How is child support calculated where the payor spouse earns income as a shareholder, director, or officer of a corporation? I have previously discussed some issues that can arise when a spouse earns income through a corporation, such as income from deemed dividends and proving business expenses.
In some cases, the ex-spouse could avoid paying proper child support by using corporate manoeuvres to shield income from being included in the calculations under the Federal Child Support Guidelines, SOR/97‑175. Plumping retained earnings without a real and identifiable need to do so artificially lowers the payor spouse’s income and deprives the children of the benefit from actual income. To ensure that income fairly reflects all the money available to the payor spouse for the payment of child support, the overriding consideration is whether the payor is in a position to influence the amounts paid out by the corporation. If the payor is in a position to influence how pre‑tax corporate income is used then, depending on all of the circumstances, it may be appropriate to attribute pre‑tax corporate income to him or her for the purpose of child support calculations under the Guidelines.
How is child support calculated where spouse earns corporate income? A recent example
Corporate income was attributed to the husband in Guenther v. Guenther, 2016 SKQB 322. The husband was an equal shareholder with his brother in two closely held corporations. The husband and wife separated in 2011 and their four children, aged 17, 13, 12 and 10, all lived with the mother. When they separated, the husband paid his former spouse $84,000 to equalize the family property distribution, which was financed through a loan he took from one of the corporations. In 2011, the court ordered child support calculated using the husband’s T1 General income of $58,163.
In 2016 the mother brought an application to vary child support on the basis that the pre‑tax income of the father’s two corporations should be attributed to him for the purpose of child support calculations. The combined 2015 pre‑tax income of the corporations was $129,000, of which each brother took $11,800 in dividends. That left $105,400 in the corporations that the brothers said must stay there to ensure the financial security of the corporations. The father maintained that his child support obligation should be assessed using only his “Total income” in the T1 General form.
How is child support calculated using the different approaches?
The child support obligation varied significantly depending on which approach was taken:
- The father relied on s. 16 of the Guidelines, which directs the court to determine the payor’s income based on the sources of income as set out in the T1 General form, adjusted in accordance with Schedule III of the Guidelines. The father’s s. 16 Guidelinesincome was $56,800, comprised of $11,800 in dividends, $39,000 in salary and the $6,000 he says is the value of the benefit he receives from the company vehicle. On that income, his child support obligation would be $14,592 per year.
Section 16 is usually sufficient to determine the payor’s financial means, but not always, such as when the payor is employed by a company over which he or she can exercise a degree of control:
- The mother relied on s. 18 of the Guidelines, which permits the court to add some or all pre‑tax corporate income to the payor spouse’s income if it is found that income as determined under s. 16 “does not fairly reflect all the money available to the spouse for the payment of child support.” If all of the father’s one‑half share of the corporations’ 2015 pre‑tax corporate income was allocated to him, his Guidelines income would be $109,500 and his child support obligation would be $27,648 per year.
Key factors when considering “How is child support calculated?”
Dufour J. emphasised that the primary purpose of the analysis is to ensure that all of the income that is actually available to the payor is included in the calculation of child support. That being said, the analysis will necessarily involve a balance of factors: on one side will always be the right of children to properly benefit from the actual financial means of each parent; on the other is the concern for the ongoing viability of the businesses. To avoid “killing the goose that lays the golden eggs”, courts are reticent to attribute corporate pre‑tax income to the payor when there are legitimate business reasons for retaining some or all of the pre‑tax corporate income.
The father maintained that because his business was a partnership with his brother, he could not unilaterally declare larger dividends. While that is true, Dufour J. observed that it is not the determining factor (emphasis added):
 … The overriding consideration is whether the payor is in a position to influence the amounts paid out by the company. Referencing the ability to influence how pre-tax income is used rather than whether there is a legal right to dictate how it is used recognizes that relationships between shareholders based on ties of family or friendship in closely held corporations can, and often do, affect corporate financial decision-making.
Dufour J. also affirmed that the onus is on the payor spouse to explain either that he or she does not have control over the way in which the corporation allocates pre‑tax income or why the decision to leave money in the corporation is reasonable from a business perspective (para. 16). Acceptable reasons will vary depending on the circumstances. Something more than “an expression of fear” is required; the payor must present “clear” evidence establishing, on a balance of probabilities, that the corporation requires all of its pre-tax income and that, therefore, it would be “unfair” to attribute all or a portion of the corporation’s pre‑tax income to the payor parent (para. 43).
How is child support calculated by the court given the facts in Guenther v. Guenther?
Dufour J. was satisfied that the father did indeed have the ability to influence the way in which the corporations allocated pre‑tax income. One indicator of influence was that the father used corporate financial resources to acquire a larger portion of family assets after he and the mother separated (i.e., the $84,000 he borrowed from the corporation to equalize the family property distribution). Other indicators of influence were listed, including the fact that their mother lived in a condo owned by one of the corporations – in other words, the brothers managed to manipulate corporate finances to help their mother.
The father argued that it was necessary for the corporations to retain all earnings due to shaky economic times and the brothers’ historical practice of taking very little out of the corporation by way of salaries or dividends. Dufour J. was not satisfied on the evidence presented that those were legitimate business reasons for keeping most of the 2015 pre‑tax corporate income in the corporations. As such, s. 18 of the Guidelines applied and half of the corporations’ 2015 pre‑tax income was attributed to the father for the purposes of calculating child support.
In so concluding, Dufour J. was careful to note that he was not directing the corporations to pay out their 2015 pre‑tax income. When s. 18 is triggered, the court is not affecting a corporation’s financial affairs. What is affected is the calculation of support which is the spouse’s personal obligation to pay. Thus, in Guenther, the amount of the pre‑tax 2015 corporate income kept in the corporations would only be diminished by $13,056 ($27,648 less $14,592) plus tax consequences. The remaining $92,344, less tax, would remain in the corporations.
How is child support calculated where spouse earns corporate income? The take home point
Answering the question “How is child support calculated?” depends on the source of the payor spouse’s income. Where the payor spouse is a shareholder, director, or officer of a corporation and the amount of the spouse’s annual T1 income does not fairly reflect all the money available to the spouse for the payment of child support, some or all of the pre‑tax corporate income may be added to the payor spouse’s income for the purposes of calculating child support. The overriding consideration is whether the payor is in a position to influence the amounts paid out by the company. Courts are reticent to attribute corporate pre‑tax income to the payor when there are legitimate business reasons for retaining some or all of the pre‑tax corporate income, however, the onus is on the payor to prove the need to retain corporate income for legitimate business reasons.