Calculating child support seems like it should be easy. You take a spouse’s income, check against the number of children, and the Federal Child Support Guidelines will produce a monthly payable amount.
But when a spouse earns income through a company he or she controls, things get much more complicated. In that case, the spouse can usually determine how much the company will pay him or her, and so the spouse often has a great deal of control over how much (or how little) he or she earns and, as a result how much (or how little) child support must be paid.
For this reason, the Federal Child Support Guidelines provide judges with special tools where a spouse earns income from a company he or she controls.
Section 16 of the Federal Child Support Guidelines provides that a spouse’s income is generally determined using the sources of income set out in a T1 General Tax return. In other words, under s. 16 of the Guidelines, the court looks at the spouse’s personal earnings over the tax year. That might include employment income, dividends from a corporation, interest or investment income, rental income, and the like.
Section 18 of the Federal Child Support Guidelines provides that where a spouse is a shareholder, director or officer of a corporation , the Court can attribute part or all of the corporation’s pre-tax income to the spouse. So if a spouse controls a corporation that has pre-tax income (i.e. profits) of $100,000 per year, the Court may attribute that income to the spouse, even if the corporation does not actually pay out the $100,000 to the spouse.
In Quinton v. Kehler, 2020 BCCA 254, the husband and wife were lawyers. The husband ran his business through a personal corporation in which he was the sole shareholder, officer and director. The personal corporation was profitable, but in any given year the husband paid himself only a portion of the profits. The wife said that because the husband was the sole shareholder and director of the company, all of the pre-tax income of the company should be included in his income for child support purposes.
In some cases, a corporation may have legitimate calls on its profits, for example reinvestment. And in those cases the Court will be careful not to “kill the goose that lays the golden egg”. But in cases where a personal corporation is used primarily as a way for a professional to earn income, there are rarely these kinds of capital requirements and the entire profits of the professional corporation are generally viewed as available for income purposes. And these were the circumstances in Quinton.
So in Quinton the Court had to decide which approach was fairer: should the court look at what the husband had actually earned, i.e. what the company had actually paid him? Or should the court look at what profits the company had earned, regardless of whether or not the husband chose to pay those profits over to himself?
This mattered because the amount the husband actually paid himself was considerably less than the profits of the company for a few reasons. First, the company had to pay tax on its profits, and obviously any monies paid towards tax couldn’t be paid out to the husband. Second, because of “timing issues”, the amount of pre-tax income was often much more than the amount of cash in the company that could actually be paid out. In fact, in most years every dollar within the company was paid out to the husband.
The Court of Appeal focused on the function of the Federal Child Support Guidelines. Under the Guidelines, income is just a “yardstick” to determine the appropriate child support under the circumstances. Just as a regular employee who earns $65,000 on paper does not “take home” $65,000 per year, a company can have large profits without having a lot of cash available to pay out. The Guidelines are designed to look at the gross amount of income, not at take home pay. The court is searching for income, not searching for cash.
As a result, the Court of Appeal endorsed the s. 18 analysis, finding that the whole of the company’s pre-tax income should be attributed to the husband. Whether or not the company had extra cash on hand was not the point: the point was the overall assessment of its income. The Court summarized these principles at paragraph 85 as follows:
"First, the Guidelines should be interpreted in light of their stated objectives, including the ability to calculate child support in an objective manner that ensures consistent treatment of spouses and children who are in similar circumstances. Second, under a s. 18 approach, the corporate income method is likely to be the fairer method of determining income of an individual who wholly controls a corporation. This method allows a court to include all income available for child support an intact family would utilize. Third, where that approach is appropriate, pre‑tax corporate earnings, not retained earnings or earnings after payment of taxes, are the starting point for an assessment of Guidelines income. Fourth, where a company is wholly owned by the payor, the onus is on the payor to provide evidence that his pre‑tax corporate earnings are not available to him."
I wonder, though, if the reasoning in Quinton applies when it comes to spousal support.
The Spousal Support Advisory Guidelines (a set of non-binding formulas published by the government) also require an assessment of income, and base that assessment of income on definition of income under the Federal Child Support Guidelines. While the Spousal Support Advisory Guidelines are non-binding, a judge can’t simply ignore them: departure from the Spousal Support Advisory Guidelines without any explanation for the departure can be an appealable error. See Redpath v. Redpath, 2006 BCCA 338.
Unlike the child support tables, in which income is merely a yardstick to determine a fixed amount of child support, the Spousal Support Advisory Guidelines are intended to actually divide income between separated spouses. In this context, ignoring legitimate cash-flow problems could leave one spouse with a much greater share of income than the Support Guidelines would normally contemplate.
To put it another way, if we ignore available cash when it comes to spousal support (especially in long marriages where the spouses are dividing income equally), one spouse’s share of the income might be made up of actual cash, while the other spouse’s share of the income might be made up of unrealizable “profits” that can’t in fact be removed from the company. That might work real unfairness on the paying spouse.
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