Imputing Income Based on Lifestyle: Ferrari’s, and Cadillacs and Luxury Vacations, Oh My!
A recent “bitterly contested” motion over financial issues stemming from a separation and presided over by the perpetually charismatic Justice Pazaratz is best summarized in Justice Pazaratz’s own words:
If you claim you’re so poor you can’t afford a penny of child support, best not to be driving a red Ferrari convertible. In addition to two Mercedes-Benzes…
The wife is 32 years old, the husband is 51. They were married in October 2012 and separated in January 2016. They have a five-year-old daughter born in April 2012.
The wife came to Canada from Morocco in 2010 on a student visa and met her future husband while she was living in Montreal. The parties began living together in 2011, and the wife began to attend the University of Toronto, at the [future] husband’s suggestion and with the husband paying her tuition. She stopped attending university when she became pregnant with the couple’s daughter. After the daughter’s birth, the parties married. During the remainder of the relationship, the wife stayed home to care for the daughter and assumed primary responsibility for her.
The husband had been diagnosed with a serious mental health issue in 2008, and claimed, during the motion hearing, that he is substantially unable to work, and that at all relevant times, his only income came from ODSP payments. Despite these apparently limited resources, the husband always assumed full financial responsibility for the wife and the child, and they lived a luxurious lifestyle.
The parties separated in January 2016, when the wife discovered weapons, bullets, and guns in the powder room vanity of the family home (an area where their young daughter could gain access). The husband was eventually charged with 24 criminal offences including assault on both the wife and the daughter. Due to the allegations of violence, and the husband’s history of mental health issues, the wife asked that the husband have no access to the daughter (who had remained in her custody since separation).
She also brought a motion seeking, among other things:
- imputation of income to the husband in the amount of $150,000;
- child support in the amount of $1,263 per month;
- retroactive child support in the amount of $15,156; and
- spousal support in the amount of $4,200 per month.
Unsurprisingly, each party submitted vastly different versions of events, particularly with respect to the husband’s financial assets.
The Wife’s Position
At the motion hearing, the wife argued that the husband had a well-established history of having “vast amounts of undeclared money, which has always allowed him to maintain a lavish lifestyle”, including luxury cars and fancy vacations. She also claimed that, throughout their relationship, the husband boasted about how much he was worth and how much money he regularly generated.
During the entirety of the parties’ relationship, the husband had exhibited a pattern of hiding income and assets so that he could continue to qualify for ODSP. He hardly put anything in his own name (including the matrimonial home that the parties lived in, which was maintained in the name of his ex). The wife further claimed that the husband was “quite sophisticated at maintaining a dishonest lifestyle” including hiding income from the Canada Revenue Agency (CRA) and defrauding the ODSP program by hiding very large amounts of ongoing income through an elaborate network of shell corporations and funneling money offshore.
The wife claimed that while the husband had regularly hidden many assets, he was the actual owner (or had actual control of) a complex network of corporations and businesses and was able to freely and regularly access large amounts of money through these corporations. She and the husband both had unlimited use of credit cards that were paid for by these companies. Due to the husband’s access to these available funds, the wife was able to remain at home caring for the child during the relationship. She further claimed that, post-separation, he continued to have vast amounts of money available to him that he was hiding.
The wife argued that, post-separation, the husband continued to have access to these funds, but that he was “attempting to maintain a fiction of poverty” in order to avoid any liability for the purposes of child support, spousal support, or equalization of net family property.
Based on all of the above, the wife sought to impute the $150,000 in annual income to him for purposes of child and spousal support.
The Husband’s Position
The husband denied being the secret or beneficial owner of various corporate and other assets, and denied having undisclosed income available to him. He claimed that he was a “simple man” with health problems that preclude him from working.
He admitted to owning one corporation and three properties, that he had not yet valued, but that financial or ownership interest in any other companies was primarily that of his twin brother. He argued that he did some work for his brother, including collecting rent, and that his brother allowed him to charge certain expenses to corporate credit cards in exchange for these services, and also in the form of ongoing loans. He further argued that his brother travels often and that, in those cases, he is often left with a responsibility for businesses that he does not own.
The husband admitted to spending a lot of money while he and the wife lived together, but that this money came from the generosity of the brother.
He denied being deceitful, and maintained that he cannot afford to pay any support since his ODSP income was less than $10,000 a year, far below the minimum threshold in the Child Support Guidelines
Imputing Income for Support Purposes
The Federal Child Support Guidelines provide guidance on determining income levels for child support and spousal support purposes.
Under section 16 of the Guidelines, the starting point for calculating annual income is the payor’s “total income” (also known as line 150 income). Sections 17 and 18 permit a court to depart from line 150 income where the court believes that relying on a spouse’s line 150 income would not be the fairest determination of income. These two latter sections permit the court to examine any pattern of income and to add all or part of pre-tax corporate income for the most recent taxation year to a spouse’s income.
Section 19 allows the court to impute income in certain circumstances, including:
- Where a support payor is intentionally under-employed or unemployed;
- Where it appears that income has been diverted which would affect the level of child support payable;
- Where the support payor’s property is not reasonably utilized to generate income;
- Where the support payor has failed to provide income information when under a legal obligation to do so;
- Where the support payor unreasonably deducts expenses from income;
- Where the support payor derives a significant amount of income that is taxed at a lower rate or not taxed at all;
- Where the support payor is a beneficiary under a trust and is, or will be, in receipt of income or other benefits from the trust.
This list is not exhaustive and the court has broad discretion to impute income in other situations where it considers appropriate to do so. Imputing income allows a court to ensure that both parents meet their ongoing obligation to support their children to the extent that they are able to do so.
The responsibility is on the party seeking to impute income (in this case, the wife) to establish:
- Whether income should be imputed;
- If so, what amount should be imputed.
Once a prima facie case for imputing income under s. 19 has been established, the responsibility shifts to the payor seeking to justify the income position they are taking.
Justice Pazaratz on the Financial Evidence
After hearing the conflicting evidence of both parties in this case, as well as additional evidence from the husband’s brother, Justice Pazaratz noted that there was overwhelming disagreement about the registered or beneficial ownership of many significant corporations and assets, but that:
…there is absolutely no disagreement that for years and years and years – before, during and after the [husband’s] relationship with [the wife] – every single year the [husband] has been able to spend vast amounts of money, on a luxurious lifestyle (and more recently on intensive and aggressive legal services)…the money’s coming from somewhere. And so far none of the [husband’s] vague explanations are very convincing.
Justice Pazaratz went on to note that:
A pervasive and troubling theme on this motion was the [husband’s] persistent failure or refusal to provide financial disclosure – an obligation clearly amplified by the scale and opaqueness of the [husband’s] complex financial world.
The wife’s request to impute income was largely (and unavoidably) based upon evidence of lifestyle and consistent spending patterns. Justice Pazaratz noted that a spouse’s lifestyle can provide valuable information about their actual income, cash flow, and real financial circumstances. Lifestyle itself is not income, but is evidence that can be used to draw an inference that a payor spouse has undisclosed income that can be imputed for determining child support.
Justice Pazaratz noted, about inputing income based on lifestyle:
Imputing income based on lifestyle is an inexact science. But it is important to consider that most often – as in this case – the challenge is created entirely by the payor’s evasion, non-disclosure and deceit. As a court system we don’t like to “guess” about anything. But when sophisticated and determined spouses go to extraordinary lengths to create a fiction of poverty, they invite a common sense and practical response: The payor couldn’t be spending all this money if he didn’t have it.
Justice Pazaratz stated that he had “no hesitation” in finding that, for many years, the husband had a large cash flow available to him that he regularly utilized on a “quite extraordinary lifestyle”. This cash flow was undeclared for tax purposes, largely invisible, and available to him not only before but also during and after this relationship with the wife.
Justice Pazaratz rejected the “narrative” that whenever there was undisclosed money discovered, the money could be explained by calling it a loan. Justice Pazaratz went on to find that:
…the [husband] has been and continues to be entitled to vast amounts of undisclosed income by virtue of his ownership and/or remunerative participation in multiple corporations, businesses, and properties.
In the alternative, in the unlikely event that any portion of his regular income stream might be characterized as gifts, this is one of those rare situations in which that money should also be included when determining imputation of income.
With respect to the wife’s suggestion that the amount to be imputed should be $150,000, Justice Pazaratz found that:
I am satisfied that the [wife] has provided sufficient information to justify an imputation of income at $150,000.00 per year, particularly given the fact that the [husband] is consistently availing himself of large amounts of money he pays no tax on.
This amount included a “gross-up” to reflect the fact that this money was tax-free.
If you have questions about spousal support, or child support or any other obligations following a separation or divorce, speak with experienced Windsor family law lawyer, Jason P. Howie, at 519.973.1500 or contact us online. We serve clients in Windsor, Essex County and throughout the region.