Child Support – How does Corporate Income come into Play?

I often have corporate shareholders, be them farmers or shareholders of larger or smaller corporations, meet with me to assess potential child support obligations in the event of a marital or common law separation.

The first question, of course, is whether there is a child support obligation at all. Without getting into the definitions of “Child of the Marriage” pursuant to our statutes, and the nuances that surround that issue, typically, where you are a parent of a child under the age of 18 and you are sharing access or see your child for less than 40 percent of the time, child support obligations will arise.

Many people believe that the child support obligation only impacts them with respect to their own income. This income, for many people, comes by way of T4 employment income. For business owners, this income can come by way of primarily employment income of dividends. However, the child support story may not end with these annual sources of income.

If you are a sole shareholder in a business, or even a half or quarter shareholder,  our laws may at the pre-tax income of your corporation, after expenses, and determine that the pre-tax income of your corporation should be added to your employment/dividend income to establish the actual available income for you. This larger income can then be used to assess child support pursuant to The Federal Child Support Guidelines. If you own only a percentage of the corporation in shareholdings, then it is likely that only the same percentage of the pre-tax income will be attributed. The onus will be on you to explain why it is that the pre-tax income should not be added to you remuneration for child support purposes. To go one step further, the expenses claimed by your corporation may also be scrutinized to make sure they are all legitimate expenses, and not expenses that have been overinflated to reduce your company’s pre-tax income.

Hearing this news is often upsetting to my clients. They had been told that starting a corporation, especially one where they are not the sole shareholder, would protect them from this type of situation.  A couple of points on this concern:

1)      Likely you have been confusing child support and family law with laws around debtor/creditor/bankruptcy/tort issues. Don’t feel bad – the legal concepts are confusing;

2)      Our laws will not have all of your pre-tax income taken from you for child support. They are simply going to add corporate income to your other remuneration and assess a larger child support payment based on that income – the actual money gets to stay in the corporation.

 The above being said, there are some areas of argument where some or all of that pre-tax income of your corporation will not be attributed to you, the paying shareholder of child support. Although the law is complex on these issues, some areas of argument for you may be:

1)      The corporation is new and we need to build our capital account to ensure success in later years;

2)      The corporation is new and we need to obtain greater capital for improvements/investment/machinery/greater expenses/expansion;

3)      The earnings for this year were higher than normal because of a unique contract, etc. our company received;

4)      The company has very little in retained earnings;

5)      The company just lost a major source of revenue.

These are a few areas where you may argue that the pre-tax income of the corporation should stay with corporation. There are others. The key to being successful with these arguments is for them to actually be true and provable.  For example, you can’t just tell the Court that you plan a big expansion next year on your grain farm. You will need to show the Court papers/evidence that indicate the proposed expansion, contacts that have been entered into, new machinery that has been purchased or leased to handle the new expansion, etc.

If you run into one of these situations and may be on the hook for increased support obligations, I would be happy to sit down for a chat to see if we may help. Give me a call to set up a strategy consultation.