nan QUEEN’S BENCH FOR SASKATCHEWAN Citation: 2006 SKQB 446 Date: 2006 10 02 Docket: DIV. No. 002479/2005 Judicial Centre: Melfort, Family Law Division BETWEEN: RAELYN DIANE KNUDSON, and KIRK HAROLD KNUDSON, Counsel: Mark R. Carson for the petitioner Melvin R. Annand, Q.C. for the respondent JUDGMENT MILLS J. October 2, 2006 [1] The parties met, married, made children and then separated. The petitioner mother has custody of the three children. She is employed with local auctioneer. The respondent father, before, during and after the relationship, is part of farming partnership with two brothers and two cousins running mixed grain and cattle operation. They have not settled division of the matrimonial property. Issues [2] What amounts, if any, are to be added to the sources of income set out in the father’s total income in his T1 General form to come to the appropriate level of income for the purpose of calculating child maintenance payments? The individual items are as follows: (i) non‑arm’s length salaries; (ii) personal expenses claimed as farm expenses; (iii) capital cost allowance on real property owned by the father; (iv) capital cost allowance on personal property owned by the father; (v) personal expenses claimed in partnership returns as farm expenses; (vi) capital cost allowance on real property owned by the partnership; and (vii) capital cost allowance on personal property owned by the partnership. [3] The parties have approached this case on the basis that the most representative and fairest method of determining this self‑employed father’s income is three‑year average under s. 17 of the Federal Child Support Guidelines [Divorce Act Regulations, SOR/97-175] (the “Guidelines”). The father’s income has fluctuated significantly in the last three years, and the inherent nature of farming is such that it is more appropriate in the circumstances of this operation to use three‑year average. In assessing each of the issues, will deal with them on year‑by‑year basis. Although the general rationale will apply to all the issues, the individual amounts will differ by year. (i) Non‑arm’s length salary [4] Under Schedule III, paragraph of the Guidelines, the non‑arm’s length salary paid in 2003 of $15,000 is to be added back into income unless the father establishes the payments were necessary and reasonable. There is evidence that the mother did perform services for the farming operation, mostly in the nature of bookkeeping, but no indication was provided as to whether the amount paid was reasonable. Given that in 2004 the amount of salary was $5,000, it would appear that the amount paid in 2003 and the healthy income to the farmer otherwise in that year, was means of splitting income, and as such, it has not been established that the value of the salary for 2003 was $15,000. It appears to me that more appropriate amount would be $5,000 utilized in 2004. In 2003, there will be added back income in the amount of $10,000 for non‑arm’s length salary. In 2004, no amount will be added back as the $5,000 appears to be reasonable amount. No claim was made for non‑arm’s length salary in 2005. (See Poff v. Fenell (1998), 1998 CanLII 13796 (SK QB), 173 Sask. R. 275 (Q.B.).) (ii) Personal expenses claimed as farm expenses [5] The father has expensed electricity, home heat, telephone, meals and office expenses of $4,675, some of which should be added back to income. It is clear in 2003 the father, in fact, added back $2,678 of these expenses based on certain percentages being allocated to personal use. In 2003, the total amount claimed on the return for business expenses is $2,000 and appears to be appropriate. It has not been established that the expenses claimed in 2003 in this area are not legitimate costs involved in running the farm enterprise. [6] The mother further wishes to have the sum of $2,000 of horse expense added back to income. The evidence does not support this approach. [7] In 2004, the amount claimed is similar to what have allowed in 2003 and is acceptable. [8] In 2005, the amount claimed is lower than the previous two years and is acceptable. (iii) Capital cost allowance on real property owned by the father [9] Schedule III, paragraph 11, of the Guidelines provides for the adding back of this expense claimed. Both counsel agree for 2003 the amount to be added back is $18; for 2004, $17; for 2005, $15. (iv) Capital cost allowance on personal property owned by the father [10] The decisions in Rudachyk v. Rudachyk (1999), 1999 CanLII 12271 (SK CA), 180 Sask. R. 73 (C.A.), and Beeler v. Beeler (1997), 1997 CanLII 10925 (SK QB), 161 Sask. R. 167 (Q.B.), acknowledged that capital cost allowance can be legitimate expense of self‑employed individual and should not be added back to income without some evidence to show all or part of the deduction is not appropriate. [11] In 2003, the majority of the claim by the father in this regard relates to his motor vehicle. He acknowledges portion of the vehicle is used for personal use and states that portion to be 10 percent. The mother says that the portions claimed as personal use should be 50 percent. Evidence was led by the father that he used the vehicle to efficiently combine personal and business use whenever he could. In looking at the last three years in total, the truck cost was listed at $23,283 with depreciation taken of $18,855 to date. The father testified he intends to use the truck for further significant period of time. The full amount claimed for capital cost allowance is not necessary for the replacement of the vehicle. This along with significant personal use of the vehicle makes it reasonable to add back 50% of the capital cost allowance claimed in each of the years in question which will result in an addition to income in 2003 of $2,882; in 2004, $3,829; in 2005, $2,733. (v) Personal expenses claimed in partnership returns as farm expenses (vi) Capital cost allowance on real property owned by the partnership; and (vii) Capital cost allowance on personal property owned by the partnership. [12] The next three categories involve the mother’s request to add back to the father’s personal income the amounts claimed in the partnership and then allocated to the individual partners. The analysis here is substantially different than that contained in the father’s personal farming statement. The father’s income tax return includes personal farm component which consists of much smaller income and expense statement on matters that are totally within his control and for which all benefits accrue to him. His tax return also includes the partnership statement which shows the same types of income and expenses but on partnership basis. There are five partners involved, two are his brothers, and it may be argued he has some substantial influence on them. The other two are his cousins. There was no evidence to suggest that the income statements of the partnership are fashioned in such way to reflect an inaccurate picture on cash basis of the operation of the farm partnership. There is nothing to suggest that the partnership is organizing its expenses or distribution to artificially lower the income of the father. This is not situation where the father is sole shareholder in corporation, and different analysis of add‑back becomes appropriate because of the benefit accruing in the corporation to the sole shareholder. This is not situation in which there is majority ownership in the partnership which would allow the father to control the activities of income distribution or asset purchase. There is nothing in the Guidelines to suggest that should be adding back any of the partnership amounts to the income of the father automatically. [13] The case law which focuses on the reasonableness of the expense as it relates to capital cost allowance and alleged personal expenses claimed on partnership returns acknowledges that these are legitimate expenses used to reduce income unless it is shown that they are unnecessary or unreasonable. There is nothing in the evidence that would lead me to the conclusion capital cost allowance being claimed by partnership is inappropriate or, indeed, that any of the expenses or accounting functions utilized by the partnership do not reflect the partnership business over the long term. Therefore, am not prepared to add back to income in any of the three years the amounts indicated in items (v), (vi) and (vii) by the mother. [14] therefore find that in 2003, 2004 and 2005 the income of the father is as follows: $12,822 Non-arm’s length salaries nan Capital cost allowance on real property 15 Capital cost allowance on personal property 2,733 Total income $15,570 [15] This total income averaged over three years comes to $29,983 each year. ear. The amount of maintenance payable is $568.00 per month. [16] The next issue becomes the starting date of this payment. The chambers judge, when setting the initial interim child support in October 2005, had significant difficulty in the affidavit evidence in coming to an appropriate determination of maintenance payable. [8] It is far from certain, at least for the purposes of this interim application, that the maintenance of $728 previously agreed (which represents an income of $40,000) is categorically wrong. It may well be, in final analysis, high or low but adjustment can be made in the account between the parties in due course. [17] It was argued by the father, and clearly contemplated by the chambers judge that an adjustment of child maintenance should take place when the issue was finally determined. When making the order in 2005, the chambers judge relied on the financial information in the years 2002, 2003 and 2004; however, review of the 2002 return shows his income level to be roughly similar to that in 2005. Therefore, the maintenance amount of $568.00 would have been appropriate in October 2005, and in accordance with the chambers judge’s comment, the adjustment can be made at this time. Assuming that the father had been making the maintenance payments as ordered, he will be in small credit position which he can offset against ongoing maintenance but in amount no greater than $50.00 per month so as not to cause any inappropriate financial hardship on the children. When arrears by the payor occur, this Court often allows those arrears to be paid monthly. see no reason why the overpayment by the payor should not be treated in the same fashion in these circumstances. [18] At the conclusion of the trial, an order for divorce, custody and access was made by consent. The issue of property division was adjourned to future trial date. The orders flowing from this trial are as follow (a) The respondent’s income is determined to be $29,983, and he shall pay to the petitioner for the support of Reidar Knudson, born December 18, 1998, and Bronwyn Knudson and Kadence Knudson, both born August 9, 2000, the sum of $568.00 per month commencing October 1, 2005, and continuing every month thereafter until a child is no longer a child within the meaning of the Divorce Act, R.S.C. 1985, c. 3 (2nd Supp.), provided that if he has overpaid child maintenance to this date, he may offset the overpayment against future maintenance payments but only to the extent of $50.00 per month so that the maintenance actually paid will not drop below $518.00 per month until the overpayment has been extinguished. (b) The income of the petitioner is found to be $24,300. (c) The respondent shall be responsible for 56 percent of the s. expenses, which, by agreement of the parties, consist of the non‑subsidized childcare and any health and medical costs in excess of $100.00 per annum. The payment of s. expenses in the percentage indicated shall commence on October 1, 2005, and in the event any shortfall exists in payment of s. expense payments by the respondent, they are payable forthwith. (d) The petitioner and the respondent are ordered to provide the other with copies of their income tax returns, including all schedules and partnership statements, no later than June 15, 2007, and by the same date in each year thereafter. [19] Although did not detect any animosity from the parties during their testimony, did detect lack of cooperation between counsel. This is one of those files where it appeared that the holding of trial, in fact, was more efficient and cheaper method of coming to conclusion regarding the issue of maintenance than ongoing negotiation or pre‑trial. Each party achieved partial success in their approach before me, and as such no costs are awarded to either.
The respondent father is part of farming partnership with two brothers and two cousins running mixed grain and cattle operation. Division of the matrimonial property is at issue. The issues include what amounts, if any, are to be added to the sources of income set out in the father's total income in his T1 General form to come to the appropriate level of income for the purpose of calculating child maintenance payments. HELD: 1) The father's income has fluctuated significantly in the last years, and the inherent nature of farming is such that it is more appropriate in the circumstances to this operation to use year average. 2) Non-arm's length salary will be added back into income unless the father established that payments were necessary and reasonable. In 2004 the amount of salary paid to the mother for bookkeeping was $5,000. It would appear that the $15,000 paid in 2003 was means of splitting income. $5,000 appears to be reasonable amount. 3) Some of the personal expenses claimed as farm expenses such as electricity, home heat, telephone, meals and office expenses should be added back to income. The father has added back portion of these expenses based on certain percentages being allocated to personal use. It has not been established that more amounts need to be added back. 4) The majority of the capital cost allowance on personal property owned by the father relates to his motor vehicle. He states the personal use of his truck is 10%. The full amount claimed for capital cost allowance is not necessary for the replacement of the vehicle. This along with significant personal use of the vehicle makes it reasonable to add back 50% of the capital cost allowance claimed in each of the years in question. 5) The mother has asked that the Court add back to the father's personal income the amounts claimed in the partnership and then allocated to the individual partners. The father's income tax return includes personal farm component which consists of much smaller income and expense statement on matters that are totally within his control and for which all benefits accrue to him. His tax return also includes the partnership statement which shows the same types of income and expenses but on partnership basis. There are five partners involved, two are his brothers and the other two are his cousins. There is no evidence to suggest that the income statements of the partnership are fashioned in such way to reflect an inaccurate picture on cash basis of the operation of the farm partnership. There is nothing to suggest that the partnership is organizing its expenses or distribution to artificially lower the income of the father. This is not situation where the father is the sole shareholder in corporation. This is not situation in which there is majority ownership in the partnership which would allow the father to control the activities of income distribution or asset purchase. There is nothing in the Guidelines to suggest that the Court should be adding back any of the partnership amounts to the income of the father automatically. There is nothing in the evidence that would lead the Court to the conclusion capital cost allowance being claimed by partnership is inappropriate or indeed that any of the expenses or accounting functions used by the partnership do not reflect the partnership business over the long term. The Court was not prepared to add back to the income of the father the personal expenses claimed in partnership returns as farm expenses, capital cost allowance on real property or personal property owned by the partnership. 6) The total income averaged over 3 years comes to $29,983 each year. Child maintenance shall be paid on that amount.