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Corporations/Business Interests and Family Law - Part 1

The method in which the court treats corporate interests / business interests in family law is complex. Generally speaking, a corporation is treated as its own separate entity and has its own legal identity. This means, practically speaking, the corporation is its own person.

To illustrate, imagine that the wife owns the corporation "X" and X owns 5 trucks. Further, the wife is an employee of X and receives a salary of $10,000 per annum. In the past year, X had $500,000 in pre-tax income. X has two shareholders. One shareholder is the wife and the other is the wife's sister. The wife owns 50% of the shares of X. 

The husband might ask questions such as:

  1. Is the wife's income $10,000?
  2. Are the 5 trucks considered family assets?
  3. Am I able to obtain a court order prohibiting the sale of the 5 trucks until the ultimate division of family property? 
  4. How will the court treat the shares that the wife owns?

This post will only address the first question, that of how the court considers the income of the corporation in reference to determining the payor's income for child support purposes.

The BC Court of Appeal considered this issue in the case of Kowalewich v. Kowalewich, 2001 BCCA 450 (CanLII)

In the course of its decision, the court referred to s. 18 of the Federal Child Support Guidelines (commonly referred to as the "Guidelines") which is reproduced as follows:

18. (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.

(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.

The court cited with approval that the purpose of s. 18 was to permit the court to consider the pre-tax income of the corporation in arriving at figure that would be appropriate to "impute" to the payor. 

I reproduce some of the pertinent in the court's reasons for judgement as follows: 

[43]    In this regard, I find helpful the view Justice Martinson expressed in Baum v. Baum (1999), 1999 CanLII 5387 (BC SC), 182 D.L.R. (4th) 715 at para. 28: Valid corporate objectives may differ from valid child support objectives.  The purpose of s. 18 is to allow the court to “lift the corporate veil” to ensure that the money received as income by the paying parent fairly reflects all of the money available for the payment of child support.  This is particularly important in the case of a sole shareholder as that shareholder has the ability to control the income of the corporation.  See Bhopal v. Bhopal,[1997] B.C.J. No. 1746 (S.C.), Blackburn v. Elmitt (1997), 34 R.F.L. (4th) (B.C.S.C.) and McCrea v. McCrea.

[44]   A court’s effort to ensure fairness does not require a court to second-guess business decisions nor, as Justice Pitfield so colourfully noted in Stamoulos, supra, at para. 44, to “place the largest available shovel in the company store.”  What it does require is that a spouse’s allocation of pre-tax corporate income between business and family purposes be assessed for fairness by an impartial tribunal when parents cannot reach agreement on priorities as they would in an intact family and may upon separation under s. 15(2).

[45]   To determine whether “Total income” fairly reflects money available for child support, a court might ask what an objective well-informed parent would make available for child support in the circumstances of a particular business over which the parent exercised control, having regard to the objectives of the Guidelines, the underlying parental obligation to support children in accordance with one’s means, and any applicable situation in s. 17.

[46]   It is common ground that Total income on Mr. Kowalewich’s 1997 T1 General form did not fairly reflect the amount of money available to him for the payment of child support in 1998.  So the first issue for this Court is whether the trial judge erred in selecting s. 18(1)(a) rather than s. 18(1)(b) after forming that opinion.

[47]   The Guidelines give no explicit guidance as to how a parent or a court might go about choosing whether to usethe corporate income method or the personal services method in determining annual income.  However, s. 18 suggests two considerations in the preconditions for its application: (1) which method produces an annual income that more fairly reflects “all the money available to the spouse for the payment of child support;” and (2) which method does the nature of the spouse’s relationship with the corporation support.  Section 18 also permits reference to the “situations described in s. 17,” and thus to the spouse’s income pattern over the previous three years.

[48]   In some cases, the nature of the spouse’s relationship with the corporation will be decisive.  Section 18 applies to a spouse who wholly controls a corporation, but it also applies to one who shares ownership and control with others. In the former case, the corporate income method is likely to be the fairer method of determining income.  This is because it allows a court to include not only reasonable payment for personal services but also a reasonable return on the owner’s entrepreneurial capacity and investment.  These are sources of income available for child support an intact family would utilize. Moreover, it not only permits but requires the inclusion of the income of companies related within the meaning of the Income Tax Act, and of non-arms length payments made without value for the company.

[49]   There may be factors in particular cases that will recommend the personal services method to a court for a one-person company, as Baum, supra, illustrates.  In that case, the company’s only business was the provision of the personal services of its owner.  There may also be cases where Mr. Kowalewich’s submission about stability of income will persuade a trial judge to choose the personal services method, having regard to s. 17 situations.  But this is not one of them.

[50]   In light of the corporate structure Mr. Kowalewich put in place for his business, the corporate income method was the fairest way of determining what money was available to Mr. Kowalewich for the payment of child support.  It follows I find no error in Justice Dorgan’s choice of that method in determining Mr. Kowalewich’s annual income for 1998 and thus 1999.

And further:

[54]   The Guidelines allow a court to include all of the pre-tax income of a corporation for the most recent taxation year in a spouse’s annual income for Guideline purposes. They do not require it. I am not persuaded they make the inclusion of all pre-tax income the default position.

[55]   The only explicit guidance the Guidelines provide as to how much of a corporation’s pre-tax income to include in a spouse’s annual income is found in the words “… the court may consider the situations described in section 17 … .” That section refers to the historical income pattern of a spouse and to non-recurring gains and losses.

The full case can be found here:

In reference to the hypothetical fact pattern in this post, it is of particular importance that the wife is not the only shareholder. Further, it is likely important to discover the amount of "working capital" X requires. It is important to note that while the court will likely consider the pre-tax income of X, it is unclear what the court will ultimately find as the wife's income for child support purposes. 

Written by
Mark J. Chiu
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