Inclusion of Common Shares in NFP as a result of an Estate Freeze

If a person owns preferred shares in a holding company, which owns a trust, does the entire value of the Trust form part of that person’s NFP?

(1) Should the entire date-of-separation value of White Holdings (“the Corporation”), a corporation of which your client, Mr. White, holds the preferred shares, be included in your client’s NFP; and

(2) Is your client entitled to credit for overpayment of past spousal support and to termination of spousal support when the property issues between the parties have been determined?

Property issues

In this discussion, I use the present tense, as if the situation at the date of separation still existed.

Mr. Whites settled a Family Trust in 1994. Mr. White, his wife and a third party are the trustees. The beneficiaries of the Trust are the parties’ children.

Mr. White set up J. Don White Holdings (“the Corporation”). He carried out an estate freeze in 1994. He owns the preferred shares of the Corporation. The Trust owns the common shares.

The Corporation owns 100 common shares of Haven Cottages. The Corporation also owns real property and mortgage receivables. Mr. White’s wife, Nora White, owns 100 common shares. Mr. White and Ms. White each own Class A and Class B shares in Cedar Haven.

Ms. White takes the position that the DOS value of the common shares of the Corporation, as well as the preferred shares, should be included in Mr. White’s NFP. Her counsel argues that “[because your] client controls the Holding Company and no assets were ever transferred to the trust,  the entire value of the Holding Company should form part of his NFP”.

Ms. White’s counsel says that no assets were ever transferred to the trust. On its face, that is an absurd statement. The common shares of the Corporation were transferred to the trust. Shares in a corporation are assets within the wide meaning of the word. I infer that Ms. White’s counsel is using “assets” in a narrower sense to refer to the land, buildings, chattels, and other underlying assets owned by Haven or by the Corporation. He appears to be suggesting that none of the land, buildings, chattels or mortgage receivables owned by Haven Cottages Ltd. or by the Corporation were transferred to the trust.

Whatever Ms White’s counsel means, he is overlooking the “Salomon principle”[1] that a corporation is an entity distinct from its shareholders and directors, even in the case of a corporation with a single shareholder. Further, subsidiary corporations are separate entities from the principal corporations that hold their shares.

A shareholder of a corporation does not have an interest in the underlying assets of the corporation. The Supreme Court of Canada confirmed this principle in Kosmopoulos v. Constitution Ins. Co. of Canada, [1987] 1 S.C.R. 2. The issue in that case was whether the sole shareholder of a corporation that owned timber had an insurable interest in the timber, which had been destroyed by a fire. The SCC concluded that he did not have an insurable interest because of the separate identities of the owner and the corporation.[2] See paragraph 12:

….As a general rule a corporation is a legal entity distinct from its shareholders: Salomon v. Salomon & Co., [1897] A.C. 22 (H.L.). The law on when a Court may disregard this principle by “lifting the corporate veil” and regarding the company as a mere “agent” or “puppet” of its controlling shareholder or parent corporation follows no consistent principle. The best that can be said is that the “separate entities” principle is not enforced when it would yield a result “too flagrantly opposed to justice, convenience or the interests of the Revenue”: L.C.B. Gower, Modern Company Law (4th ed., 1979) at p. 112.…

“[T]he courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct”: Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co., 28 O.R. (3d) 423, [1996] O.J. No. 1568 (Gen. Div.); affirmed, [1997] O.J. No. 3754, 1997 CarswellOnt 3496 (C.A.).

As in Kosmoupolous, there is no indication that Mr. White   incorporated his companies and took his other steps for anything but sound business and family reasons. The incorporation of  Haven, the setting up of the holding company, the creation of the trust and the estate freeze were all done for legitimate purposes. This is not a case for “lifting the corporate veil”.

Ms. White has not shown, or even suggested, that the Corporation was “completely dominated and controlled” by Mr. White, in the sense intended in Transamerica, and “being used as a shield for fraudulent or improper conduct”.

In Singer v. Singer, 1979 CarswellOnt 281, 10 R.F.L. (2d) 159, 24 O.R. (2d) 14, 97 D.L.R. (3d) 562 (H.C.J.), a case decided under the Family Law Reform Act, the husband had an interest in a company that held land. The wife was making a claim for a share of non-family assets. She registered a caution against the land. The court vacated the caution. Title to the land had always rested in one or another of a series of corporations. The principle of Salomon v. Salomon & Co, [1987] A.C. 22, applied: the legal persona created by an incorporation is an entity distinct from its shareholders and directors; in the case of a one-man company, the company is not an alias for the owner. The husband had no interest in the land. He merely had an interest in the shares of the corporate body owning the land.

See also the Alberta case of Gabriel v. Gabriel, 14 R.F.L. (2d) 174, [1980] A.J. No. 39 (C.A.), and the Saskatchewan case of Butzelaar, Re, [1978] 3 W.W.R. 435, 1 R.F.L. (2d) 124 (Sask. Q.B.).

The reason Mr. White does not own any of the Corporation’s real estate or investments is not merely that he does not own the common shares. His ownership of preferred shares does not give him a direct ownership interest in the real estate or the investments held by the Corporation because the shareholder and the corporate entitly have a separate existence.

Mr. White has an interest in the preferred shares of the Corporation. Applying the Salomon principle, as exemplified and applied in the cases above, Mr. White does not have an interest in the underlying assets held by the Corporation. As he does not have an interest in them, he could not have put any of the assets held by the Corporation into the trust. The idea that the value of the common shares should be included in his NFP because he did not put the underlying assets into the trust — if that is what Ms. Green’s counsel means — is incoherent.

As for the common shares, Mr. White has no interest in them because he placed them in the Trust. He was only one of three trustees, the others being Ms. White and a third party. To transfer the common shares to the Trustees for the benefit of the children, the statutory requirements would have to be met. The share transfer form would have to be completed in the trustees’ names, and their names would have to be registered in the company’s books. See Waters’ Law of Trusts in Canada (3rd ed.) at page 172.

As far as I can see, Ms. White’s counsel is not suggesting that the shares were not transferred properly.

Mr. White is not a beneficiary of the Trust. He has no interest in it. Again, the notion that the value of the shares held by the Trust should be included in his NFP is incoherent.

Spousal support

The parties separated on January 2, 2008. Mr. White made voluntary payments to Ms. White after separation, including $200,000 to purchase her new home. He also paid, directly or through Haven, the expenses of the family home and the family cottage. He considers that he has overpaid spousal support. He wishes to obtain credit for th overpayment.

Since June, 2009, Mr. White has paid interim, without-prejudice spousal support of $5,000 a month. Meanwhile, his income has fallen from $152,000 in 2009 to $90,000 in 2013, a reduction of about 41 percent. Such a reduction would normally result in reduced ongoing spousal support.

As I noted in my memo for the Orange matter, in Greenglass v. Greenglass, 2010 ONCA 675, 99 R.F.L. (6th) 271, at para. 44, the Court of Appeal said:

….[T]he amount of the equalization payment and the impact of any potential income-generating potential associated with the assets with which each party is left will almost invariably affect the support analysis. As a matter of law, therefore, the calculation of the division of assets and resulting equalization payment must always precede any support analysis.

I think Mr. White probably will be able to reduce or terminate spousal support, but that issue cannot be determined until the equalization payment has been calculated and the parties’ asset positions and income potential can be assessed.

The case references on “means” in the Black memo are relevant here, as well. I note that it is possible to delay converting an RESP to a RRIF for about three years. Depending on her “longevity risk”, Ms. White may be able to argue that she should not be obliged to start drawing on her RRIF until the maximum age.

Credit for overpayment

Mr. White wants credit against the equalization payment he will owe Ms. White for the overpayment of spousal support.

In Lafazanidis v. Lafazanidis, 2014 ONSC 3287, [2014] O.J. No. 2671, the husband had paid spousal and child support, based on an interim separation agreement, for several years between separation and trial. He took the position that he had overpaid support. He wanted a credit against the equalization payment.

Justice Mesbur found that the equalization payment from the husband to the wife was $320,740,56, less a few small, agreed adjustments. See paragraphs 179-181.

After determining the EP, Mesbur J. looked at spousal and child support and the support overpayment issue.

Mesbur J. found that the husband’s adjusted income for support purposes was $85,000 in 2011, $91,000 in 2012, and $101,000 in 2013. She assumed his 2014 income would be in the same range. The wife’s income was considerably lower. Looking at the parties’ actual incomes and applying the SSAG at the high end of the range (based on the husband’s ability to fund a gambing habit and the impossibility of determining his cash income), she found that the husband had overpaid support by about $14,000. This amount was adjusted for the tax benefit to the husband of deducting spousal support payments from his income and reduced to $10,000. See paras. 196-205.

Although overpayment of child support does not arise in the White case, Mesbur found that the husband had overpaid child support. His total overpayment of child and spousal support was $13,910. Mesbur J. considered that the most appropriate way to account for it would be to give the husband a credit on prejudgment interest, if she decided to award it, and then to credit any remaining overpayment against the equalization payment.

In the result, the EP from husband to wife was reduced to $308,068. See paras. 223-226:

223      The husband has overpaid child and spousal support in the amount of $13,910. I will offset the husband’s prejudgment interest obligation by his overpayment of support, reducing the overpayment of support to $6,136.97. The husband may apply the balance of his overpayment to his equalization payment, reducing it to $308,068.

Post-separation adjustments:

224      To summarize the post-separation adjustments, first, the husband is entitled to a credit of $7,535.40 against the equalization payment, made up of the $6,000 advance, the money he paid for the towing/ticket expenses. This reduces the equalization payment to $314,205.

225      The husband owes the wife prejudgment interest of $7,773.02 on the equalization payment. However, he is also entitled to a credit of $13,910 on account of spousal and child support. Once the credit is applied to PJI, the wife still owes the husband $6,136.97 on account of his overpayment of support.

226      This amount should be credited against the husband’s equalization payment of $314,205. After taking all the post separation adjustments into account, the husband owes a net amount of $308,068 on account of the equalization payment.

See also Yunger v. Zolty, 2011 ONSC 5943, 2011 CarswellOnt 10343. On an interim motion, spousal support of $1,750 a month was ordered, without prejudice to a subsequent variation or determination of support.

The husband wanted credit for what he had already paid. The motion judge left the determination of retroactive support, if any, to trial. There was not enough information to determine how much credit should be given for the payments (voluntary and court-ordered) the husband had alrady made. At paras. 87-88, the motion judge said:

87        While I am prepared to characterize the $25,000 payment as combined spousal support, child support and s. 7 expenses, I am not in a position to credit the payment to support owing as between 2010 and 2011 or determine the portion of the payment attributable to spousal support.

88        The interim support orders that I have made will therefore be effective as of January 1, 2011. The father will be given credit for any payments he made on or after that date. The determination of credit for payments made before that date is left for trial, where the judge will be in a better position to determine support owed and payments made since separation.

See also Kierks-Legue v. Legue, [2001] O.J. No. 5586 (S.C.J.), where the Case Management Master ordered that “Any overpayment of spousal support shall be considered an advance [on] equalization after taking in the tax consequences for each party” (para. 19).

In Yunger v. Zolty, it appears that there was the possibility (once the numbers could be determined) of crediting the husband with both voluntary and court-ordered spousal support payments.

In Cole v. Cole, 2014 ONSC 1404, [2014] O.J. No. 1167, no credit was allowed for overpayments that were voluntary in the sense of not being court-ordered. However, in Cole, the payments were for both spousal and child support. It is well established that overpayments of child support cannot be set off against the equalization payment because support is the right of the child and set-off is allowed only where the same debtor and creditor are involved. See Starr v. Starr, [2008] O.J. No. 6042, 2008 CarswellOnt 11318 (S.C.J.).

Maryelle Symons

Barrister  & Solicitor