that the PTCI should remain untouched. He says  there should be no upward adjustments because:

•        The company has no money. It operates at a deficit and experiences undue hardship.

•        The corporate expenses were vetted by his accountant and approved by CRA.

•        All corporate expenses are legitimate. He is credible and honest; his evidence ought to be accepted.

•        Business expenses should not be subject to scrutiny in this family proceeding.

•        The company has a right to make its own business decisions. Neither the court, nor Ms. Murphy, should question how the company conducts its business. Corporate business decisions must be respected.

•        He is fighting hard so that the company can survive. If he is imputed income from the company, the company may have to sell its rental properties.

[16]         In contrast, Ms. Murphy states that I must scrutinize the corporate expenses. She wants me to eliminate or reduce many of the expenses because of their personal component. By so doing, Ms. Murphy seeks to increase the available PTCI for calculating child support.

Law

[17]         Section 18 of the Child Support Guidelines allows a judge to lift the corporate veil when they are satisfied that the payor’s line 150 income does not fairly reflect all income available for child support purposes. This is an important consideration where the payor, as sole shareholder, can control the income of the corporation, as noted by Van den Eynden JA in Ward v. Murphy, supra:

[117]  I now turn to the s. 18 analysis, which the judge used to determine whether pre-tax corporate income should be attributed to Mr. Ward for the purpose of determining his child support obligations. Section 18 allows a judge to lift the corporate veil if satisfied income under s. 16 (the payor’s Line 150 income) does not fairly reflect all income available for child support purposes. This is particularly important in the case of a sole shareholder (as is the case here) because that shareholder has the ability to control the income of the corporation.

[18]         It may be appropriate to pierce the corporate veil and impute additional income to the payor where the court is satisfied that the parent is using a closely-held company to pay for personal expenses. As Beaton JA (dissenting in part) wrote in Ward v. Murphy, supra:

[44] Section 18 is a tool designed for a specific purpose. It permits a judge to look into the financial circumstances of a company by “piercing the corporate veil”. As stated in Aubin v. Petrone, 2020 ABCA 13:

[37] The concept of the corporate veil enters family law most frequently on questions of child support. The first step in determining child support is determining the income of the payor parent. Where a payor parent obtains his or her income from a closely-held corporation, the Federal Child Support Guidelines, SOR/97-175, enable courts to look past the corporate veil to determine whether the parent is using a company to disguise income, for example by splitting income with a non-arm’s-length party, by paying for personal expenses, or by unnecessarily leaving earnings in the company rather than drawing them out as income: Cunningham v Seveny, 2017 ABCA 4 at paras 25-27. [Emphasis added]

Decision

[19]         I am satisfied that I should exercise my discretion to increase the PTCI by adjusting some of the claimed expenses. Before providing my reasons, I will first address Mr. Ward’s submissions concerning the role of CRA, as well as his accountant’s involvement. 

CRA’s Role

[20]         When analyzing corporate expenses, courts are not constrained by CRA’s determination of reasonableness. In Wilcox v. Snow, 1999 NSCA 163, albeit in the context of a self-employed business owner, Flinn JA confirmed that deductions which are reasonable and appropriate for CRA purposes are not necessarily reasonable and appropriate for child support purposes: paras 22 and 26.

          Accountant’s Involvement

[21]         Mr. Ward’s accountant, Mr. MacDougall, testified at the original variation proceeding. I had the benefit of reviewing the transcript of his evidence. Mr. MacDougall confirmed that he only conducted a compilation engagement. He did not conduct a review engagement or an auditor’s report.

[22]         Mr. MacDougall said that a compilation engagement is a “no assurance engagement”, while “[t]he other two engagements have a various level of assurance with them”: pg 170, exhibit 55.  Mr. MacDougall said that his firm basically compiled the information provided by Mr. Ward. Neither he, nor any other member of his firm, verified any of the receipts, although he could not submit “something to CRA that is, that we know is incorrect”: pg 171, exhibit 55.  This obligation led Mr. MacDougall to reject the claimed receipts for children’s toys, but not the receipt for a McDonald’s “Happy Meal”. Mr. MacDougall said “.. who am I to question who eats happy meals and who didn’t…” pg 295, exhibit 55. I was uncertain about Mr. MacDougall’s treatment of the treadmill receipt.

[23]         In summary, the claimed corporate expenses are not more reliable because CRA accepted the tax filing or because Mr. MacDougall was involved in the preparation of a compilation engagement. Neither CRA nor Mr. MacDougall audited the expenses or provided any significant level of assurance. 

          Contested Corporate Expenses

[24]         I will now address each of the expenses that Ms. Murphy seeks to adjust.

A.     Directors Fees

[25]         Exhibit 66 confirms that in 2018, the company paid Mr. Ward $22,000 in director’s fees and that in 2019, the company paid him $2,500. I will add back the director fees paid to Mr. Ward. I make this upward adjustment because this expense is not related to the company’s generation of income. Mr. MacDougall stated that he recommends paying director fees for tax planning purposes, such as when the shareholder has a lower tax bracket than the company. On other occasions, director fees are disbursed because the shareholder is seeking a personal infusion of money.

[26]         The rental company’s generation of revenue is not tied to the payment of director fees. The company does not reasonably need to incur this expense to successfully operate. For the purposes of determining available income for child support, this expense will be added back to the PTCI.

B.     Meals and Entertainment

[27]         From 2018 to 2022, the company deducted meal and entertainment expenses, which varied annually from a low of $762 to a high of $1,362. I will include these expenses in the PTCI for three reasons:

•        As noted by MacLeod-Archer J in PW v. CM, supra, at para 36, the company’s business dealings are largely local. The company does not reasonably need to incur meal and entertainment expenses to successfully operate. All rental units are located next to Mr. Ward’s home. The company and Mr. Ward bank in the local area. Mr. Ward buys supplies for the company in the local area.

•        I find that the meals and entertainment expenses are personal and are not reasonably required for the rental business to generate income. Mr. MacDougall stated that it was “highly unlikely” that the corporate revenue would reduce absent the food expense: pg 218, exhibit 55.

•        Like MacLeod-Archer J noted at para 35 of PW v. CM, supra, I also infer that the Happy Meal was, more likely than not, eaten by Mr. Ward’s son. I infer that other fast-food meals are in the same personal category – eaten by Mr. Ward or his son or his friends.

•        Mr. Ward did not make notations on the various receipts to identify and justify the alleged business need or business purpose. He thus failed to discharge the burden upon him.

[28]         All meal and entertainment expenses will be added back to the PTCI. Mr. Ward suggested that the maximum that can be included is 50% because of the tax treatment. Although CRA only permits a 50% deduction, the financial statements were based on 100% of the expense. The deductibility limit will, however, impact the gross up calculation, as will be later discussed.

C.     Amortization

[29]         During the first variation hearing, Mr. Ward acknowledged that the CCA on buildings was a proper adjustment, although he disagreed with any adjustments being made for vehicles and equipment amortization. He has since changed his mind and now seeks to exclude all amortization adjustments. In contrast, Ms. Murphy seeks to include all amortization expenses.

[30]         I will adjust the PTCI to include all the claimed depreciation of the buildings, adopting the discussion and comments of Julien Payne and Marilyn Payne in Child Support Guidelines in Canada, 2022, (Toronto: Irwin Law, 2021) at pp 132 and 133:         

Any capital cost allowance permitted to a spouse under the Income Tax Act with respect to real property, as distinct from personal property, must be added back into the spouse’s income under section 11 of Schedule III of the Guidelines.  Section 11 of Schedule III to the Guidelines refers not to a corporation’s deductions but to a spouse’s deductions for an allowable capital cost allowance with respect to real property.  Section 11 of Schedule III of the Guidelines should not be read into the analysis of available corporate income under section 18 of the Guidelines. However, a payee spouse will not be disadvantaged by the omission of an equivalent provision in section 18, because if there is a finding that the spouse’s annual income does not reflect what is actually available to him for child support, a court can consider (1) the pre-tax income of the corporation, or (2) the value of the spouse’s services to the company. And the former measure will necessarily add back all tax deductions subsequently utilized by the corporation, including amortization. After reviewing the above text and relevant Canadian caselaw respecting the jurisdiction to adjust for capital cost allowances claimed by companies, Forgeron J, of the Supreme Court of Nova Scotia, in Wolfson v Wolfson concluded:

 

Given the remedial nature of the Guidelines, their stated objectives, and the case authorities, I find that I have the jurisdiction to adjust for the CCA claimed by Mr. Wolfson’s companies either pursuant to ss. 18 or 19 of the CSG or through s. 11 of Schedule III. My preference is for such a calculation to occur under s. 18 or s. 11 because s. 19 would place the evidentiary burden on the spouse who lacks control of the asset and the associated evidence. In this case the burden is of no consequence, because even if it rests on Ms. Wolfson, she has overwhelmingly satisfied it.

[31]         I will also adjust the PTCI to include 50% of the claimed amortization expense for the vehicles, computers, and equipment for three reasons. First, I am satisfied that the company vehicles are used by Mr. Ward personally. I find that his personal use likely exceeds 50%, as will be more fully discussed at para 46. The fact that Mr. Ward may drop into a store to buy a tool while travelling to and from his employment or to pick up his son, does not negate the vehicle’s personal use. Second, I am not satisfied that Mr. Ward proved that all the company vehicles and equipment are reasonably associated with the company’s generation of rental revenue. Third, I am not satisfied that Mr. Ward proved that the vehicles and equipment are depreciating at the rate claimed.

D.    Mortgage Interest

[32]         Based on the unique circumstances of this case, I will adjust the mortgage interest expense because about 38% of that expense is of a personal nature as concluded by MacLeod-Archer, J and approved by the Court of Appeal. In 2016, the company’s restructuring was finalized. As part of the restructuring, the company purchased Mr. Ward’s home and paid out his Line of Credit and a mortgage. The Line of Credit had been used to finance the construction of Mr. Ward’s home. As a result, Mr. Ward now lives in an unencumbered home and the company deducts the interest payments.

E.     Office Expenses

[33]         I will adjust the PTCI for office expenses for three reasons. First, Mr. Ward has a home office and is thus able to deduct a portion of his home expenses which he would incur in any event. Second, the office expenses are mainly associated with Mr. Ward’s variation application and appeal in relation to his child support obligation. Third, Mr. Ward has little business requirement for a home office: see  paras 44 and 46 of MacLeod-Archer J’s decision in PW v CM, supra, which reasoning I adopt.

[34]         I will add back 90% of the office expenses except for 2021. In 2021, office expenses increased as Mr. Ward incurred significant photocopy charges because of his appeal. For 2021, I will add back 95% of the expenses.

F.     Repairs and Maintenance

[35]         Despite rental properties requiring regular maintenance and repair, I will nevertheless add back 15% of these purported expenses because of the state of the evidence. Mr. Ward submitted large stacks of receipts, with little or no explanation as to which property the receipt related or what work had been completed as a result of the purchase. He failed to prove, on a balance of probabilities, that all reported expenses were reasonably needed for the generation of rental income.

[36]         Furthermore, Mr. Ward purchases tools and equipment. If they are not large purchases, they are recorded as repair and maintenance expenses; they are not capitalized. Mr. Ward enjoys working with tools and equipment. Other people who enjoy and collect tools and equipment are required to purchase them with after-tax dollars. Mr. Ward, on the other hand, can acquire tools and equipment, while expensing them through the company.

G.    Salary and Wages

[37]         In 2020 and 2021, Mr. Ward was employed by the company. In 2020, he was paid $17,500; in 2021, he was paid $38,000.[i] I will adjust the PTCI by adding back 50% of Mr. Ward’s employment income for four reasons.

[38]         First, tax planning, and not corporate need, is a factor associated with Mr. Ward being paid wages. Reducing the amount of the PTCI generates a favourable tax outcome. Mr. Ward often pays income tax at a lower rate than does the company because the company generates income from rentals – characterized as passive assets by CRA. Further, Mr. MacDougall said that when the company operates at a deficit, the company can retain the corporate losses for 20 years. Corporate losses can be used to offset future tax liability.  

[39]         Second, prior to the contentious court proceedings, during periods of unemployment, Mr. Ward worked on his rental properties without pay. The company, solely controlled by Mr. Ward, did not pay Mr. Ward wages to build, repair, or renovate the rental units. Since the 2017 decision, Mr. Ward continued to have periods of unemployment and thus time to complete any necessary renovations and repairs as he had in the past – without pay. Mr. Ward would, however, derive a financial benefit from the increased equity in the various rental properties which operate as an investment vehicle.

[40]         Third, the rationale underpinning income imputation confirms that corporate wages should be adjusted. All court decisions distinguished between Mr. Ward’s two sources of imputed income. In the 2017 decision in PW v. CM, supra, Gregan J imputed an annual income to Mr. Ward of $60,000 for income earned from sources other than the rentals (employment and EI income). In addition, Mr. Ward was imputed an additional $60,000 in income from the rentals.

[41]         In MacLeod-Archer J’s 2021 decision in PW v. CM, supra, she considered Mr. Ward’s income for the years 2018-2020. She noted that in 2020, Mr. Ward worked for several months through the union and collected EI benefits. After being laid off, he worked for his company, paying himself wages of $17,500.00 instead of looking for outside work. MacLeod-Archer J. held at para 61:

I’m not satisfied that the choice to work for his company in the fall of 2020 was reasonable, nor that the work he completed couldn’t be interrupted or delayed if he got union work.      

[42]         She went on to find that it was still appropriate to impute $60,000 annually to Mr. Ward for income derived from external employment and E.I. benefits: para 62. The Court of Appeal in Ward v. Murphy, supra, took no issue with this aspect of her analysis: para 116.

[43]         Not adjusting the PTCI for wages paid to Mr. Ward would defeat the rationale underlying the court’s previous imputation decisions. Employment income paid to Mr. Ward from the company should therefore be added back into the PTCI.

[44]         Fourth, in 2020 and 2021, Mr. Ward intentionally reduced his income to avoid being garnished. In June 2018, upon Ms. Murphy’s counsel withholding $300 from his costs award[ii], Mr. Ward stopped making child support payments as ordered. Mr. Ward reduced his monthly payments from $994 to $300. By October 2019, Mr. Ward owed maintenance arrears in excess of $10,000. Thereafter, MEP started to aggressively garnish Mr. Ward’s EI benefits. Once his EI claim expired in March 2020, Mr. Ward did not open another claim, despite having the qualifying hours. Further, he did not apply for CERB. The federal garnish would attach to both the EI and CERB payments. With no other source of income, Mr. Ward decided to withdraw money from the company as an employee, although he did not receive regular pays.

[45]         Given these four circumstances, I was initially inclined to add 100% of the wages to the PTCI. But for the pandemic, I would have. However, given the unique circumstances flowing from the pandemic, I will adjust by only adding back 50% of the wages paid to Mr. Ward.

H.    Vehicle Expenses

[46]         The company owns several vehicles – a 2023 SUV, two older trucks, a plow attachment[iii], a four-wheeler, and a backhoe. Expenses associated with these vehicles are significant. I will adjust the PTCI by adding back 50% of the claimed vehicle expenses because at least 50% of these expenses were for personal use. In making this finding, I note that:

•        All rental units are situate in the area of Mr. Ward’s home. Mr. Ward banks in the local area. Mr. Ward buys supplies in the local area.

•        Mr. Ward did not keep a log book to record his business and personal usage. Mr. MacDougall said that he did not use a stand-by fee to address any personal use. He claimed 100% of all vehicle expenses.

•        Mr. Ward claimed vehicle expenses associated with his family law variation application and appeal as business expenses.

I.        Heat

[47]         I am satisfied that the heating bills are proper business expenses as heat is  included in the tenants’ rent. From a proportionality perspective, it is not necessary to adjust this expense by $200 every several years because of Mr. Ward’s personal use of the garages.

J.      Telephone and Telecommunication

[48]         Mr. Ward uses the company’s cell phone, internet and cable for personal purposes. Mr. Ward provided little evidence to suggest that this expense is solely a business one. I will add back 50% of this expense because at least 50% is personal usage.

K.     Advertising and Promotion

[49]         Although laudable, making charitable donations is not required for the company to generate income. Donations are a discretionary expense and should be added back into the PTCI.

Summary of Adjusted PTCI

[50]         Given my findings, the following represents the adjusted PTCI from 2018 to 2022, with all numbers being rounded:

2018 Tax Year
Rental Income		$83,720
Operating Expenses		$110,173
PTCI		-$26,453
Adjustments to PTCI
Directors Fee 100%		$22,000
Meals & Entertainment 100%		$762
CCA (Buildings) 100%		$18,592
Amortization (Other) 50%		$3,332
Interest 38%		$3,742
Office 90%		$594
Repairs & Maintenance 15%		$1,319
Vehicle 50%		$3,160
Telephone 50%		$601
Internet and Cable		$833
Total		$54,935
Adjusted 2018 PTCI		$28,482
2019 Tax Year
Rental Income		$84,220
Operating Expenses		$82,465
PTCI		$1,755
Adjustments to PTCI
Directors Fee 100%		$2,500
Meals & Entertainment 100%		$411
CCA (Buildings) 100%		$17,848
Amortization (Other) 50%		$2,380
Interest 38%		$4,038
Office 90%		$2,408
Repairs & Maintenance 15%		$784
Vehicle 50%		$2,333
Telephone 50%		$652
Internet and Cable 50%		$832
Total		$34,186
Adjusted 2019 PTCI		$35,941
2020 Tax Year
Rental Income		$84,170
Operating Expenses		$121,665
PTCI		-$37,495
Adjustments to PTCI
Meals & Entertainment 100%		$984
CCA (Buildings) 100%		$17,972
Amortization (Other) 50%		$6,895
Interest 38%		$2,691
Office 90%		$501
Repairs & Maintenance 15%		$3,007
Wages and Salary 50%		$8,750
Vehicle 50%		$3,220
Telephone 50%		$520
Internet and Cable		$778
Total		$45,318
Adjusted 2020 PTCI		$7,823
2021 Tax Year
Rental Income		$82,650
Operating Expenses		$66,786
PTCI		$15,864
Adjustments to PTCI
Meals & Entertainment 100%		$1,361
CCA (Buildings) 100%		$11,696
Amortization (Other) 50%		$3,899
Interest 38%		$3,082
Office 95%		$3,866
Repairs & Maintenance 15%		$1,764
Wages and Salary 50%		$19,000
Vehicle 50%		$5,778
Telephone		$530
Internet and Cable		$825
Total		$51,801
Adjusted 2021 PTCI		$67,665
2022 Tax Year
Rental Income		$86,325
Operating Expenses		$101,096
PTCI		-$14,771
Adjustments to PTCI
Meals & Entertainment 100%		$1,200
CCA (Buildings) 100%		$11,229
Amortization (Other) 50%		$2,954
Interest 38%		$2,991
Office 90%		$223
Repairs & Maintenance 15%		$3,652
Vehicle 50%		$5,866
Telephone		$608
Internet and Cable		$838
Donation		$1,000
Total		$30,561
Adjusted 2022 PTCI		$15,790

[51]         Should any of the corporate expenses be subject to a gross up?

[52]         When a shareholder receives benefits that are expensed through a closely-held corporation, the court has the discretionary authority to gross up the value of those benefits to reflect any tax advantage. As is noted, in part, by Julien Payne and Marilyn Payne in Child Support Guidelines in Canada, 2022, at p 205:

The Federal Child Support Guidelines base support payments on the payor’s gross taxable income. One of the objectives of the Guidelines is to ensure “consistent treatment” of those who are in “similar circumstances.” Thus, there are provisions to impute income where a parent is exempt from paying tax, lives in a lower taxed jurisdiction, or derives income from sources that are taxed at a lower rate. Where a parent pays substantially less tax or no tax on income received, the income must be grossed up for the purpose of determining the amount of child support to be paid. This is the only way to ensure the consistency mandated by the legislation.

[53]         Further, in footnote 4 of Ward v. Murphy, supra, Van den Eynden JA stated:

[4] As a general statement, gross up of personal expenses paid by corporation are non-controversial, as it reflects the pre-tax value. I cannot ascertain from the judge’s reasons whether she grossed up amortized expenses because they were of a personal benefit (see Duffus v. Frempong-Manso, 2017 ONCA 360 at paras. 30 to 32). It would have been helpful had the judge explained why she applied a gross up to these deductions. Without the gross up of amortized expenses, the company’s available pre-tax income would be significantly less. On appeal, Mr. Ward challenges the judge’s gross up of the amortized expenses. As will become evident later in my reasons, I would remit the s. 18 analysis back for determination and accordingly make no comment as to the propriety of the gross up.

[54]         I am grossing up only those PTCI adjustments that provide a personal benefit to Mr. Ward and which were or will not be taxable to him or the company. Further, in consideration of CRA’s treatment of meals and entertainment expenses, I am only including 50% of the claimed expense. In making my calculation, I will apply the lowest combined marginal tax rate for Nova Scotia – 23.79%.  The following are my calculations, all of which are rounded:

Gross Up of 2018 PTCI Adjustments
Meals & Entertainment	$381	$91
Amortization (Other)	$3,332	$793
Interest	$3,742	$890
Office	$594	$141
Vehicle	$3,160	$752
Telephone	$601	$143
Internet and Cable	$833	$198
Total		$3,008
2018 Gross Up		$3,008
Gross up of 2019 PTCI Adjustments
Meals & Entertainment	$206	$49
Amortization (Other)	$2,380	$566
Interest	$4,038	$961
Office	$2,408	$573
Vehicle	$2,333	$555
Telephone	$652	$155
Internet and Cable	$832	$198
Total		$3,057
2019 Gross Up		$3,057
Gross Up of 2020 PTCI Adjustments
Meals & Entertainment	$492	$117
Amortization (Other)	$6,895	$1,640
Interest	$2,691	$640
Office	$501	$119
Vehicle	$3,220	$766
Telephone	$520	$124
Internet and Cable	$778	$185
Total		$3,591
2020 Gross Up		$3,591
Gross up of 2021 PTCI Adjustments
Meals & Entertainment	$681	$162
Amortization (Other)	$3,899	$928
Interest	$3,082	$733
Office	$3,866	$920
Vehicle	$5,778	$1,375
Telephone	$530	$126
Internet and Cable	$825	$196
Total		$4,440
2021 Gross Up		$4,440
Gross Up of 2022 PTCI Adjustments
Meals & Entertainment	$600	$143
Amortization (Other)	$2,954	$703
Interest	$2,991	$712
Office	$223	$53
Vehicle	$5,866	$1,396
Telephone	$608	$145
Internet and Cable	$838	$199
Donation	$1,000	$238
Total		$3,589
2022 Gross Up		$3,589

[55]         What portion, if any, of the PTCI should be included as Mr. Ward’s available income when calculating child support?

[56]         Mr. Ward seeks to exclude all PTCI, while Ms. Murphy requests that all PTCI be included when determining Mr. Ward’s income for child support purposes.

[57]         Based on my prior calculations, the adjusted PTCI from 2018 to 2022 is as follows:

 

[58]         In Ward v Murphy, supra, Van den Eynden JA reviewed the factors which I am to consider when determining what portion, if any, of the PTCI should be attributed to Mr. Ward when calculating income for child support purposes:

[153]    In short, a s. 18 analysis should not be shied away from when its use is appropriate. Here are some general, non-exhaustive, considerations that may assist in deciding whether income should be attributed under s. 18:

•     Attribution of pre-tax corporate income to a payor pursuant to s. 18(1)(a) is a factual exercise, undertaken by a judge on a case-by-case basis.

•     A judge is not required to add any pre-tax corporate income to a payor’s income. The Guidelines merely allow for a judge to do so.

•     The reasonableness of a deduction is a discretionary determination; however, the objective is to ensure the allocation of pre-tax corporate income between business and family purposes is fair. At the end of the day, one should not interfere with reasonable economic decisions needed to meet corporate sustainability.

•     The onus rests on the shareholder parent to establish that pre-tax income of the corporation is not available for support purposes. This means the parent, who is typically the payor, must lead evidence that the pre-tax corporate income is not available for support purposes because it will jeopardize the capacity of the corporation to meet its financial obligations.

•     When deciding the amount of pre-tax corporate income to attribute to the payor, consideration should be given to:

•    What is the nature of the business?

•    Is there a business reason for retaining earnings?

•    What is the historical practice for retaining earnings?

•    What degree of corporate control does the payor exercise?

•    Is there only one principal shareholder or other bona fide arm’s‑length shareholders involved?

•    Depreciation;

•    Possible economic downturns;

•    Return on invested capital; and

•    If the corporation, after adding back expenses to the pre-tax corporate income, has an overall negative pre-tax income (also known as a loss), no amount of pre-tax corporate income can be attributed to the payor’s income. (As illustrated above, this was not relevant in this case.)

See Merrifield v. Merrifield, 2021 SKCA 85 at paras. 32, 35, 47–48; Walker, at para. 39; M.C. c. J.O., at para. 16; Potzus v. Potzus, 2017 SKCA 15 at para. 64; Mason v. Mason, 2016 ONCA 725 at para. 163; Chekowski v. Howland, 2013 ABCA 299 at paras. 13–14; Goett, at para. 21; Kowalewich v. Kowalewich, 2001 BCCA 450 at paras. 54, 58–59.

[59]         In response to the above points, I find as follows:

•        The company is engaged in the rental business. It is characterized as a passive investment for CRA purposes.

•        Mr. Ward historically withdrew money from the company when it was advantageous from a tax planning perspective, as explained by Mr. MacDougall, or when he required a personal infusion of money.

•        Historically, the decision to withdraw or to retain corporate earnings had little to do with the financial needs of the company.

•        Mr. Ward exerts 100% control as he is the sole and controlling shareholder. Mr. Ward solely decides what vehicles and equipment are purchased by the company. Mr. Ward solely decides what expenses will be incurred by the company. Mr. Ward presented little evidence to explain if or how a corporate budget was set or how financial expenditures were determined based on the company’s needs. For example, Mr. Ward said he had the company purchase a $23,000 backhoe because he wanted to spread tandem loads of soil on the recently subdivided land and because he always wanted a backhoe. From a business perspective, it may have been more cost-effective to hire someone to spread the earth or even to rent a backhoe.

•        The company and Mr. Ward are substantially interconnected. There is much mixing of the business and the personal. I will provide seven examples to support this conclusion. First, the company now owns the home where Mr. Ward and his son live. When the company acquired Mr. Ward’s home, it refinanced and about 38% of the corporate refinancing is associated with Mr. Ward’s homes. Second, the company also owns and expenses vehicles used by Mr. Ward personally. Third, Mr. Ward built garages on company property which are used, in part, to store his personal Corvette and tools. Fourth, although most of the rental cheques are deposited in the business account, some cash payments are retained by Mr. Ward and then reconciled at the end of the year by his accountant. Fifth, business and personal expenses are often paid through Mr. Ward’s personal Visa and then reconciled at years’ end. Sixth, the claimed business receipts usually do not have any notations to indicate the purpose for which each was incurred. Seventh, Mr. Ward records personal expenses as business expenses, such as those which he incurred for his variation and appeal hearings and at least half of his vehicle expenses.

•        The rental properties operate in a stable market. Usually, vacancies only occur when a resident passes on. No credible evidence was led to suggest that the rental market was or will be negatively impacted by the economy. To the contrary, the demand for rental units is high. 

•        Mr. Ward identified one anticipated large repair – the roof replacement on two of the buildings. He did not, however, present credible evidence about the cost to effect the roof repairs. Mr. Ward submitted only one quote. It was a letter from his boss who had not viewed the buildings and who obtained his information from Mr. Ward.

•        The company should not require the PTCI to fund the roof repairs for two reasons. First, Mr. Ward said that he intends to sell 358 Mitchell Avenue to cover the renovation and repair expenses in lieu of refinancing. Second, the company could also have saved some of the proceeds from the 2022 sale of 419 Mitchell Avenue to cover the costs of the intended repairs. Instead, $153,752.51 was deposited directly into an account in Mr. Ward’s name. 

•        Although there is insufficient evidence to specifically calculate the equity in the company, I do infer that the properties have appreciated in value and that the company is healthy. For example, in addition to the vehicles and equipment, the company currently owns 329 Mitchell Avenue; 331/333 Mitchell Avenue; 335/337 Mitchell Avenue; 358/360 Mitchell Avenue; and the subdivided plots on 419 Mitchell Avenue. There are only two mortgages $141,193 on 335/337 Mitchell Avenue and $110,908 on 358/360 Mitchell Avenue.

•        No evidence was led about any banking or financial restrictions which have been placed on the company, other than the mortgages or money due to Mr. Ward. Mr. Ward is owed $97,264 on his shareholder loan and $128,500 from the outstanding promissory note.

 

[60]         After considering these factors, I find that Mr. Ward did not prove that the adjusted PTCI should not be available to determine his income for child support purposes. In the circumstances of this case, I will include all the PTCI. Therefore Mr. Ward’s imputed income for child support purposes from the PTCI and his employment and EI benefits is as follows:  

2018	$60,000 + $31,490 =	$91,490
2019	$60,000 + $38,998 =	$98,998
2020	$60,000 + $11,414 =	$71,414
2021	$60,000 + $72,105 =	$132,105
2022	$60,000 + $19,379 =	$79,379

[61]         What PTCI is available for 2023 and forward?

[62]         The parties each supplied their suggested calculations for determining  available PTCI for 2023 and onward. I have considered their calculations.

[63]         In determining the PTCI available for child support purposes, I must comment on revenue and expenses. I recognize that rental revenues will decrease in 2023 because Mr. Ward is not renting one of the properties. Rent will therefore decrease from $86,325 to $83,100 in 2023. However, in January 2024, rents can be increased by 5%. It is in the company’s interest to do so. Thus, in 2024, I project rental income at $87,255 – more than in prior years.

[64]         Will the reduction in the 2023 rental income cause significant changes to the available PTCI? I find that it will not, for these reasons:

•        In 2021, the company reported revenue of only $82,650 and yet had more available PTCI than in other years, largely because there were fewer maintenance and repair charges and also because I adjusted for wages.

•        In 2023 and 2024, maintenance and repair expenses will be, more probably than not, less than those expensed in 2022. Any roof repairs can be paid from sale proceeds as Mr. Ward said he intended, or in the alternative, they can be financed and capitalized, rather than expensed. In addition, Mr. Ward did not identify any other outstanding repairs. In the recent past, when major renovations were not completed, maintenance and repair expenses were much lower than reported in 2022. For example in 2021, claimed maintenance and repair expenses totalled $11,760; in 2019, only $5,227 were claimed. Finally, there is now one less building to repair and maintain given that 419 Mitchell Avenue was sold.

[65]         Although I anticipate other fluctuations in the claimed corporate expenses in 2023 and 2024, I am satisfied that Mr. Ward will have about $30,000 in available PTCI for the purpose of calculating child support, inclusive of the gross up. This figure is slightly lower than that produced by a three-year average, which Simmons JA confirmed in Mason v. Mason, 2016 ONCA 725, is appropriate to consider:  

[164] As I see it, it would make little sense to permit consideration of a spouse’s income over the three-year period without permitting consideration of the spouse’s access to pre-tax corporate income in each year of the three-year period. This is particularly the case where, as here, the payor spouse now wholly owns the corporation (which was formerly owned by him and the wife). Otherwise, the exercise of considering a pattern of, or fluctuations in, income would be artificial.

[165] Further, this interpretation, is consistent with the language of s. 17:

....

[166] Had it been the legislature’s intention to restrict the three-year review of the spouse’s income to line 150 income, the legislature could easily have said the court may have regard to the spouse’s annual income over the last three years as determined under s. 16. But instead of using that or similar language, s. 17 refers to the “spouse’s income over the last three years.” “Income” in this context is not restricted to the spouse’s annual income as determined under s. 16; it can fairly be read as meaning the payor’s annual income as defined under s. 15 – meaning the payor’s income as determined in accordance with ss. 16 to 20.

[167] In addition, interpreting the sections in this way avoids any incentive to manipulate corporate income leading up to a trial or the inevitability of a variation in the event of an unusual year.

[168] This approach is also consistent with the fundamental object of the Guidelines, which is to ensure fairness to both spouses, and to their children, in determining what amount of money is in fact reasonably available for the payment of support.

[66]         For Mr. Ward’s benefit, I confirm that the imputation of available PTCI does not strip the company of its resources, or even $30,000 annually. As the Court of Appeal of Newfoundland and Labrador explained in Gosse v. Sorenson-Gosse, 2011 NLCA 58:   

[94] Neither imputing pre-tax corporate income to a shareholder, nor  adjusting the amount shown as pre-tax corporate income to offset non-cash  expensing, in the course of establishing the basis for calculating child  support obligations under the Guidelines, requires the corporation to alter its financial records or its business decisions in any manner. It does not require the actual transfer of any of its financial resources to the sole shareholder. That remains a decision of the corporation, as guided and directed by the sole shareholder. Imputing is only a theoretical exercise for the purpose of  making “the fairest determination” of an income level by which to judge the  level of responsibility the shareholding spouse should have for child support, when compared with the income level of the other spouse. The corporation  is not a party to the action and no order is directed at the corporation. In the case of a sole shareholder, the effect is, essentially, to ignore the corporate  structure, for Guidelines income assessment purposes only, and treat the  shareholding spouse in the same manner as that spouse would be treated if  the business were carried on in the name of that spouse personally. When applied to this case, that requires Ms. Sorensen to account for “all the money  available to [her] for the payment of child support”, on precisely the same  basis as Mr. Gosse has been required to account for all the money available  to him for that purpose. Only in that manner can a primary objective of the  Guidelines, “the fairest determination of that income” be achieved.  [Emphasis added] 

[67]         Should child support be varied retroactively?

[68]         Mr. Ward seeks to retroactively vary his child support obligation, while Ms. Murphy wants to limit the retroactive nature of the award.

[69]         In  Colucci v. Colucci, 2021 SCC 24, Martin J outlined the framework that applies when a payor seeks to retroactively reduce their child support obligation. Upon proving a material change in circumstances, a presumption arises that child support will be decreased to the date of effective notice, to a maximum of three years before formal notice was provided. Courts nonetheless retain jurisdiction to depart from the presumptive date if unfairness will result. Unfairness is based on the factors (as necessarily adapted) set out  in DBS v. SRG, 2006 SCC 37 – understandable reason for delay; payor’s conduct; child’s circumstances; and hardship.

[70]         In defining effective notice, Martin J discussed informational asymmetry, noting that the payor has the informational advantage. As a result, effective notice must be accompanied by reasonable proof. If effective notice is lacking, then courts should generally defer to the date of formal notice:

[88]  In decrease cases, therefore, courts have recognized that effective notice must be accompanied by “reasonable proof” that is sufficient to allow the recipient to “independently assess the situation in a meaningful way and respond appropriately” (Gray, at para. 62, citing Corcios, at para. 55; Templeton, at para. 51). This ensures that effective notice provides a realistic starting point for negotiations and allows the recipient to adjust expectations, make necessary changes to lifestyle and expenditures, and make informed decisions (Hrynkow v. Gosse, 2017 ABQB 675, at para. 13 (CanLII); Hodges v. Hodges, 2018 ABCA 197, at para. 10 (CanLII)). At paras 80 - 88, the Supreme Court of Canada expanded on the meaning of effective notice.  Effective notice requires communication of the change in circumstances and disclosure of “reasonable proof” (Colucci, paras 87-88). These requirements demand the payor to substantiate the change and allow the recipient to assess their situation and adjust as needed (Colucci, para 88). If the payor does not give effective notice, courts should generally vary child support to the date of formal notice (Colucci, para 95).

[71]         Mr. Ward’s variation application is retroactively adjusted to October 2018 after he filed his variation application and as stated by MacLeod-Archer J. An earlier date is not appropriate because Mr. Ward did not provide effective notice as described in Colucci. Indeed most of his financial disclosure was not provided until well after his 2018 application was filed.

[72]         What is the appropriate retroactive and prospective child support order?

[73]         The Maintenance Enforcement Program is directed to adjust their records to calculate whether there has been an under or overpayment in child support based on the following:

•        From October 1, 2018 until December 31, 2018, Mr. Ward owed Ms. Murphy child support in the monthly amount of $786 based on an imputed annual income of $91,490.

•        In 2019, Mr. Ward owed Ms. Murphy child support in the monthly amount of $845 based on an imputed annual income of $98,998.

•        In 2020, Mr. Ward owed Ms. Murphy child support in the monthly amount of $611 based on an imputed annual income of $71,414.

•        In 2021, Mr. Ward owed Ms. Murphy child support in the monthly amount of $1,105 based on an imputed annual income of $132,105.

•        In 2022, Mr. Ward owed Ms. Murphy child support in the monthly amount of $680 based on an imputed annual income of $79,379.

•        In 2023 and forward, Mr. Ward owed Ms. Murphy child support in the monthly amount of $773 based on an imputed annual income of $90,000.

[74]         Once MEP calculates the outstanding under or overpayment, the parties may provide their written submissions on the appropriate repayment schedule to address the retroactive award.

Conclusion

[75]         After conducting the required s. 18 analysis, and determining available PTCI, I grant Mr. Ward’s application to vary his child support obligation. Prospective child support will be payable in the monthly amount of $773. Retroactive child support will be calculated as of October 2018.

[76]         MEP will recalculate the under or overpayment based on the imputed annual incomes stated in para 73.  The parties are also to provide written submissions about the appropriate repayment schedule once they confirm MEP’s recalculation.  

[77]         Further, the Nova Scotia Court of Appeal directed me to determine costs. Ms. Murphy should file her costs submissions by January 9, 2024. Mr. Ward should file his submissions by January 29, 2024. The costs submissions should address this hearing and the hearing before MacLeod Archer, J.

[78]         Ms. O’Leary is to prepare the variation order.

 

Forgeron, J