Calculating Income – RRSP Income and Unreasonable Business Expenses
Ludmer v. Ludmer, 2014 ONCA 827
This is a case from the Ontario Court of Appeal that addresses both family law issues and intentional torts. In particular, the Court of Appeal considered whether business expenses and RRSP proceeds should be included in the calculation of income for support purposes.
The Appellant Husband, and Respondent Wife, were married for nearly 20 years before they separated in 2005. They had two children in university at the time of their 2012 trial and had agreed upon issues of custody and access. The outstanding issues related to property and income.
At trial, the Husband succeeded in excluding trust property from his net family property statement. Justice Penny of the Ontario Superior Court of Justice found that the Wife had waived any right to or interest in the trust when she signed marriage contracts in 1986. This was a significant outcome for the Husband, as his contingent interest in the trust was approximately $6 to $8 million. In finding that the trust property was excluded, the Wife owed the Husband an equalization payment of approximately $270,000.
The Husband was unsuccessful in his claim to an 80 per cent ownership in the matrimonial home and was ordered to share the post-separation increase in its market value with the Wife. When all of the various claims for child support, section 7 expenses, and property were set off against each other, the Husband was required to pay the Wife a net amount of $194,434.
The Husband raised many grounds of appeal, including the trial judge’s calculations of the parties’ income. First, he argued that all of his claimed business expenses should have been excluded from his income for spousal support purposes and that the trial judge had arbitrarily arrived at a 50 per cent threshold in relation to gross income. Secondly, he argued that RRSP income should have been included in the spouses’ income because the Wife had cashed in significant RRSPs in 2007 and 2008. This would have favoured the Husband in the calculation of child support. The Husband also appealed the judge’s award of spousal support on a compensatory and needs basis; failing to adjust the lump sum spousal support award for tax consequences, present value discounting, and future contingencies; failing to deduct spousal support from his income for the purpose of allocating section 7 expenses; allocating all of the section 7 expenses to him for one post-separation year; ordering the parties to bear their own costs; and failing to determine previous motion costs that had been deferred to the trial judge.
Mr. Ludmer had also added a third party claim to his divorce proceedings against his neighbour and Wife’s friend, Gary Spira. Mr. Ludmer sued Mr. Spira for invasion of privacy, intentional infliction of mental distress, and a restraining order to prohibit Mr. Spira from interfering with access to the children. These claims were all dismissed and Mr. Spira was entitled to costs on a full indemnity basis. Mr. Ludmer appealed the Spira action and the Ontario Court of Appeal heard the two proceedings simultaneously.
The Wife conceded that the Husband’s spousal support payable should have been deducted from his income for the purpose of the section 7 calculation, pursuant to section 3.1 of Schedule III of the Federal Child Support Guidelines (Guidelines). This reduced the net amount owing to the Wife from $194,434 to $156, 337.64. The Husband was unsuccessful on all other grounds of appeal.
With respect to the business expense deductions, the Court of Appeal held that the trial judge was open to find that the Husband’s expenses, for support purposes, cannot reasonably exceed 50 per cent of gross revenue. The Husband had claimed expenses between 56.99 and 78.42 per cent of his gross income for the years 2009-2011 for his one-man law firm. Although these business expenses were legitimate for tax purposes, this did not mean that the deductions are necessarily reasonable for support purposes. The trial judge’s approach was fair, simple, and expedient, and the Court of Appeal saw no basis for interfering with it.
With respect to RRSP income, the Court of Appeal made clear that the inclusion of RRSP proceeds in income for child support purposes is not mandatory. Section 17(1) of the Guidelines gives the Court discretion to exclude RRSP income if it is appropriate to do so:
“If the court is of the opinion that the determination of a spouse’s annual income under section 16 would not be the fairest determination of that income, the court may have regard to the spouse’s income over the last three years and determine an amount that is fair and reasonable in light of any pattern of income, fluctuation in income or receipt of a non-recurring amount during those years. [Emphasis added.]” (Paragraph 23)
The trial judge accepted the Wife’s evidence that she used her RRSPs primarily to finance the litigation, not to enhance her lifestyle. The trial judge did not err in his decision to exclude the RRSP proceeds from income as he found that including the RRSPs would not be the fairest determination of the spouses’ financial capabilities for the purpose of support.
In brief, the Court of Appeal rejected the Husband’s various grounds for appeal against the Wife because they attacked the trial judge’s findings of fact, all of which were fully supported by the evidence and the trial judge’s written reasons. An appeal court may intervene only when there is a material error, a serious misapprehension of the evidence, or an error in law. The Court of Appeal chose not to interfere with the trial judge’s determinations in order to bring finality to the parties’ “scorched-earth litigation warfare” (paragraph 2).
As for the third party action against Mr. Spira, the Court of Appeal determined that there was no merit in the appeal. The Court of Appeal accepted the trial judge’s conclusion that Mr. Ludmer’s claims against Mr. Spira “was a form of intimidation and punishment for ‘siding’ with [Ms. Ludmer] in the dispute” (paragraph 61).
In summary, the Husband’s appeal was allowed only to the extent that the trial judge erred in failing to deduct spousal support payable from the Husband’s income for the section 7 calculation. The appeal was otherwise dismissed, with costs to Ms. Ludmer for the Ludmer action and costs to Mr. Spira for the Spira action.