In determining the appropriate reduction to an award for lump-sum retroactive spousal support arrears, will a court consider the amount that the paying spouse has already paid in income tax where the retroactive award is based on imputed income?

[12] On the other hand, the case law I have referenced (see: Vanasse; Bargout; Lalonde v. Lalonde, [2009] W.D.F.L. 297 (Ont. S.C.); Patton-Casse v. Casse, 2011 ONSC 6182, 8 R.F.L. (7th) 393; and, Korkola v. Korkola, [2009] W.D.F.L. 1380 (Ont. S.C.)). has in each case reduced the retroactive lump-sum payable for arrears, taking into consideration the approximate marginal tax rate of the payor, as opposed to adjusting the lump-sum payable based upon the DivorceMate provisions for the “net” or “after-tax” amounts or “Net Disposal Income” NDI amount. As noted, the SSAG’s software, DivorceMate, addresses after-tax amounts for periodic support ordered rather than retroactive lump-sum payments.

[13] As such, I prefer the approach foremost adopted by the courts of this province, and would calculate the arrears owed to be $14, 363.02 from March, 2012 less 37% ($5,314.32) representing the average marginal tax rate of the Respondent. I therefore determine the net amount owing for arrears to be $ 9,048.70.

[231] There was no evidence provided nor submissions made on the income tax implications of characterizing the retroactive spousal support as a lump sum as opposed to periodic payments. Lump sum spousal support is not taxable in the hands of the recipient nor deductible by the payor. However, taking into consideration that three years have passed, that the exercise of refiling tax returns for those years may not result in a deduction to Mr. Seguin, in any event, and that the spousal support is based on imputed income, I am going to order lump sum retroactive spousal support. The total amount payable, as noted above, would be $257,000 less the $157,000 already paid, for a total of $100,000. Given that Mr. Seguin will not receive a tax deduction for paying lump sum spousal support, I will reduce the amount, taking into consideration the relative tax positions of the parties based on actual incomes and the fact that some of the spousal support consisted of direct payments for which Mr. Seguin received no deduction. I order Mr. Seguin to pay retroactive spousal support of $70,000, payable within 30 days.

[66] Because Ms. Muller will not pay tax on the spousal support payable, the amount of spousal support should be reduced by an appropriate amount: see Vanesse v. Seguin, 2008 CanLII 35922 (ON SC), [2008] O.J. No. 2832 (S.C.J.). In that case, the spousal support arrears were reduced by 30% and I see no reason why I should differ with that approach. Accordingly, spousal support arrears are fixed in the amount of $90,385 (70% of $147,550). Total child and spousal support arrears are accordingly $221,323 ($130,938 + $90,385).

[11] I believe that there should be a balanced approach taking into account both parties’ respective tax positions. Allowances should be given for both the amount the recipient spouse might have achieved, had the support been paid, but also for the deduction available to the payor, should he have made the payments. This is confirmed by Rogerson, C. and Thompson, R., Spousal Support Advisory Guidelines, (July, 2008) at p. 132, where the authors discuss the reduction in support that occurs as a result of a payor having non taxable income where a deduction is impossible:

In every one of these non-taxable exception cases, it is necessary to balance the tax positions of the spouses—the reduced ability to pay of the payor spouse, who can’t deduct the support paid, and the needs or loss of the recipient spouse, who still has to pay taxes on spousal support and only receives after-tax support.

[12] Although in this case, unlike above, there are tax consequences to neither party, the same principle should apply; the positions of both spouses must be balanced and in setting an amount, I must take into account both the fact that the respondent will not receive a tax deduction for the retroactive spousal support arrears that are being paid and the fact that the recipient will not declare the support for income purposes.

[13] The applicant also requests that I also take into account, however, the fact that these are support arrears being paid after a lengthy period of time, and she will not receive an allowance for pre-judgment interest; the respondent has had the benefit of these funds throughout. The respondent states that this should not be taken into account due to the fact that he had a spousal support release; there was no reason to pay support in the face of that release.

[14] I disagree with the latter premise. The spousal support release was dealt with extensively in my decision, and was of no effect considering Alex’s Asberger Syndrome. As such, the spousal support should have been paid, and in determining the lump sum, a midpoint figure would not be appropriate in view of the time that has elapsed, and the lack of pre-judgment interest on the arrears. 

[15] I accordingly will not use the midpoint figures from the DivorceMate calculation noted above, and the figure will be closer to that of the applicant than that of the respondent. As such, I find that the lump sum amount of support arrears payable by the respondent to the applicant is $177,000 which is a 25% reduction of the face amount of support arrears in this matter. So ordered.

[23] In these circumstances, the appeal judge decided to award an amount of $177,000. That amount was approximately midway between the positions of the parties. In doing so, he considered all of the surrounding circumstances, including Patton’s needs and Casse’s ability to pay. On this appeal, both parties take issue with the appeal judge’s approach. 

[24] In our view, it was within the appeal judge’s discretion to adopt the approach he did. We see no basis to interfere.

[296] As the father does not file income tax returns in any jurisdiction the Spousal Support Advisory Guidelines (SSAGs) are not overly helpful to the court when determining the appropriate variation of the spousal support order given that the SSAGs generate a range of spousal support based on the assumption that the payor will claim a tax deduction for spousal support paid while the recipient must include the spousal support as taxable income. The net effect is that the cost to the payor is lower than the amount paid in spousal support and the amount received by the recipient is reduced by the income tax attributed to the support.

[297] As retroactive spousal support orders do not attract this income tax treatment, courts adjust the amount to be paid by a percentage the court deems to be appropriate given the approximate marginal tax rates of the parties. Hume v. Tomlinson, 2015 ONSC 843 (CanLII), and, Gonsalves v. Scrymgeour, 2017 ONSC 1034 (CanLII).

[298] I find that the mother is entitled to an increase in spousal support retroactive to June 1, 2016. The amount of the order for spousal support retroactive to 2016 must be adjusted to reflect that the mother will receive these monies tax free. As the mother had five people in her home as opposed to the father only be responsible for himself, a 65%-35% division of net family income is a fair and appropriate division. In order to affect that division in 2016, the father shall pay spousal support to the mother retroactive to June 1, 2016 in the amount of $2800.00 (with credit for amounts paid). This will result in the mother having net disposable income of $10,684.00 (refer to chart on page 69) in comparison to the father’s net disposable income of $5699.00.

[299] In 2017 all four children lived with the mother but O.N. completed her post-secondary education by April 2017. Once again, a 65%-35% division of net family income is an appropriate division in this case. In order to achieve that result, the father will be required to pay the mother spousal support in the amount of $2550.00 from January 1, 2017 to December 1, 2017. This will result in the mother having net disposable income of $11,362.00 (refer to chart on page 69) in comparison to the father’s net disposable income of $6086.00.

[193] Doyle J. conducted a thorough review of the case law addressing retroactive spousal support payments when the payor can no longer deduct those amounts from income. She held (Charron, at para. 19):

The courts have taken the approach of netting a payor’s retroactive spousal support payable to take into account the taxes he/she would have been able to deduct.

[194] Doyle J. held that “the appropriate method to be used in this case is the mid-point of the parties’ respective [marginal] tax rates” (Doyle, at para. 49).

[195] Doyle J. noted that the court has taken different approaches to the netting process. She held that “[t]here are variations in calculating this deduction” (Charron, at para. 19).

[196] In particular, whereas Doyle J. had evidence as to the parties’ marginal tax rates, she reviewed the court’s approach when such information was not available.

[197] Doyle J. referred to the decision in Bastarache v. Bastarache, 2012 NBQB 75 (“Bastarache”). In that case, Walsh J. held (Bastarache, at para. 45):

The approach in Murray v. Murray, supra, in Chalifoux v. Chalifoux, 2008 ABCA 70 and in Vanasse v. Seguin, 2008 CanLII 35922 (ON SC), [2008] O.J. No. 2832 (Supr. Ct.), as examples of a solution to this problem, was to fix, somewhat arbitrarily, a notional tax rate to the lump sum retroactive spousal support award. I intend to follow this same approach and will apply a 30% notional tax rate to reduce the size of the award accordingly. In doing so I am comforted by the following observation:

It is clearly an error for the Court to ignore the tax discount issue, but arbitrary determination of tax rates seems to be acceptable in most cases. Courts are aware that this is an imperfect science unless they are provided with clear evidence of what discount rate to use. In addition, the factors of delay and potential interest entitlement of the payee spouse make approximations of the right net amount seem acceptable ...

(Marie L. Gordon Q.C., An Update on Retroactive Child and Spousal Support: Five Years After S. (D.B.) v. G. (S.R.), National Judicial Institute Family Law Seminar, Toronto, Ont. (2012) at p. 66)

[...]

[202] There needs to be some adjustment so that the amount paid is somewhat reflective of the cost to the payor and the benefit to the recipient.

[203] Often, there will not be a precise match between after tax benefit to a recipient and after tax cost to a payor, if the payor and recipient have different marginal tax rates. In those situations, using the mid-point of those marginal tax rates may yield a just result.

[204] In the present case, there is no evidence as to the parties’ applicable tax rate from 2013 to 2015. The SSAG calculations provided are based on imputed income (as the parties both relied on imputed income to determine retroactive support).

[205] Without any evidence as to applicable tax rates, the court is left only with actual earnings during that time. Gonsalves earned approximately $20,000 as a bank teller, and Scrymgeour earned approximately $20,000 in employment income plus varying amounts of dividends and capital gains each year.

[206] There was no evidence of the parties’ marginal tax rates.

[207] However, Scrymgeour’s proposal to “net” support on the basis of the mid-point of the after tax benefit to Gonsalves and the after tax cost to Scrymgeour appears to yield an unjust result.

[208] By way of example, if the court were to use the mid-point of 2013 after tax benefit and cost in the SSAG calculation, the “gross” amount of $1,858 would be reduced to $1,141.50, a reduction of almost 40%. Such a reduction is inconsistent with the reductions applied in the cases reviewed in Charron and Hume, which are generally in the range of 30%.

[209] Without any evidence of marginal or average tax rates in effect at the relevant time periods, I can do no better than the “arbitrary” approach suggested in Bastarache. I reduce each of the “gross” spousal support numbers by 30% and set that amount as the “net” retroactive spousal support Scrymgeour is to pay on a monthly basis from March 2013 to December 2015.

[48] The recipient’s lower marginal tax rate which was substantially less than the payor’s lost deduction. The Court considered what lump-sum retroactive award could place both parties in the position they would have been in had the payment been deductible and taxable. The Ontario Court of Appeal agreed with McDermott J. in Paton-Casse case that the amount should be approximately midway between the positions of the parties. In doing so, the Court stated that it should consider all of the surrounding circumstances, including the recipient’s needs and the payor’s ability to pay.

[49] The Court finds that the appropriate method to be used in this case is the mid-point of the parties’ respective tax rates. 

[50] In doing so, the Court has considered the following:

1. the amount that would have been deducted and included by each of the parties had spousal support been paid when due;

2. the current ability of the payor to pay the arrears, he is unemployed and looking for employment;

3. the recipient’s needs and effect of not receiving the payment;

4. the difference in their respective rates; here the recipient had virtually no real tax rate whereas the payor would have had sizeable tax deduction. Using the recipient’s tax rate would be very unfair to the payor;

5. the amount of arrears and the effect of a tax deduction;

6. the fact that the payor had the benefit of these funds that were payable;

7. the parties have invited the Court to review conduct of the parties during the litigation. The Court of Appeal did not consider conduct in Patton-Casse. Certainly, the willingness of the payor to attempt to resolve the matter should be considered. Yet, on the other hand he ceased payments upon unemployment and only reinstated support when FRO became involved.

[27] While the trial judge’s deduction, based as it was upon an averaging of what he considered to be the approximate marginal tax rates of the parties to come up with a single discount rate (30%), may not have been precisely reflective of what the actual tax consequences of periodic spousal support payments would have been had they been paid and received on a current basis, his deduction was based on the evidence which was presented to him. The conclusion he reached using that evidence was not unreasonable and he is owed deference.

[28] Furthermore, retroactive spousal support awards may be paid in a lump sum and the lump sum reduced by a percentage to adjust for the lost tax deductibility to the payer, Mew v Mew, 2012 ABCA 382; Shukalkina v Shukalkina, 2012 ABCA 274; Mancini v Phelan, 2012 ABQB 536 and Arnason v Arnason, 2011 ABQB 393. Indeed, once the issue was raised, it would likely have been an error not to consider the tax consequences of retroactive lump sum spousal support versus periodic spousal support paid as an allowance for the on-going maintenance of the recipient. The trial judge did so, as best he could on the basis of the evidence which was put before him.

[33] While it may appear on the surface that the judge used too high of a marginal tax rate, I would not accede to the cross appeal. Although the judge referred to the 35% marginal tax rate in the context of tax payable by Mrs. Robinson, she was entitled to take into account the tax consequences to Mr. Robinson of an award of a lump sum compared to the tax treatment of periodic payments: see, for example, Patton-Casse v. Casse, 2011 ONSC 6182 at para. 12, 8 R.F.L. (7th) 393. In para. 129 of her reasons, the judge did make reference to the relative tax situations, and it may be that she took the tax consequences to Mr. Robinson into account when she arrived at the 35% rate.

[34] The evidence in the summary trial, to which the judge briefly referred at para. 65 of her reasons, was that under German tax law Mr. Robinson would be entitled to a tax deduction of approximately €4,000 a year in respect of periodic spousal support payments but would only be eligible to claim one €4,000 deduction in respect of a lump sum award. Over the course of the period of nine and one-half years of periodic spousal support utilized by the judge, this amounts to approximately €36,000 (or approximately $49,000 at the conversion rate used by the judge) in tax deductions unavailable to Mr. Robinson as a result of an order for a lump sum payment. This offsets the amount of notional tax Mrs. Robinson says the judge should not have deducted in her calculations.

[35] Even if the judge did not take Mr. Robinson’s tax consequences into account and erred in assuming too high of a marginal rate in respect of Mrs. Robinson’s income, then she made a corresponding error in failing to take into account the tax benefits which Mr. Robinson lost as a result of her decision to order that the spousal support be paid in a lump sum. The result is that there was no material error in the amount of the lump sum awarded by the judge.

[12] The parties disagreed on the netting down of the retroactive lump sum spousal support payments. They agreed that there should be a balanced approach to the determination of a lump sum support payment that took into account the parties’ tax positions and the ability of the payor to take advantage of a tax deduction.

[13] Counsel for Ms. Meth acknowledged that the netting down of a support payment occurs in instances when a payor had no opportunity to pay and claim the support payments in accordance with the income tax rules. However, in this instance the problem was not one of a court’s retroactive order but rather a failure by Mr. Barrenechea to pay in accordance with the July 2011 Final Order. Had Mr. Barrenechea complied with that order, he could have claimed the payments and obtained the appropriate income tax deduction to which he would likely be entitled. Instead, as noted by Ms. Meth, “[Mr. Barrenechea] has assiduously avoided his spousal support obligations”. In contrast to Mr. Barrenechea’s conduct, Ms. Meth declared the support payments that she expected to receive in the years 2010 – 2014 in accordance with Justice LaFreniere’s Order of July 28, 2011.

[14] Mr. Barrenechea did not deny his failure to pay spousal support. Nonetheless, his counsel submitted that his client should have the benefit of an adjustment to his arrears on account of the deduction he would have had if he had paid on time and declared his payments to the Canada Revenue Agency. Based on his client’s marginal tax rate, counsel argued that the outstanding arrears of $52,060.00 reflected in the Director’s Statement of the Family Responsibility Office, ought to be reduced by twenty five per cent. The Respondent relied on cases such as Hume v. Tomlinson, 2015 ONSC 843. Counsel for both parties referred Patton-Casse v. Casse, 2011, ONSC 6182 and 2012 ONCA 709, in support of their respective positions. 

[15] In my review of the parties’ submissions and the case law on this issue, I find that Mr. Barrenechea is trying to find ways to reduce his support arrears with FRO. Mr. Barrenechea’s situation is distinguishable from the cases that were referenced in his counsel’s submissions. The case law relied on by Mr. Barrenechea’s counsel contained examples of a payor who was ordered to make a retroactive lump sum support payments but who, because of the late date of the order, was not able to engage the CRA process for a corresponding retroactive deduction. The case law does not deal with a payor who ignores a court order and by implication, who then does not identify the support payments in his tax returns. Mr. Barrenechea falls in the latter category. He would not be in his current position if he had respected the Orders of Justice LaFreniere and Steinberg and made his support payments in a timely fashion.

[9] I agree with the comments by Justice Doyle in Charron v. Carriere 2016 ONSC 7523 where she stated the following:

47. As stated by the Court of Appeal decision in Patton-Casse v Casse, the court must take a balanced approach.

48. The recipient’s lower marginal tax rate which was substantially less than the payor’s lost deduction. The Court considered what lump sum award could place both parties in the position they would have been in had the payment been deductible and taxable. The Ontario Court of Appeal agreed with McDermott J. in Patton-Casse that the amount should be approximately midway between the positions of the parties. In doing so, the court stated that it should considered all the surrounding circumstances, including the recipient’s needs and the payor’s ability to pay.

49. The Court finds that the appropriate method to be used in this case is the midpoint of the parties’ respective tax rates.

[10] Consequently, considering all of the circumstances, I find that the midpoint of the parties’ respective tax rates is the appropriate method. I order that Brent pay to Tracey the sum of $8,400 for retroactive non-deductible spousal support for the year 2013.

[12] Certain assumptions about marginal tax rates must be made to perform the calculation and I imputed income to the applicant for part of the time period covered by the spousal support award. There are various ways to do the relevant calculation. I find, in the exercise of my discretion, that the lump sum spousal support award shall be reduced, to reflect taxes that would have been paid or reduced if the amount had been paid as periodic support, to $35,000. I find that $35,000 is, therefore, the appropriate amount of the spousal support lump sum payment required to be paid to the applicant in this case.