Angela Walker – February 2016
Lifting the Corporate Veil: Income Determination for Child and Spousal Support
When you derive your income as a shareholder of a corporate entity, a court will analyze whether there is more income available to you that you are choosing not to take when determining income for the purposes of child and spousal support.
Section 18 of the Federal Child Support Guidelines has been used to impute income to a spouse beyond the income that appears on his or her personal tax returns by taking into account the performance of companies in which s/he is a shareholder/director. Courts have considered the company’s income, expenses (such as personal expenses of the shareholder) and deductions to justify increases to the payor’s income, as well as retained earnings of the company.
Section 18 states:
(1) Where a spouse is a shareholder, director or officer of a corporation and the court is of the opinion that the amount of the spouse’s annual income as determined under section 16 does not fairly reflect all the money available to the spouse for the payment of child support, the court may consider the situations described in section 17 and determine the spouse’s annual income to include
(a) all or part of the pre-tax income of the corporation, and of any corporation that is related to that corporation, for the most recent taxation year; or
(b) an amount commensurate with the services that the spouse provides to the corporation, provided that the amount does not exceed the corporation’s pre-tax income.
Adjustment to corporation’s pre-tax income
(2) In determining the pre-tax income of a corporation for the purposes of subsection (1), all amounts paid by the corporation as salaries, wages or management fees, or other payments or benefits, to or on behalf of persons with whom the corporation does not deal at arm’s length must be added to the pre-tax income, unless the spouse establishes that the payments were reasonable in the circumstances.
Section 18 of the Child Support Guidelines does not require that the spouse be a controlling shareholder.
In the decision of Jenkins v. Jenkins, 2012 NSSC 117 (CanLII) the following emergent themes are summarized:
- Courts will access the pre-tax corporate income for support purposes.
- The onus of proof falls upon the director, officer, or shareholder to show that the pre-tax corporate income is not available for support purposes. Evidence of legitimate business needs must be led before a court can conclude that the corporation requires its pre-tax income.
- Minority shareholders are not necessarily exempt from having pre-tax corporate income imputed to them for support purposes. The courts may grant the right to at least examine the financial statement of the corporation, even if the party is only a minority shareholder.
- Personal benefits paid on behalf of a shareholder, officer, or director by a corporation will be considered in the calculation of income
- Negative inferences are correctly drawn when there is a lack of disclosure and a lack of relevant evidence before the court.