A Division of Pension Assets Based on the Period of Cohabitation, Not Marriage

Elliston v. Elliston, 2015 BCCA 274

This recent case from the B.C. Court of Appeal upheld an earlier decision where the trial judge elected to divide a pension in a divorce proceeding based not on the period of marriage, but on the period of cohabitation.

The parties began cohabiting in 1992, but didn’t marry until 2008 and eventually separated in 2012. The Appellant husband was a member of the Canadian Armed Forces and over the course of their period of cohabitation and marriage the two moved around the country a number of times in order to accommodate his career. The Respondent wife had comparatively small earnings, partly as a result of a workplace injury early in their relationship that resulted in her receiving workplace compensation benefits.

Both the lower court and the Court of Appeal noted that the division of a military pension is performed subject to a number of statutes, including portions of the B.C. Family Relations Act, the Pension Benefits Division Act, and the Division of Pensions Regulation (another B.C. statute). The Courts found that through the interplay of the relevant sections of these acts, a military pension is to be divided based on the couples’ period of cohabitation unless doing so would be unfair, having regard to a number of factors.

The Court found that the onus was on the Appellant husband, “to establish that an equal division based on the entire period of cohabitation would be unfair to him.” At trial, the judge found as a fact that the respondent wife did contribute to the pension and that there was a clear evidentiary basis to construe her support of her husband’s advancing career as a contribution to the pension, a family asset.

Undisclosed Income

It’s not often that we use this space to talk about developments in the Tax Court of Canada, but a recent case has brought forward an issue that we end up seeing time and again in personal injury and family law disputes: real versus declared income.

In Truong v. the Queen[1], the appellant reported annual earnings of around $40,000 from his work as a casting inspector. After receiving a tip that the appellant was living beyond his means, the CRA initiated an investigation and learned that he had been convicted of possession with the intent to traffic marijuana. Clearly, the appellant elected not to report income from these illegal activities.

Since income was not reported from these activities, the CRA had to determine the additional unreported income indirectly from a number of other sources – sadly, the appellant neglected to keep detailed financial records from his trafficking business. In determining an appropriate level of income to impute to the appellant, the CRA examined the income and expenses of his girlfriend – who could not have financed her personal expenditures without assistance – and real estate properties held in other individuals’ names, for which evidence existed that implied the appellant was using them in order to generate rental income.

Imputing Income in Personal Injury Matters

Calculating damages in personal injury cases is an exercise in weighing possibilities; we need to ask ourselves realistically, what could the injured have possibly earned in the absence of their accident? The answer to that question is largely based on the available evidence, including their background, education, economic conditions and what is often the most important piece of evidence, their earnings history.

Reported income is one of the bedrocks upon which a personal injury claim is based. In motor vehicle collisions, for example, the injured plaintiff is compensated by their insurer by way of benefits that are based on their income. If this bedrock is not solid, the injured party stands to lose both their income replacement benefits in the short-term, and any future damage awards further down the road. A plaintiff’s personal injury claim without sufficient evidence to establish their true income is akin to building the proverbial house on a bed of sand.

Individuals from all stripes will work to minimize their income for tax purposes, using a variety of strategies ranging over the entire spectrum of legitimacy. Because it is usually difficult for a salaried employee to minimize their income these individuals are usually business owners or contractors with the flexibility to deduct personal expenses and engage in unreported cash business. When we encounter a client whose income is in dispute prior to being injured, our first order of business is to develop a case that supports their true earned income.

How do we do this? It isn’t always possible to construct a purely evidentiary argument; detailed financial records may not exist. What we will usually end up with is a scenario based in part on the available financial information and using other, indirect evidence of additional unreported income. An example will help to illuminate this process.

Consider a client that had not reported income for at least five years prior to being injured in a motor vehicle accident. The client states that he had been working as a tradesman, but was paid in cash from an employer that also ran an entirely cash business. He also earned income from other cash sources: renovating houses in his spare time and purchasing, renovating and then selling homes for a profit.

Let’s start with the evidence: we would ask for copies of cheques issued by his employer in order to corroborate his employment income. In addition, bank statements, credit card statements or any copies of receipts from home improvement retailers like Home Depot and other home renovation supply stores would serve to provide some evidentiary basis for the income that he earned renovating houses. And finally, mortgage documents and agreements of purchase and sale would demonstrate a history of real estate income that wouldn’t necessarily need to be reported for income tax purposes.

Personal cheques may not be as reliable as a T4, but they are at least indicative of some level of employment income; receipts and invoices from Home Depot could suggest a little more than a passing fancy for hardwood floors and granite countertops, particularly if the expenses are substantial; and mortgage documents are not only evidence of gains made on buying and selling homes, but they can also be used to deduce some basic level of income because banks will not lend unless they can be assured that the borrower has the resources to pay them back.

So, we’ve managed to cobble together individual pieces of evidence from a number of sources in order to construct what looks like a picture of this person’s income. It’s an admittedly fuzzy picture, but the general form is there. The question we need to ask and answer is, “Is this reasonable?” Let’s say our analysis resulted in us attributing annual income to our client of about $40,000, a huge jump from the $0 they claimed for income tax purposes. In light of that fact, it’s important to take a step back from the details and examine this scenario we’ve created so that the Courts and we can judge whether or not our calculations bear any resemblance to reality.

Now, the words ‘reasonable’ and ‘reality’ are a little bit vague in this context, but let’s agree that it would be neither reasonable nor realistic to impute $100,000 of income to a single parent living in community housing. If we think about it this way, a nice way to test the reasonableness of our conclusions would be to compare our client to his neighbours using statistical data.

So if we were to summarize the process through which we would impute income to a client that had previously underreported their income for tax purposes, we could liken it to penning a novel. The first part – using bills, mortgages, and other pieces of evidence to construct our argument – is akin to writing the plot. We’re using little bits of information in order to develop a story about Mr. or Mrs. X and what they do for a living. The second part – evaluating how they compare to similar individuals around them – should establish for the reader (read: the Courts) that this is a work of non-fiction. Our case needs to look more like a biography than Alice in Wonderland, so it’s important and hopefully evident that the narrative needs to be consistent and that both parts are integral in making that happen.

This process need not be limited to personal injury matters; it can, for example, also be applied to self-employed spouses in a family law matter or in proving or defending criminal charges such as in Mr Troung’s case. The techniques described in this article are even used by Canada Revenue Agency in establishing a taxpayer’s undisclosed income. The key to using these methods successfully lies in obtaining quality evidence and employing experienced and knowledgeable financial experts.

Let the experts at Krofchick Valuations assist you in creating a case built on a solid foundation. We employ the skills of forensic economics, business valuations, investigative accounting, and actuarial science to assist in assessing and quantifying your clients’ economic position. Let the experts at Krofchick Valuations help you resolve your case in a timely, efficient, and professional fashion and see why We Make The Difference.

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[1] Truong v. The Queen, 2011 TCC 72.

Simple Divorce NOT Always So Simple

My spouse and I thought our divorce was going to be rather simple but it seems to be getting more complicated and contentious since we both hired lawyers to represent us. Can you suggest ways we can reduce the tension and cost?

Ending a marriage after having shared years of your life with your spouse is, in and of itself, an emotionally trying experience. Many divorcing spouses will pile on additional emotional and financial costs by hiring their own lawyers and financial experts in what often ends up as years of combative communications, billable hours, conflicting reports, and court appearances. The emotional and financial toll can be devastating.

Spouses often go through this ordeal because they’re not aware of any other way to settle their differences outside of this sort of adversarial approach.

However, spouses that are separating on good terms might want to consider the less costly and more efficient collaborative approach to divorce. Collaborative Practice is a voluntary dispute resolution process that is non-adversarial, mutually respectful and solutions-oriented. Spouses work together on the issues with their lawyers present for guidance and advice.

Because a collaborative approach to divorce is predicated upon both parties’ commitment to conduct negotiations in good faith, voluntarily disclose all relevant information, remain focused on the best interests of children, and reach creative resolutions that best address the goals and priorities of the family, they can regularly be less of an emotional burden than traditional, and often adversarial methods traditionally employed in a marital breakdown.

Costs are saved not only by avoiding the expensive court proceedings that so often accompany a divorce, but where differences do arise – say in conflicting opinions of the value of a spouse’s business – the parties can agree to jointly retain relevant experts rather than bearing the cost of their own professionals.

Collaborative professionals operate in a wide variety of specialties, including legal professionals, mental health professionals, mediators, and Chartered Business Valuators, like us. All collaborative practitioners must have completed an approved training program and so are specially trained to assist in matters like these.

You can find us and other collaborative practitioners on Collaborative Practice Toronto (http://www.collaborativepracticetoronto.com) 

Article originally published in Divorce Magazine 

Anyone want to buy a business? It appears not - The Globe and Mail

http://www.theglobeandmail.com/report-on-business/small-business/sb-managing/succession-planning/anyone-want-to-buy-a-business-it-appears-not/article4102129/

Owning and running a small business is considerably different from selling a business.  There needs to be a lot of preparation to make a company saleable.  It is important to pre-plan and start organizing the business so it can be sold.  Many entrepreneurs have much of the business operating based on their knowledge.  But what happens if they are not available to run the business? Obviously problems for a prospective purchaser.  Organizing and optimizing a business for sale is an entirely different set of skills than are used in managing that business.

Self-Employed Spouse

My husband and I are getting a divorce and I’m worried that I won't get the amount of spousal support I’m entitled to. He runs his own business and we’ve always had plenty of cash and lived a very good lifestyle, but I know from our years together that he’s always reported lower income for tax purposes than he typically earns. How can I ensure I’m paid my fair share?

One of our most common assignments in a family law context is the calculation of income for support purposes. This is often referred to as an income valuation, income determination, or support calculation Because self-employment allows for numerous deductions that reduce taxable income, spouses that own their own businesses will often report earnings on their income tax returns that may not accurately reflect their lifestyles. This can pose problems when couples go through a divorce because one of the objectives of support payments, which are based on the Federal Child Support Guidelines, is to establish a fair standard of support.

There are typically two ways that income is underreported: overstating expenses and undeclared revenue.

The Guidelines provide a number of examples of expenses that should be added back or adjusted in order to give a truer representation of the income a spouse has available for support payments. For example, spouses that employ friends or family members and pay them wages over and above market rates for the same work will have to restate these wages when calculating their income for support purposes; we’ve also encountered spouses that deducted rental expenses for storing files or supplies in their own homes, and these expenses would also need to be added back. Any personal expenses that a spouse has been paying through their business are also included in their income, as well as an additional amount that reflects the benefits they received in doing so by paying lower taxes.

Unfortunately, the Guidelines make no mention of any provision for undeclared income. Some spouses conduct some or all of their business activities in cash and there may not be a paper trail recording these transactions. Income Tax Authorities will assess a taxpayer on unreported income using a net worth assessment to show that the income they reported could not account for their lifestyle or the increase in their personal equity (their assets, less their liabilities). The challenge with unreported revenues lies in presenting a convincing enough argument that this additional income exists; if you can make the case compellingly enough the Courts will often impute some additional income. Making this case often relies on evidence that demonstrates your spouse’s lifestyle, including reviewing their bank and credit card statements, mortgage payments, and credit applications to see if their stated income supports their obligations and their standard of living. Attention has to be directed to the assets and liabilities at an opening and closing period and the resulting changes therein.

Finally, if after all of the above, the Courts find that your spouse’s income as calculated using the adjustments set out above doesn’t fairly represent the income available to them for the purpose of child support, and if they are a shareholder or director of a corporation, the Courts can impute some or all of the Corporation’s net earnings to their income. This is a helpful provision even in cases when income hasn’t been historically underreported; sometimes, spouses will continue to pay themselves a management salary but leave additional earnings in a business to try and reduce the income available for support. However, unless they can demonstrate that their business needs these funds – perhaps for a future expansion, or the purchase of new equipment – the Courts may reject these attempts to shelter funds when they could easily be withdrawn by the shareholder and available for support.

Vows of Arbitration - Grosman v. Cookson

An Ontario court of Appeal has confirmed that a matter dealt with by family law arbitration will resist invitations to intrude into family law arbitration and will restrict parties to the private arbitration they originally selected. In Grosman  v Cookson (2012) O.J. No. 4203 this matter was dealt with the couple chose mediation to resolve separation issues such as spousal support which indicated if a party wanted to vary support they would apply to mediation/ arbitration. Grosman after some years indicated he was retiring and applied to mediation to vary the support.  The mediation failed and Grosman stopped paying support. Cookson filed the separation agreement with the court as permitted by the Family Law Act. Under this act the separation agreement provisions were deemed to be an order enforceable by (FRO) the Family Law Act. FRO began enforcing and took steps to suspend Grosman's license.

Grosman brought a motion for an order to refrain from lifting his license and to vary spousal support. Cookson responded by bringing a motion for summary judgment. It was ruled by the motions judge that Cookson could not seek the courts assistance to enforce but had no authority to vary. Cookson appealed and the Court of Appeal overturned the motions judge and granted her summary judgment.

Once a support agreement has been filed for enforcement, even if arrived by private mediation or arbitration it can be enforced using the court system. The courts have the authority to enforce a spousal agreement even if the power to vary it lies with an arbitrator.  The parties are simply required to apply for variation in the arbitration process and then apply to the courts for enforcement.

http://www.lawyersweekly.ca/index.php?section=article&articleid=1777 By Sarah Boulby

New Accident Benefits Rules

September 2010 ushered in what should prove to be some of the most significant changes to the Statutory Accident Benefits Rules (S.A.B.S.) in many years. Of particular note, the changes to the manner in which Income Replacement Benefits, or IRB’s, are to be calculated will affect every single driver on the road, though as we’ll show, some will be affected more than others.

Let’s consider John, an employed forklift operator earning $40,000 per annum. John’s been injured in a motor vehicle accident and hasn’t been able to return to work; his only income is in the form of short term disability benefits from his employer in the amount of $200 per week. How would we calculate John’s weekly IRB’s?

In essence, the new rules calculate IRB’s in exactly the same way as the old rules did, except we now have to replace the phrase ‘80% of net weekly income’ with the phrase ‘70% of gross weekly income’. We follow the same rules and the same steps; we just don’t have to worry about calculating income taxes. Let’s see how this subtle change affects John’s weekly IRB’s before and after the new rules came into effect:

Old Rules Versus New Rules

The new rules have been kind to John. The weekly difference of $46.53 begins to add up over time, totalling over $2,400 per year of additional, non-taxable income. Good news for drivers, right?

Not So Fast

IRB calculations under the new rules may end up being unkind to individuals earning lower income. Consider how IRB’s are calculated under the new rules: instead of using 80% of net income, we now use a lower benefit percentage of 70% but you won’t have to worry about making all those statutory deductions for income taxes, C.P.P. and E.I. payments. As we start considering lower and lower incomes though, those deductions start becoming smaller and 70% of gross income starts looking a lot less attractive than 80% of net. Lower income earners may also get hit twice, as they are also less likely to benefit from an employer sponsored disability insurance plan.

Consider our friend John, hit by the recent recession and downturn in manufacturing employment only able to secure part-time employment earning $200 per week with an employer that doesn’t provide disability insurance.

Section 7 (5) - What It Will Mean

It’s a small difference. The new rules will see John net a total of $11.25 per week less than he would have under the old methodology, but that’s $11.25 someone like John can’t afford on his meagre income. The new rules will have effectively cost John $585.00 for each year he receives IRB’s or 5.63% of his pre-accident income.

One provision of the new rules in particular has caught our attention: Section 7 (5). This provision requires an insurer to pay for the preparation of IRB entitlement reports with a cap of $2,500, effectively placing the risks and costs of challenging IRB payment amounts in the hands of the insured should additional information become available or circumstances change. We have identified a number of scenarios where the inclusion of this additional provision under the new rules may have adverse financial consequences to insured persons.

Self-employed individuals frequently require adjustments to their weekly IRB’s in light of the fact that their income is rarely earned on a consistent basis. As time passes, they may be operating at different working capacities as they learn to adjust to their injuries or start withdrawing from their business. As such, their entitlements may change from year to year or even more frequently, necessitating a recalculation of their benefits at each time. In light of the new provision set out in Section 7 (5), an insured person may be forced to weigh the cost benefits of commissioning new reports given that their financial liability for doing so has been greatly increased.

Government employees or union members may also be affected due to the number of benefits they may have available to them. These individuals may have access to short and long-term disability benefits, CPP disability benefits, and depending on their age at the time of the accident, retirement benefits. The difficulty lies in the fact that these benefits are typically awarded or elected at different times, the result being a change in their entitlement to IRB’s. It’s not uncommon for these individuals to require several updates to their IRB’s up to the date of trial.

Medical, Rehabilitation, Attendant Care and Housekeeping & Home Maintenance Benefits

The amounts payable for medical, rehabilitation and attendant care benefits have undergone perhaps the most sweeping changes under the new rules. The table below summarizes the major changes:

The new rules will end up placing a larger burden on those people who suffer serious injuries as a result of a motor vehicle accident, but who fall short of meeting the technical definition of ‘Catastrophic’. Optional benefits that top-up coverage for injuries that are deemed to be non-catastrophic can be purchased at extra cost, but the likelihood that lower and middle income drivers – in other words, the people that would be hardest hit by the reduction in benefits – will end up paying more now in order to better their coverage is probably very slim.

You’ll also notice the introduction of a new classification called ‘Minor Injuries’ under medical and rehabilitation benefits, where benefits are limited to a mere $3,500 (including the cost of any medical assessments).

The Krofchick Opinion

The overall thrust of these new rules appears to shift the financial burden for individuals with non-catastrophic injuries to the tort defendant from the AB carrier. From the perspective of the insurance companies, these provisions make a lot of sense; the majority of automobile injuries would tend to fall under the category of non-catastrophic and the new rules would appear to provide insurers with a lower limit on their liabilities.

These changes will also affect the damage recovery process. With the insurers’ liability to pay statutory benefits substantially reduced, tort defendants are now open to even greater exposure and as a result, picking that pocket could become an even greater uphill battle. Knowing that drivers may be entering negotiations in financial duress due to what will end up being lower accident benefit settlements, tort defendants may end up using this additional leverage to settle their disputes more quickly and on more favorable terms. On the other hand, the insured now have the opportunity to recover a greater portion of their damages through tort, which treats certain losses more favorably than the accident benefits scheme.

It will be interesting to watch how the public and the legal community will receive the new IRB formula. Many drivers will stand to benefit from the new formula and calculation of benefits has been made quicker and easier to understand; but as with medical, rehabilitation and housekeeping benefits (and indeed, with many proposed changes to the statutory benefits), it will be the lower income earners that will bear the brunt of the financial fallout.

Krofchick Valuations

Krofchick Valuations is a professional firm, which includes Chartered Business Valuators, Forensic Economists, Investigative Accountants, and Actuaries.

We have offices in Toronto and London to better serve the province of Ontario. If you have any questions please call us today 1-877-250-6682