Application of Spousal Support Advisory Guidelines to pre-tax corporate profits
Mason v. Mason 2016 ONCA 725
This recent decision by the Ontario Court of Appeal provides an in-depth analysis of the application of the Spousal Support Advisory Guidelines to pre-tax corporate profits, and the inclusion of same as income for spousal support purposes. The Court of Appeal cautions litigants from automatically accepting mid-range entitlements according to the SSAG, and stresses the importance of the accurate determination of income regarding same.
The parties were married in 1992, and there were two children of the marriage. During the marriage, the parties’ primary source of income was from working at their jointly-owned recreational equipment business. The parties separated in 2011. On the first day of trial, the parties entered into Minutes of Settlement, which resolved all of the issues in their matter other than spousal support. Pursuant to their settlement, the wife’s interest in the business was transferred to the husband as part of equalization of net family property. In total, the wife received $1,636,130.00, with $1 million payable up front, and the remainder payable over five years, with interest of 4% per year.
The issue of spousal support proceeded at trial. The judge held that the husband’s buyout of the wife’s share of the business did not disentitle the wife to spousal support. The trial judge further noted that the wife had enjoyed a high standard of living throughout the marriage as a result of joint efforts in the business, and since she could no longer earn income and benefit from the business, she suffered an economic disadvantage from the breakdown of the marriage. The judge stated that although the wife had the benefit of accumulating capital from the business during the relationship, this capital was not convertible to an income which supported the standard of living she has become accustomed to during the marriage.
In his reasons, the trial judge accepted the wife’s argument that the husband’s income for spousal support purposes should be comprised of both salary, and some component of after-tax corporate profits. In the year leading up to trial, the business sustained an after tax loss of $235,067.00. However, in the 8 years preceding same, the business generated an average annual after-tax profit of $355,000.00 over and above the parties’ salaries and bonuses. The trial judge concluded that the husband’s salary combined with after tax earnings would result in an income of $400,000.00 for spousal support purposes. The wife was attributed with an income of $82,500.00 based on investment income of $40,000.00 – $50,000.00 per year and imputed employment income of $35,000.00 – $40,000.00 per year. The wife was awarded $9,584.00 per month in spousal support, in accordance with the Spousal Support Advisory Guidelines, as the trial judge held there was no reason to depart from the mid-point of same.
The husband appealed the trial judge’s award, and submitted that the judge erred in multiple ways, with those considered in depth by the Court of Appeal to be:
- by focusing his analysis on the provisions of the Divorce Act R.S.C. 1985, c. 3 (2nd Supp.), rather than the provisions of the Family Law Act, R.S.O 1990, c. F.3, the Act under which the wife advanced her claim;
- by attributing income, including corporate profits, to the husband without an adequate basis or explanation and by failing to apply the Ontario Child Support Guidelines, O. Reg. 391/97 (“CSGs”), enacted under the Family Law Act, to the determination of the husband’s income as required by the SSAGs;
In conducting its analysis, the Court of Appeal completed a detailed analysis of the Spousal Support Advisory Guidelines. The Court acknowledged the history of the SSAG, noting that they were developed to create certainty and predictability for spousal support claims brought pursuant to the Divorce Act. However, in practice, there are similarities and overlap between federal and provincial laws regulating spousal support. The Court of Appeal clearly states that under both the Divorce Act and the Family Law Act, the court is required to consider the assets and means that parties are likely to have in the future, and finds no core difference in determining support under either statute.
The Court of Appeal noted that the SSAG provides that the starting place for determining income is the definition of income under the Federal Child Support Guidelines. The core question before the Court was the second argument listed above, whether any portion of the profits of the corporation, now owned solely by the husband, should be included in his income for spousal support purposes. This was particularly challenging in consideration of the substantial loss sustained by the business in the year preceding trial.
In making his submissions to the Court of Appeal, the husband relied upon the Saskatchewan Court of Appeal decision in Bear v. Thompson 52 R.F.L. (7th) 257 (Sask. C.A.) in which the Court determined that corporate income can only be added to income for support purposes where the corporation had pre-tax income, and not a loss, in the most recent taxation year. The husband made the added argument that even if the trial judge was satisfied that pre-tax corporate profits should be incorporated into his income for support purposes, the jurisprudence on point supports including some portion of the average profits over the preceding three years, at most, and that the trial judge’s finding of an income of $400,000.00 did not reflect same.
The Court of Appeal agreed with the husband that the trial judge erred in the calculation of his income by inaccurately applying the Guidelines. As the trial judge was using the SSAG to determine the amount of support, it was necessary for him to use the provisions of same for the purposes of determining income, or to provide an explanation for why they should not apply. As the SSAG are income-based, it is imperative that the methods established by the Guidelines for calculating income are used, otherwise, the resulting calculation may be inaccurate. Essentially, the Court of Appeal notes that there is more involved in applying the SSAG than entering numbers mechanically.
The Court of Appeal found that the trial judge did not provide a sufficient explanation for determining that the husband’s income for support purposes was $400,000.00, and as such, his reasons were inadequate. Imputing income requires a rational basis for doing so, and the amount reached must be evidence-based. Upon analysis of the trial judge’s calculation of the husband’s income, the Court of Appeal found errors.
Accordingly, rather than order a new trial, the Court calculated the husband’s income based on the evidence presented at trial. In doing so, the Court of Appeal referred to s. 17 of the Guidelines which permits a court to consider a payor’s income over the past three years, which includes amounts of pre-tax corporate income that the court considers appropriate to include pursuant to s. 18 of same.
The Court of Appeal acknowledged that application of the Guidelines provisions concerning the addition of pre-tax income has been divided. The Court undertook a careful analysis of Bear v. Thompson, as noted above, and found that the approach taken therein was overly narrow and restrictive. Most notably, in Ontario, the Court found the following at paragraph 163:
“s. 18 permits a court to take an annual snapshot of a spouse’s income – and include in it pre-tax corporate income from the most recent taxation year. If the corporation suffered a loss in the most recent taxation year, no amount of pre-tax corporate income may be included. Under s. 17 however, the court may determine an amount that is fair and reasonable having regard to the spouse’s income over the last three years in light of, among other things, any patter of, or fluctuations in, income over the three-year period. And “income” for that purpose may include amounts of pre-tax corporate income added to line 150 income under s. 18 for each of those years”
Following the above approach, the Court of Appeal found that the husband’s income was $214,872.00 for the purposes of determining spousal support.
The Court of Appeal also conducted a fresh analysis of the wife’s income. In addition to her investment income and employment income, the Court considered that the wife would receive investment income from the equalization payment, and a reasonable rate of return for same would be 4.25%. The Court found the wife’s annual income to be $109,535.00.
With both spouses incomes determined, the Court of Appeal conducted a SSAG with child formula calculation based on a period of marriage and cohabitation totaling 20 years, which resulted in a range of $0.00 to $1,678.00, with a mid-range of $767.00. After analyzing same, the Court of Appeal noted that courts should avoid automatic application of the mid-range, and should examine the factors which would support an order in either the low range, or the high range. For the reasons setout therein, including but not limited to the martial standard of living, the Court determined $1500.00 per month to be appropriate for same in this matter.