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Determining a spouse’s income for purposes of spousal support can be complicated if the spouse owns or controls a corporation. While corporations are separate entities, courts may look at the business’s pre-tax income and other factors to determine the true income available to the payor. And corporate losses, investment decisions, and business operations may be scrutinized. But what if a payor owns several corporations? Can losses from one business offset the pre-tax income of another corporation?
Judge Examines Respondent’s Corporate Income
In Jeffrey v. McNab, the parties were unmarried but had been in a relationship for 13 years, which ended in 2015. The respondent had owned and operated a business, which he also sold in 2015, and the applicant sought spousal support and a share of the sale proceeds. While the property issues were resolved, issues such as the spousal support claim remained. The parties disagreed on the respondent’s income and the nature of the applicant’s entitlement to support. The judge determined that the applicant had a minimal entitlement to compensatory support as well as a non-compensatory entitlement due to the applicant’s financial dependence on the respondent during the relationship and the disparity in their incomes.
Determining the respondent’s income was challenging, as he owned seven corporations and was the sole owner, except for one, CTG Medical, where he was an equal shareholder with his brother. The judge pointed out that he had an obligation to show that his salary from the corporations was a reliable indicator of his actual earnings, but the respondent admitted that it was not. Ontario’s Child Support Guidelines enable pre-tax corporate income to be attributed to a support payor when determining their income. Both parties used these Guidelines as a tool to determine spousal support income and also retained experts to assist.
Courts Must Determine the Funds Available for Support Payments
One of the items the experts disagreed on was the corporate losses from the respondent’s group of companies. The respondent’s expert took the view that the pre-tax income available from the group of corporations should be calculated after factoring in corporate losses. This was relevant because CTG Medical was the only corporation to be profitable; therefore, the expert claimed that the corporation’s pre-tax corporate income should be netted against the losses accrued by the other corporations.
However, the applicant’s expert disagreed that the losses of the non-profitable corporations could be used to reduce the pre-tax corporate income.
Section 18 of the Child Support Guidelines specifically references a corporation’s pre-tax income. However, Justice Bingham noted that “this does not mean that corporate losses cannot be considered in calculating a corporation’s income”.
For instance, in Mason v. Mason, the Ontario Court of Appeal explained that the section enables courts to take an annual “snapshot of a spouse’s income”, but where a corporation has suffered a loss, then no pre-tax corporate income can be attributed to the payor.
In Colivas v. Colivas, there was a dispute over whether pre-tax corporate losses could be applied to reduce a payor’s income for purposes of child support. The judge looked at the definition of income in the Guidelines and concluded that it was not broad enough to include “losses”. Therefore, pre-tax corporate losses could not be considered in determining a payor’s income. While they could be considered in determining business income, if corporate losses exceeded profits, the corporate income would be zero. The judge indicated the focus would then shift to determining if any corporate income should be attributed to the payor.
A similar approach was adopted in Nixon v. Lumsden, where the judge sought to make a fair determination of the payor’s income that would be available for spousal support. And the judge concluded that business losses could not be used to reduce the payor’s income from other sources, including employment income, for the purpose of determining support obligations.
Business Losses Cannot Reduce Income From Other Sources
In this instance, it was significant that the respondent’s corporations were not at arm’s length, since he was the sole owner of them, except the income earning corporation, where he was an equal owner with his brother. This relationship between shareholders and corporations within the family law context was considered by the Saskatchewan Court of Appeal in Mais v. Shoman. There, the Court emphasized that corporations have separate rights apart from those of any other person and that shareholders have limited liability for corporate losses. Further, deducting a corporation’s net losses from a shareholder-parent’s income is “inconsistent with the principle of shareholder limited liability”.
For the Court, section 18 of the Guidelines does not pierce the corporate veil. Rather, the intention behind the section is to “permit a judge to determine whether a shareholder-parent has left money in a closely held corporation that reasonably could have been made available to the shareholder-parent for child support purposes”. For Justice Bingham in Jeffrey, the respondent’s use of corporate losses to reduce the corporate income of his profitable corporation was inconsistent with section 18.
Do Investment Losses Represent Available Income?
The parties also disagreed about the impact of losses from loans made by CTG Medical. In one case, the investment failed, resulting in a loss of approximately $830,000. The applicant’s expert took the view that the losses incurred on the loans should be attributed to the respondent as pre-tax corporate income, on the basis that the funds were available to his business. The fact that he made the investment was proof that the funds were available to him.
In contrast, the respondent’s valuator held the view that the corporate income of CTG Medical should not be adjusted for the loans. But the judge found that the investment of the funds resulted in a significant loss. And this was money that was available income to the corporation, a share of which was available to the respondent for support purposes.
There was also a question of how to deal with the respondent’s capital gains resulting from the sale of a property. The respondent did not report the sale to the applicant, despite a court-ordered obligation to do so. He also did not report the capital gain on his personal income tax return. The experts considered four different options for how the property sale and resulting capital gain impacted the respondent’s income. The judge determined that either the capital gain or the gross-up should be included in income, or else both should be excluded. The respondent suggested that since it was a non-recurring gain, it should be excluded, while the applicant argued that it should be included.
Whether a capital gain or other non-recurring payments should be counted as income is fact-specific. In accordance with section 16 of the Guidelines, the amount is presumptively included as income, and the payor has the onus of establishing that an amount should be excluded from the determination of their income.
Judge Finds Capital Gain Arose From a One-Off Sale
In Mosher v. Bossence, Justice Hassan noted that this determination can depend on several considerations, including “the nature of the payment, the frequency of the occurrence, and the impact of the transaction on the payor’s income and support payments”. Additionally, courts can weigh whether the payment should be treated as income for the benefit of children, or whether it resembles an asset rather than an income source, which may suggest it should be excluded. For example, courts previously concluded that capital receipts will rarely be treated as income in a one-off sale.
In this instance, the amount in question was derived from the sale of a property and was not a payment of income. Also, the rental income the respondent earned from the property was small relative to his other income sources. The judge also found that, although the capital gain generated some cash for the respondent, he used the funds to purchase another property, and the cash he had available was less than the capital gain he realized. There was also nothing to suggest that the sale of property was a source of income for him.
Moreover, the property was purchased solely by the respondent near the start of the parties’ relationship and was sold several years after separation. Since the parties were not married, there was no entitlement to equalization.
Considering these factors, Justice Bingham concluded that the respondent successfully rebutted the presumption that the capital gain should be included in the determination of his income, and the judge felt it was fair to exclude the amount.
Navigating Corporate Income in Ontario Support Cases? Contact Johnson Miller Family Lawyers
If you or your former partner owns one or more corporations, determining income for spousal or child support can quickly become complex. Courts will closely examine corporate structures, pre-tax income, and financial decisions to ensure support obligations reflect the true funds available, not simply what appears on paper.
Johnson Miller Family Lawyers represents clients in Windsor-Essex County and throughout the surrounding areas with high-stakes support disputes involving business ownership, corporate income, and financial disclosure. Contact our team of family and divorce lawyers by calling 519-973-1500 or reach out online to schedule a confidential consultation.
