An ounce of prevention is worth a pound of cure

The case of Kimla v. Golds, 2005 CarswellOnt 1000 involved a father who sought a variation of his support obligations, fixed in a separation agreement, due to changed circumstances.

The father and the mother had, in June 2003, negotiated the separation agreement that based the father's child support obligation on an income of $140,000.00, despite the fact that the father's employment had recently been terminated. At the time of the conclusion of the separation agreement in May 2004, the father was aware that, under the terms of his severance package, he would only be in receipt of the $140,000.00 annual salary until September 2004.

The father, in his variation application, argued that he had been unable to find a replacement position and his projections concerning profits for a business he had recently started with a friend were overly optimistic. The mother counter-argued that the father was intentionally under-employed and that income comparable to his previous earnings should be imputed to him. Luckily for the father, the Honourable Madame Justice Mesbur did not take strictly at face value the business plan he had submitted to a bank to secure a loan that would have resulted in an imputed income of $130,000.00.

In rejecting a wholesale adoption of the father's projections to the bank, Justice Mesbur commented that "[W]hile this approach is tempting, it is somewhat unrealistic, given the actual circumstances the father is in." The judge then went on to find that the business plan submitted by the father was realistic with some exceptions relating to the amounts for loan repayment.

Taking the exceptions into consideration, the judge determined that the father's child support obligation should be calculated based on an income of $88,200.00 for 2005. This determination was made in acknowledgement of the fact that the father had, at the time the application was heard in March 2005, received no income at all for the first three months of 2005.

There is a further interesting point to be mentioned concerning the father's bank loan application. Although not specifically relied on by Justice Mesbur in her reasons, the decision does make reference to discrepancies between the information the father provided the bank in his loan application and the court in his variation application. In his loan application, the father stated that he was the sole owner of property in Muskoka valued at $600,000.00 and that his net worth was $1.1 million. In his variation application, on the other hand, the father claimed to have only a 50% beneficial ownership in the property and a net worth of merely $430,000.00.

One can only wonder how this background information – that the savvy opposing counsel is sure to request – swayed the court's ruling. The advice counsel should impart to their clients from this case: when applying for credit, stick to honest and realistic business projections, particularly for start-up operations, and avoid the lure of exaggeration and its potential risks.