When Corporate Ownership Complicates Child Support Income Calculations

The Federal Child Support Guidelines aim to ensure fairness in child support payments that reflect the funds available for support. But determining a payor’s income and an appropriate amount of child support can be more complicated when the payor earns income through a closely held corporation. One reason is that the payor may retain corporate earnings in the business instead of taking the funds as income. This can lead to allegations that the payor could receive a higher income and that they have managed their affairs to leave money in the business to avoid their family obligations. Although there can be legitimate reasons to retain some earnings in a business, the income that a business owner pays themselves may not accurately reflect their earnings.

Child Support Is Based on the Parents’ Financial Means

In Oshungbemi v. Taylor, the parties had resolved issues regarding their child’s primary residence and decision-making responsibility, but did not agree on the amount of child support the father should pay. The mother argued that the father was sheltering money in his corporation to reduce his child support obligations. She asked the court to impute an income of $236,167 to him. The father was the corporation’s sole shareholder, director and operator. The mother claimed that in October 2023, the parties agreed the father would pay child support on an income of $120,000. However, in December of that year, he told her that his accountant had advised him to take an income of $60,000 and, accordingly, he would reduce his support payments. The father stated that it was essential for his business to retain earnings to meet the operating expenses, and that amount accurately reflected his income.

The Federal Child Support Guidelines establish an amount of support that is based on the financial means of the parents. The court first explained that income had to be determined in accordance with the Guidelines. If the parties do not agree on the payor’s income, section 16 of the Guidelines provides that a spouse’s annual income is determined according to the “Total Income” in the T1 General form that the Canada Revenue Agency issues. But the court can also look beyond this income calculation. Section 17 also states that courts can take note of a payor’s pattern of income. If the court concludes that the payor’s income under section 16 is not the fairest determination of income, it can “have regard to the spouse’s income over the last three years and determine an amount that is fair and reasonable in light of any pattern of income, fluctuation in income or receipt of a non-recurring amount during those years”.

Child Support Guidelines Direct Courts to Consider All Potential Sources of Income

Additional considerations arise when the payor is the sole shareholder of a corporation. If a judge does not believe that the income determined under section 16 fairly reflects the funds available for the payment of child support, section 18 of the Guidelines gives courts discretion to attribute:

1. Some or part of the corporation’s pre-tax income to the shareholder, director, or officer personally; or
2. To attribute an amount less than or equal to the pre-tax corporate income commensurate with the services that the payor provides to the corporation.

In Nesbitt v. Nesbitt, the court explained that when section 18 is applicable, the shareholder, director, or officer has the onus of showing that the corporate funds, whether they are retained earnings or pre-tax corporate income, are not available for support purposes. The rationale was previously set out in Elder v. Dirstein, where the court concluded that it was justified on the basis that the “payor parent knows more about the business than the recipient, and is therefore in the best position to explain why some or all of the company’s pre-tax income is not available for support”. In Oshungbemi, the judge noted that the process under section 18 requires a judge to first determine whether there are expenses that should be added back to the corporation’s pre-tax income, and secondly, whether any part of the pre-tax income should be attributed to the payor’s income for support purposes.

Judges Scrutinize Whether Corporate Income Is Available for Child Support

The purpose behind these sections is to enable courts to examine whether the payor may be using a corporation to conceal or reduce their income. Courts have recognized that parties who control a business may leave money in the business, but if they do so, they “must be prepared to explain why his or her decision is reasonable from a business point of view”. Yet, courts are not required to add any of a corporation’s pre-tax income to the payor’s income, as the Guidelines merely permit judges to do so. But in Ward v. Murphy, the Nova Scotia Court of Appeal explained that the shareholder parent has the onus of establishing that corporate income is not available for support purposes.

Additionally, courts “should not interfere with reasonable economic decisions needed to meet corporate sustainability”. Ward also identified a series of factors that can be considered when deciding whether to attribute pre-tax corporate income to the payor:

1. The nature of the business;
2. Whether there is a business reason for retaining earnings;
3. Any historical practice for retaining earnings;
4. The degree of corporate control exercised by the payor;
5. Whether there are arms-length shareholders involved;
6. Depreciation;
7. Possible economic downturns; and
8. Return on invested capital.

The Payor Has the Onus to Establish That Their Salary Is Justified

The court determined that the father “did not provide timely, complete and comprehensible financial disclosure”. Nor did he provide an updated personal financial statement, which was required by Rule 13(12) of the Family Law Rules. As Justice Sherr noted, the updated financial statement was important to determine how the corporation was financed. Additionally, the father himself could not make sense of his corporate financial statements and did not provide direct evidence from the corporation’s account, which might have answered the judge’s questions. On that basis, the judge drew an adverse inference against the father. Ultimately, he was not able to meet his onus to demonstrate that the salary he drew from the corporation was a reliable indicator of his income.

The judge then listed a series of unanswered questions raised by the father’s financial disclosure. It was notable that the father ran a business with annual revenues of over one million dollars. And on the evidence the father provided, the judge did not find it credible that he earned only $60,000 annually. Having concluded that, the challenge was “to determine what is a reasonable amount for the corporation to pay the father”. The judge found the mother’s estimate of the father’s income was too high, noting that it was unfair to include the corporation’s entire net profit before tax and retained earnings. The business had to pay staff and had other expenses, so it was reasonable for the corporation to retain some of its earnings. Instead, the court assessed the father’s income conservatively, explaining that the trial judge would be better positioned to determine his income after all the evidence was presented. Nevertheless, Justice Sherr emphasized that the child required a fair amount of support now, and this was not a basis for the father to pay support only on the “very low income he chooses to take from the corporation”.

The judge accepted the mother’s evidence that the parties had previously agreed that the father would pay support on his declared income of $120,000, although she believed that he was likely earning a higher amount. The judge felt this was probably closer to the father’s true income, and used that as a basis for the temporary child support order.

Courts Can Consider Whether a Corporation Is Used to Conceal Income

If a party fails to provide sufficient disclosure relating to their income, a court may draw an adverse inference and can impute income to them. Courts may also assess a corporation’s pre-tax income and can decide that additional income is available to a support payor. In these instances, a judge can determine a reasonable amount for the corporation to pay to the payor.

Johnson Miller Family Lawyers: Providing Top-Tier Family Law Services to Windsor-Essex Business Owners

If you own or receive income through a corporation, child support calculations can be far more complex than your T1 suggests. Courts have broad discretion to look beyond salary, scrutinize retained earnings, and impute income where disclosure is incomplete or corporate funds appear available for support. Whether you are a payor facing allegations of income sheltering or a recipient concerned that support is being understated, experienced family law advice is critical.

At Johnson Miller Family Lawyers, our knowledgeable family lawyers help clients understand how corporate income, disclosure obligations, and recent case law affect their child support rights and obligations. To book a confidential consultation, please contact us online or call 519-973-1500.