Imputing Income Part V

Diverting Income

By Danielle Sawh

The fifth article in my Imputing Income series explores the Court’s authority to impute income to a support payor in circumstances where the payor may have diverted money from their income which may decrease the support that they owe. For a refresher on the general overview of the topic of imputing income, see Part I of my series here.

The legislation gives the Court the authority to impute income where a payor may have diverted income. The diversion of income can occur in a variety of ways – from failing to disclose tips and commissions, to giving money away to third parties. This article will summarize only some of the key examples from the case law.  

Legislation

Section 19(1)(d) of the Child Support Guidelines says that the Court may impute income to a parent or spouse when:

(d) it appears that income has been diverted which would affect the level of child support to be determined under these guidelines.

Case Law Takeaways

Undeclared tips and commissions may be considered a diversion of income for the purposes of calculating support obligations. In Bourassa v Magee, 2015 ONCJ 534, the Court heard the mother’s evidence that the father earned cash income including tips and commissions which he did not declare, and that artificially deflated his income. The mother claimed that this was the father diverting income that would otherwise be included in his income for child support purposes.

The Court considered the discrepancies in the father’s evidence when assessing the mother’s claim. The father’s financial statements were significantly different from his reported earnings. Most notably, the father disclosed that his expenses exceeded his income but failed to prove any corresponding debt or provide an explanation for how he covered his expenses without incurring debt. As a result, the Court found the father’s evidence was not believable.

The Court agreed that it would be very easy for the father to receive payment for work in the form of tips and commissions and not declare that income. The Court considered that this fact, coupled with the father’s lack of record keeping and evidence, made it likely that the father was diverting income which would affect the level of child support he was obligated to pay under the Guidelines. The Court drew an adverse inference that the father’s evidence about his earnings was not credible and did not paint an accurate or reliable picture of his true income for child support purposes. The Court found the father diverted and unreported income, and imputed income to him.

In some cases, a party’s lifestyle can convince a Court that they have diverted or underreported income. In Biamonte v Biamonte, 1998 CanLII 29663 ONSC, the Court heard a trial in which the husband owned and operated a restaurant. The Court agreed with the wife’s claims that the husband was skimming large amounts of cash from his restaurant operation and that prior to separation, the parties lived an extravagant lifestyle and spent in excess of $100,000 per year on their lifestyle. The Court accepted expert evidence that the books of the restaurant did not truly reflect the financial picture of the husband’s restaurant. The Court stated, “It is totally unacceptable for an individual with Mr. Biamonte’s training and skills to simply work 15 to 20 hours per week at running a restaurant and at the same time say that he has no income whatsoever to direct towards the children’s support. Surely, any self-respecting individual, let alone any loving father, would quickly have abandoned a sinking ship and wandered out to earn a living generating enough income to at least put some food on his children’s table”. Ultimately, the Court found that there was a cash component to the husband’s restaurant business in addition to the income he declared from the business and imputed income to him.

In other cases, giving large monetary gifts to third parties may be considered a diversion of income. In De Zen v De Zen, 2001 CanLII 28139 (ONSC), the Court heard a trial including the issue of the amount of child support owing by the father. Amongst other findings, the Court found that the father had given non-interest bearing loans, forgivable loans, and gifts to third parties in the amount of approximately $1,120,000.00, which he had not disclosed. One of these loans was a $697,000.00 loan the father gave to his own mother. The Court drew an adverse inference from this and found that the father had diverted income which could affect the level of child support he might pay.

Running another person’s business may be considered a diversion of income. In Wakeley Wakeley, 2012 ONSC 4035, the father was the sole shareholder of his own company, and a joint owner of another company in the same industry with his new wife. The father was experienced in his industry, whereas his new wife was not. The new wife’s company’s gross sales increased significantly, and the father’s company’s gross sales decreased. The mother claimed that the father was purposely doing more business under his new wife’s company to divert income from himself and sought to impute income of $207,000 to the father which was a combination of his Line 150 income and the profit stated by his company and the new wife’s company. There was no evidence denying the allegation from the mother that the new wife’s company was run by the father and income from it should in part be attributed to him.

The Court held that the father’s lifestyle was not proportionate to his declared income and moreover stated, “It is also too much of a coincidence to think that the astounding success of Wendy’s company and the lack thereof of the respondent’s company over the last few years has nothing to do with the current matrimonial litigation and everything to do with her business acumen”. As a result, the Court imputed income to the father.

Suspicious business dealings and transfers of assets may also be considered a diversion of income. In Fendelet v Dohey, 2006 CanLII 34273 (ONSC), the respondent asked to retroactively reduce his spousal and child support obligations and to rescind his support arrears. He claimed that his business experienced a downturn, resulting in a decrease to his income. The respondent made an assignment in bankruptcy, and prior to the date of his bankruptcy, he transferred assets, including his book of business, to another company whose sole shareholder was his new common law spouse. The Court held the evidence established that the company was essentially run by the respondent. The Court stated, “The net result of questioning of the respondent, his common law spouse and the sister of the common law spouse with respect to these various matters gives the impression of a convoluted but convenient pattern of dealings by the respondent directly and through complicit aides in creating an impenetrable fog that obscures the true nature of his assets, undertakings and income sources”. The Court also stated, “His explanations of his property dealings since separation in the name of his common law spouse and the common law spouse’s sister are suspect in the extreme”. The Court did not believe the respondent’s evidence regarding the income generated by his business and was satisfied that the respondent had diverted income as well assets for the purpose of reducing his support obligations. The result was that the Court dismissed the respondent’s application to vary his support payments.

Failure to make full disclosure can contribute to the Court concluding that a person is diverting income. For a recap on the law around imputing income on the basis of failure to provide income disclosure, see Part III of my series here. In Azimi v Mirzaei, 2007 CanLII 16445 (ONSC), the Court found that the payor failed to produce the documentation requested of him, including the details of his various bank accounts, employment history, and options trading activity. The payor did not produce financial statements for his company, and he moved his company to larger premises and had employees working for him. There was evidence that the payor had made transfer of US funds from and to US accounts and the Court believed the payor was hiding money from the wife. There was also evidence that the payor had not disclosed all of business activities. This led the Court to believe that the payor was making money.

The combination of inadequate financial disclosure, the lack of credibility to the payor’s claim that he had made no money, and the evidence that the payor moved money around led the Court to conclude that the payor was likely to be diverting income – and if those earnings were include in the payor’s income, they would affect the level of child support he was required to pay.

All of these cases make it clear that diverting income can take many forms. Full transparency and reasonable explanations for how financial affairs are managed is critical for support payors. For more information on these issues, contact Danielle Sawh at dsawh@sorbarawlaw.com.