 “> |
| Georgialee A. Lang |
A recent family law decision from the British Columbia Court of Appeal is instructive in regard to business expenses and their role in determining a party’s income for child and spousal support purposes.
In M.T. v. J.S. [2023] B.C.J. No. 227, a high-profile real estate agent and his wife had been engaged in high-conflict litigation, eventually resolving many of the outstanding issues by consent and later obtaining final orders after an 11-day trial.
However, M.T. was not satisfied with the trial judge’s orders with respect to her husband’s income, arguing that the trial judge erred by failing to add back certain business expenses to his income.
The parties had been married for 19 years and raised four children. M.T., who was also a licenced realtor, assisted her husband, but her role was secondary as she was primarily responsible for their children and the home.
At the time of their separation, the parties faced the reality of a weakening real estate market and the expense of managing two homes instead of one. J.S.’s annual income over the four years between 2016 and 2019 ranged between $600,000 and $2.9 million.
M.T. submitted that the trial judge erred by considering the issue of business expenses from the perspective of s. 19 (1) (g), rather than s. 18 of the Child Support Guidelines.
Section 19(1)(g) provides:
The court may impute such amount of income to a spouse as it considers appropriate in the circumstance, which circumstances include the following:
(g) the spouse unreasonably deducts expenses from income;…
Section 18 reads:
In determining the pre-tax income of a corporation for the purposes of subsection (1), all amounts paid by the corporation as salaries, wages or management fees, or other payments or benefits, or to or on behalf of persons with whom the corporation does not deal at arm’s length must be added to the pre-tax income, unless the spouse establishes that the payments were reasonable in the circumstances.
M.T. argued that if the court had applied the correct section, deductions for her husband’s meals, entertainment, cell phone and vehicle expenses would be added back to his income for the purpose of child and spousal support. She submitted that the court had used s. 18(2) to add back salary and dividends but failed to utilize the section to add back the business expenses.
She pointed out the significance of the alleged error, noting that s. 18 (2) is mandatory, dictating that benefits “must be added back to the pre-tax income,” while s. 19 (1) (g) was permissive, “a court may impute income as it considers appropriate in the circumstances where the spouse unreasonably deducts expenses from income.” She argued that the difference in these provisions was crucial in respect of the burden of proof, which fell on the spouse claiming business expenses to reduce guideline income under s. 18.
The appeal court did not accept M.T.’s analysis finding that where business deductions are in issue, the spouse claiming the deductions will bear the burden of establishing that they are reasonable deductions under both ss. 18 and 19. Further, the court said that the spouse asserting that business expenses should be added back to income must “put that in issue in their pleadings by identifying the specific expenses being challenged,” with the burden of proof on the spouse claiming the deductions.
The appeal court also noted that there was a long line of cases that recognized that business expenses could be addressed under either s. 18 or s. 19, including Dornik v. Dornik [1999] B.C.J. No. 2498 at paras. 14 and 20-25; Hausmann v. Klukas [2009] B.C.J. No. 121; and Ursel v. Ursel [2014] B.C.J. 1366. While s. 19 is the only option where a sole proprietorship or partnership is in issue, either s. 18 or 19 can be used when the spouse is a shareholder, director or officer of a corporation.
M.T. also argued that the trial judge had conflated the test for the reasonableness of an expense with the test for the reasonableness of a deduction under the Income Tax Act. The trial judge’s analysis was found in paras. 67 and 70 of the Reasons in M.T. v J.S. 2020 B.C.J. No. 230, as follows:
[67] Under the ITA, no deduction in respect of an outlay or expense may be made in computing income from a business “except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business”: ITA s. 18(1) (a). Further, as a general limitation, a deduction is only allowed “to the extent that the outlay was reasonable in the circumstances”: ITA s. 67 (1).
[70] It was not put to the respondent that he improperly certified the relevant tax returns or claimed expenses that he did not believe were made for the purpose of gaining or producing income. Tax evasion is a serious allegation which goes to both an individual’s personal reputation and business reputation. Any such assertion should have been squarely put to the respondent in order to maintain such an assertion.
The result of the trial judge’s findings was that he determined that the business expenses were incurred for the purpose of earning income and that J.S. had not claimed personal expenses for either accounting or business purposes.
The Court of Appeal concluded that the trial judge had erred in law by asking the wrong question. The legitimacy of an expense deduction under the Income Tax Act is a relevant consideration, as an expense not recognized as valid under the Act will not likely be a reasonable business expense for the purpose of ascertaining guideline income; however, the inquiry must not end there.
The question to be asked is whether the business deduction includes expenses that provide a person with a personal benefit or constitute a living expense that would normally be paid from a party’s income, such as meals, telephones, Internet and vehicle expenses.
The trial judge had declined to add back to J.S.’s income expenses for meals, golf club fees, car lease and insurance payments, and cell phone costs, totaling $86,456. The Court of Appeal accepted M.T.’s position that 50 per cent of those expenses should be added back to J.S’s income, the sum of $43,000, resulting in a 2019 income of $623,000.
In Ursel v. Ursel, supra, Justice Jacqueline Dorgan summarized the rationale behind ss. 18 and 19, saying that these sections were designed to permit the court to lift the corporate/business veil to ensure that the income stated by the payor spouse reflected all monies available for support, a foundational principle of the guidelines.
**This article was first published in Law360 Canada at law360.ca
Lawdiva's Blog 