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Lorne and Rana, Family Law Founder and Lawyer Vancouver

The long awaited British Columbia case involving, spousal misconduct and BC spousal support, of Leskun came down on June 21, 2006. The BC spousal support case broke ground on the issue of what- if any-  impact should spousal misconduct and its consequences have on spousal support awards and what proof should be required.

One of the most interesting issues moving forward is how should family property awards impact on the entitlement and quantum of spousal support. As divorcing parties acquire more assets through their efforts and inheritances this issue becomes even more important.

Moving to a Refined and Principled Approach to the Consideration of Capital

by Lorne N. MacLean of MacLean Family Law

With baby boomers acquiring more wealth through their efforts and receiving burgeoning inheritances, divorcing spouses are owners of unprecedented amounts of capital. In Leskun v. Leskun 2006 SCC 25, the Supreme Court of Canada dealt with the thorny issue of how capital relates to entitlement and quantum of spousal support. Sadly, in their reasons they ignored the pleas of practitioners to provide guidance on how capital should be considered in child and spousal support cases.

Leskun, Mr. Justice Binnie states:

There is no support in the case law or in logic for the proposition that the Chambers judge was wrong to take into account the appellant’s capital assets acquired after the marital break-up. In Strang v. Strang, [1992] 2 S.C.R. 112, the Court stated that the traditional understanding of the word “means” includes, “all pecuniary resources, capital assets, income from employment or earning capacity, and other sources from which the person receives gains or benefits” (p. 119). J. Payne and M. Payne elaborate as follows:

includes all pecuniary resources, capital assets, income from employment or earning capacity, and any other source from which gains or benefits are received, together with, in certain circumstances, money that a person does not have in possession but that is available to such person.

(Canadian Family Law (2001), at p. 195)

… upon marriage dissolution the payee spouse (here the wife) receives assets and an equalization payment that take into account the capital value of the husband’s future pension income. If she later shares in the pension income as spousal support when the pension is in pay after the husband has retired, the wife can be said to be recovering twice from the pension: first at the time of the equalization of assets and again as support from the pension income. [para. 34]

The appellant says that there was a division of capital by Collver J. at the original trial and that it is unfair that his after-acquired capital should now be tapped to pay the respondent continuing support. The present case does not raise the “double dipping” issue mentioned in Strang and dealt with at length in relation to pension benefits in Boston v. Boston, [2001] 2 S.C.R. 413, 2001 SCC 43. In that case, Major J. described the problem in this way:

31      The appellant’s capital assets at issue here did not exist at the time of the initial division by Collver J. and no issue of “double dipping” arises. As Major J. put it in

32      If a court could not take into consideration after-acquired capital assets in considering a spousal support order it would create a potential injustice. A spouse could (as is alleged here) shield his or her true worth to avoid paying support, even though his or her financial situation is significantly better than that of the other spouse. In this case, for example, the appellant seems to have taken the income he earned working in

It is submitted that this statement is of little use to practitioners as the court did not say how capital should be considered, what amounts fully replace lost income and what amount replaces need, in whole or in part.

The capital position of the parties was not referred to in either Moge or Bracklow, however it was a primary consideration in the Leskun case. Mr. Leskun lost his job which provided him with an income of $200,000+ US per year and had $300,000-$450,000 CDN of net worth, not $1,000,000 as widely reported.

Section 19(1)(e) of the Federal Child Support Guidelines states:

19.  (1)  The court may impute such amount of income to a spouse as it considers appropriate in the circumstances, which circumstances include the following:

(e)  the spouse’s property is not reasonably utilized to generate income;

This paragraph makes it clear that capital itself is not to be included when calculating the appropriate level of child support but rather only the income that it might be properly used to produce. Using capital to pay either child support or spousal support is antithetical to the income principles. It reduces a payor’s ability to generate income and it may have deleterious effects on third parties, including, where applicable, the new spouse and children of a payor in a subsequent relationship who themselves have a preserved one-half interest in the post-separation capital.

The Spousal Support Advisory Guidelines use the same definition for income as the Federal Child Support Guidelines.

4.3.5 Determining income

Income-sharing schemes work directly off income, as income levels essentially determine the amount of support to be paid. Under these advisory guidelines, the accurate determination of income will become a much more significant issue in spousal support cases than it has in the past, and there will be more incentives to dispute income. However, because these advisory guidelines generate ranges and not specific amounts, absolute precision in the determination of income may not be as crucial as under the Federal Child Support Guidelines. Many cases will involve combined claims for child and spousal support, where a precise determination of income is already required for child support purposes.

The starting point for the determination of income under both our proposed formulas is the definition of income under the Federal Child Support Guidelines, including the Schedule III adjustments. This is consistent with current practice. In cases involving combined claims for child and spousal support, the payor’s income, as determined under the Federal Child Support Guidelines, is also the basis for assessing spousal support.

The test proposed for spousal support by the MacLean Family Law Group is in accord with the principles set out in the Federal Child Support Guidelines and the Spousal Support Advisory Guidelines. It was argued by the Appellant that both Guidelines required a firm test to be stated and approved of by the Supreme Court of Canada.

A refined version of the Appellant’s position in the Supreme Court of Canada was that prior to ordering an unemployed payor to use capital to support the recipient spouse, the Court should:

(i) accurately calculate the net worth of the payor and determine if any capital assets have been used to produce income to the payor and for the balance of the assets consider if it is appropriate to impute a notional, historical or expertly calculated income to such assets if they are not prudently invested;

(ii) apply an identical analysis in (i) above to the net worth of the recipient spouse;

(iii) determine the income or historical or expertly calculated income for the payor based on a prudent investment of such assets‚ e.g. net worth x .05 (5% interest);

(iv) apply the calculation in (iii) above to the recipient spouse;

(v) consider other persons in each household who need to rely on the notional income, such as new spouses and children; and

decide if the disparity in notional incomes justifies any payment of spousal support, assuming entitlement has been established.

(vii) The court should also analyze if any assets that could produce income have been improperly disposed of and attribute income on the above analysis.

This income calculation can be added to other sources of income to properly determine the real income of a paying and/or recipient spouse so the court can make a required finding of income for each party.

The only fair method to force an unemployed payor to encroach on capital is to attribute a properly calculated interest income to both spouses‚ capital and apply the above income from capital spousal support guidelines. To force a payor to use his or her capital and not just the attributed notional income on that capital amounts to nothing more than a redistribution of assets. It should also be noted that if the payor is unemployed tax deductibility is not available to the payor as there is no taxable income from which the support can be deducted.

The Supreme Court of Canada applied an analogous analysis to the above income on capital spousal support guidelines‚ in Boston v. Boston [2001] 2 S.C.R. 413 (S.C.C.). Boston, supra dealt with support payments in cases where the payor had retired and was in receipt of pension income after buying out the recipient’s interest in the pension in past property division.

At paragraphs 43, 44 and 54 through 60 in Boston (supra), the Supreme Court of Canada approved of an analysis of investment of capital proposed by Czutrin J. in Shadbolt v. Shadbolt (1997) 32 R.F.L. (4th) 1253 (Ont.Ct.(Gen. Div.)). It was held that the recipient spouse was obliged to invest the capital received from her share of the payor’s pension on the principle that the recipient spouse should attempt to generate economic self-sufficiency. Under a compensatory spousal support order, the recipient has an obligation to use assets in an income-producing way.

In this case, there is very little reliable evidence of what the defendant actually earns or of what should reasonably be imputed to him. The defendant says he has not worked since his stroke, but no medical evidence was called to support the contention that his ability to earn income has been affected. In fact, the defendant was not employed at the time of his stroke and had not been employed for several years. The family lived very well from investment income and/or liquidation of assets when necessary. To the extent that his investments must be properly managed to generate income, the defendant has the assistance of professional advisors.

The Plaintiff wife had stocks and mutual funds worth $1.3 million, mutual funds of $840,000, tax liability of $400,000 and a $1 million house.

The Defendant husband’s assets included $1.2 million in trust, investments of $128,000, RRSP’s worth $188,000, and a $1 million house with a debt of $365,000.

At paragraphs 25 and 26, Smith, J. stated:

A stated objective of the Federal Child Support Guidelines, is to provide children with a fair standard of support that ensures they continue to benefit from the financial means of both parents. It is important that the reference in s. 1 is to the parents’ “means,” because a party’s means include more than income. In its recent decision in Leskun v. Leskun, [2006] S.C.J. No. 25, 2006 SCC 25, the Supreme Court of Canada cited with approval at [paragraph] 29, the following definition:

The word means includes all pecuniary resources, capital assets, income from employment or earning capacity, and any other source from which gains or benefits are received, together with, in certain circumstances, money that a person does not have in possession but that is available to such person. (Canadian Family Law, (2001), at p. 195)

The court then cited Leskun and made a review order under s. 15.1(4) of the Divorce Act (26      Applying that definition, I can consider the fact that the defendant owns a house, which he is able to borrow against. He chose to put the house in joint tenancy, although he was the only one to pay for it. He also chose to spend money on renovations. I can also consider the fact that he has historically had, and likely will continue to have, some access to his family’s resources. However, on the state of the evidence any attempt to quantify those benefits would be pure speculation.

Having regard to the Supreme Court of Canada’s warning, I believe this is a case where there is “genuine and material uncertainty.” If the order I make is open to review in approximately one year, there should by then be evidence of the income generated from the defendant’s investments. If the plaintiff at that time believes the defendant’s assets are not being managed appropriately to generate income, she will be in a position to call opinion evidence about what different management could have produced over that period. Both parties expressed the hope that, once the litigation is resolved, they will be able to develop a more co-operative attitude toward shared parenting. I am well aware that by making a review order I may be delaying that process, but I do not see any reasonable alternative on the state of the evidence.

The court ordered a reviewable child support payment of $4,000 per month, being slightly above the $3,598.20 that was based the $23,000 monthly income that the husband told his bank that he earned.

Smith, J. went on to say at paragraph 32:

Either party will have liberty to apply for a review of that amount after

This case focuses on income as Child Support Guidelines and Spousal Support Advisory Guidelines mandate. One important difference should be noted in the wording of s. 15.1 and s. 15.2. The child support sections, except for 4, 7, and 9 do not mention the phrase take into consideration the condition, means, needs and other circumstances of the spouse

This may allow a broader consideration of capital but the question remains: how do we calculate the benefits?

It is hoped that this paper will help move family lawyers to a refined and principled approach to calculating the impact of capital assets in child and spousal support cases.

April 30, 2007

the date by which they must both file their personal tax returns for 2006. The parties will provide each other with those tax returns, as well as any corporate or trust tax returns filed on or before that date. In the interim, the parties will also provide each other with copies of any monthly statements from banks, brokers or other financial advisors showing the state of their investments and the income received from those investments, including interest, dividends and capital gains. The hearing of the review application will be preceded by a judicial case conference to ensure there are no outstanding disclosure issues when the application is heard.

Canada

Griffiths v. Griffiths
2006 BCSC 1077 – 12 year marriage. Attribution of income for child support. Income of $276,000 imputed, with a review in one year so the matter could be re-examined on better evidence regarding investment income. The parties were ordered to provide updated financial information. At paragraph 12, Mr. Justice Smith stated:

Griffiths

a decision Mr. Millar was involved in.

Chicago

and invested it into a bagel business. Morrison J. estimated that his investment in that business was worth as much as $230,000. To say this asset cannot be taken into consideration would not reflect the true “means, needs and other circumstances” of the parties as required by s. 15.2(4) of the Divorce Act.

Boston

at para. 64 “the court should … focus on that portion of the payor’s income and assets that have not been part of the equalization or division of matrimonial assets when the payee spouse’s continuing need for support is shown” (emphasis added).