Pre-Corporate Tax Income

Today, we will be speaking about how a payor's income is calculated for the purpose of determining support.

Hello. My name is Andrew Feldstein, and today I will be speaking to you about how a payor’s income is calculated for the purpose of determining support, and specifically about whether the law can impute an income to a payor spouse based on their pre-corporate tax income.

There are written Federal Child Support Guidelines for the amount of support payable based on the income of the spouse making the payments, known as the payor.

Generally speaking, for the purpose of calculating support, income is determined in one of two ways.

First, a court can calculate a payor’s income by adding up the sources of income under the “Total Income” entry on a spouse’s T1 income tax return and then make adjustments to that income as required by Schedule III of the Guidelines.

Or, second, both spouses can agree in writing on an amount, which the court must find reasonable in light of the income information disclosed elsewhere.

Calculating income for support purposes becomes more complex when payor spouses are in a position to manipulate their apparent income in their capacity as director, officer or shareholder of a corporation.

As a result, for the purposes of calculating support, section 18 of the Federal Child Support Guidelines permits the court to include all or part of the corporation’s pre-tax income, after adding amounts paid to persons with whom the corporation was not dealing at arm’s length, to a spouse’s income.

The court also has discretion to include in the payor spouse’s income an amount which reflects the work that the spouse performs for the corporation, which can be up to the amount of the corporation’s pre-tax income.

Accordingly, under the Guidelines, the Court has discretion to include corporate profits in a payor spouse’s income if it is felt that the declared income “does not fairly reflect all the money available to the parent or spouse for the payment of child support.”

Moreover, the Courts have held that in determining whether to exercise its discretion to impute corporate pre-tax income to a payor, the court will consider a number of factors, including:

  1. Whether there should be a general reluctance to automatically attribute corporate income to a shareholder because of the separate legal entity of the corporation;
  2. Whether there is a business reason for retaining earnings in the company;
  3. Whether there is one principal shareholder or other bona fides arm’s length shareholders are involved;
  4. The historical practice of the corporation with respect to retaining earnings; and
  5. Finally, the degree of control exercised by the spouse over the corporation.

Ultimately, the court must undertake an extensive analysis of the history of the company in question, prior to deciding whether to attribute retained earnings to a payor’s income.

To learn more about determination of income for the purposes of calculating support, please visit our website at www.separation.ca.

If you need advice on your own family law matter, please call us at (905) 581-7222 to schedule an initial consultation. We’re always happy to assist.

From Feldstein Family Law Group, I’m Andrew Feldstein. Thanks for watching.

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