In this judgment heard June 12-19, 2012 and released August 17, 2012, Justice Riley of the Ontario Superior Court of Justice, did not agree with Madam Justice MacPherson’s interim Order and concluded that income transferred from the Applicant’s Father’s business to the Respondent Mother should be construed as a gift, and not income splitting for the purpose of calculating support. This judgment, considered controversial by some, essentially states that income may be construed differently for tax and support purposes.
Factual Background
The Applicant Father, Chad, and Respondent Mother, Michelle, were married on September 20, 1997. The parties separated in January 2008. There were two children of the marriage; namely, R, born May 4, 1999 and C, born August 23, 2001.
Prior to trial, the parties resolved many of the issues, including issues of custody and access, sale of the matrimonial home; holiday access and life insurance.
At trial, the remaining issues in contention were the father’s obligation to pay child and spousal support. The principal disagreement between the parties related to the quantum of the father’s income. The mother sought to impute an income to the father of $180,000 based upon his salary from his employer, Twincorp Inc., as well as deemed income from three companies owned and controlled by the Applicant’s father, Strassco, Restco and Regenovate. The Applicant Father’s “Line 150” income as reported to the CRA in 2011 totalled only $96,544.
Moreover, the Respondent Mother took the position that income received by her in an amount between $30,000 and $38,000 should be imputed to the father as this was money received by her for income splitting purposes. In contrast, the father took the position that the aforementioned payments were in fact gifts to the mother from the Applicant’s father and should not be imputed to him as additional income for the purpose of calculating support.
Analysis
First, Justice Riley reviewed the evidence from the Respondent’s two witnesses: an accountant and the controller of Twincorp, who both testified as to the financial health of Twincorp, Strassco, Restco and Regenovate. After careful review, Justice Riley concluded that
Strassco, Restco, and Regenovate could not be seen as providing an income stream for the Applicant. All three companies are seriously in debt and are in effect incapable of providing an income stream. Therefore, the court will impute no income to the applicant from these three companies.
Justice Riley then turned to his evaluation of the Applicant’s income from Twincorp, a company owned and operated by the Applicant’s father. Although the Applicant’s father had been highly successful in the past, the number of franchises he operated was reduced from 97 to 62 in 2008 and many of the remaining restaurants were doing poorly and were set to close. The Applicant’s father further notified the court that loans providing financing to the company had been called in in January 2012. However, while the court took note of the imperiled position of Twincorp, it relied on the Applicant’s testimony that with his experience and business acumen he was confident that he would always be able to “get work.” Accordingly, Justice Riley held that “the children will be able to count on an income stream that will allow the applicant to meet his support obligations.”
Turning to the challenging issue of whether additional income should be imputed to the father as a result of payments made to the mother by Twincorp over their years of marriage and even subsequent to their separation, Justice Riley set out to determine whether such income was, in fact, “income splitting” or “gifts” from a generous father-in-law for the purpose of calculating support.
Although Madame Justice MacPherson held that it was inappropriate to construct the couple’s finances in one way for tax purposes during marriage and then upon separation suggest a different construction of those finances, Justice Riley respectfully disagreed.
Justice Riley considered the jurisprudence, specifically, Bak v Dobell (ONCA), in which payments were made over a period of time by a generous father for the support of an adult son who was seriously mentally challenged and incapable of earning income. Justice Riley also considered the factors outlined by the Ontario Court of Appeal in determining whether a gift should be construed as income, including the regularity of the gifts; the duration of the receipt; whether the gifts were part of the family income during cohabitation that entrenched a particular lifestyle; the circumstances of the gift that earmarked them as exceptional; whether the gifts do more than provide a basic standard of living; the income generated by the gifts in proportion to the payor’s entire income; whether they are paid to support an adult child through a crisis or period of disability; whether the gifts are likely to continue; and the trust purpose and nature of the gifts.
In the end, Justice Riley concluded that payments made to the respondent mother were truly “gifts.”
Although they purported to be by way of “salary” in order to benefit the tax position of Twincorp, they were in fact intended to be and were indeed “gifts” from a generous father in law to his daughter in law. This was not a case where the Applicant, having historically earned a salary of $120,000, then had his salary reduced to $90,000 when the respondent was “hired” by the company. Neither did the applicant’s salary increase when the Respondent’s “employment” was terminated. Such circumstances would clearly be evidence of an “income splitting” arrangement.
Justice Riley further noted that the family, including the Respondent, benefited in a number of ways from the Applicant’s position at Twincorp, and that if he was of the opinion that the generosity of Twincorp were to continue for the Applicant he might be disposed to imputing some further income to the Applicant to reflect those benefits. However, given the evidence concerning the financial state of Twincorp and decreased benefits to the father, Justice Riley was of the opinion that Twincorp could no longer afford such generosity.
As a result of Justice Riley’s finding that the respondent was not entitled to the quantum of support she had been receiving pursuant to Madam Justice MacPherson’s interim order, an overpayment resulted that should be taken into account in his assessment of the quantum and duration of spousal support on a going forward basis.
In the end, Justice Riley refused the Respondent mother’s request for lump sum spousal support, noting that periodic support ending in four years, once the mother had had an opportunity to complete teacher’s college and obtain employment, was better suited to fulfilling the objectives of spousal support outlined in the SSAG.