Support When Income Sits Inside a Corporation

A salary is a number. Income for a person who controls a company is an argument, and it is the argument that decides support in most business owner separations.

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Section 18Add BacksRetained EarningsImputed Income

Guideline Income | Corporate Statements | Discretionary Expenses | Capital Needs

Why the tax return is only the starting point.

A controlling shareholder decides what appears on a personal return.

Section 18 permits a court to look at pre tax corporate income.

Discretionary expenses run through a business can be added back.

Genuine capital needs of the business are a legitimate answer.

Quick Answer

How is support calculated when income is retained in a corporation?

Section 18 of the Federal Child Support Guidelines allows a court to determine income by reference to the pre tax income of a corporation over which the payor has control, rather than by reference to the personal tax return alone. The court may add back expenses that are discretionary or personal in nature. The payor can answer by showing that retained earnings are genuinely required for the operation and capital needs of the business. Similar reasoning is applied to spousal support.

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THE PROBLEM

Two Honest People, Two Different Numbers

A shareholder who controls a company decides how much of its profit is paid out as salary or dividend and how much stays in the business. That decision is ordinarily made for tax and commercial reasons and long before anyone contemplates separation. It nonetheless determines what appears on the personal tax return, which is where a support calculation would otherwise begin.

This produces a genuine dispute between people who are both telling the truth. The owner says the reported income is real, is what the accountant advised, and that the company needs its retained earnings. The recipient says the household lived at a standard the reported income would not support, and that the number is a matter of choice rather than fact.

Neither position is automatically right. What resolves it is financial evidence about the business, and the party who assembles that evidence properly usually prevails.

SECTION 18

Looking Through to the Company

Where a payor is a shareholder, director or officer of a corporation and the reported income does not fairly reflect the money available, section 18 of the Guidelines permits the court to include all or part of the pre tax income of the corporation for the most recent taxation year, or to use an amount commensurate with the services provided to the company.

The provision is not a presumption that everything in the company is available. It is a discretion, exercised on evidence. A business with genuine working capital requirements, debt covenants, planned capital expenditure or cyclical revenue has real reasons to retain earnings, and a court will accept them when they are demonstrated rather than asserted.

Where there are other shareholders the analysis is different again. A payor holding a minority interest may have no ability to compel a distribution, and treating corporate income as available to them may be unrealistic. Control is the operative question, and it is a factual one.

ADD BACKS

Expenses That Are Really Personal Consumption

Beyond retained earnings, the Guidelines permit adjustment where expenses have been deducted that are not reasonably necessary for the business. The recurring examples are a vehicle used mainly privately, travel with a limited business purpose, meals and entertainment, a home office claimed generously, and salaries paid to family members who do little.

The exercise is not an audit and it is not an allegation of dishonesty. Many of these deductions are entirely proper for tax purposes while still representing a benefit the payor enjoys and an ordinary employee would have to fund from after tax income. The support question is what the payor actually has available, not what the Income Tax Act permits.

A payor who anticipates this and can explain each significant deduction typically does better than one who resists the enquiry. Resistance invites broader disclosure orders, and broad disclosure orders in a business are expensive and intrusive.

IMPUTED INCOME

What You Could Earn, Not What You Chose To

Section 19 allows income to be imputed where a person is intentionally under employed, has diverted income, or fails to provide the information they are required to provide. It is used where a business owner reduces their compensation after separation, where earnings are shifted to a new spouse, or where disclosure simply does not arrive.

Failure to disclose is the most reliable way to have a large income imputed. Courts draw adverse inferences, and the figure that results is often higher than the one honest disclosure would have produced. The instinct to withhold financial information in a separation is understandable and, in this specific respect, self defeating.

The mirror argument arises where a business genuinely declines. A downturn is a real answer, but it is answered with evidence: statements, contracts lost, industry conditions. An assertion that the business is struggling, unsupported by records, tends to be treated as a decision rather than a misfortune.

Common Questions

Frequently Asked Questions

How is support calculated when income is retained in a corporation?

Section 18 of the Federal Child Support Guidelines allows a court to determine income by reference to the pre tax income of a corporation the payor controls, rather than the personal tax return alone. Discretionary expenses may be added back. The payor can answer by showing the retained earnings are genuinely needed by the business.

Does this apply to spousal support as well?

Yes. Although section 18 sits in the child support framework, similar reasoning is applied when determining income for spousal support, so the analysis of corporate income is generally common to both.

What if I do not control the company?

Control is central. A minority shareholder who cannot compel a distribution is in a different position from a sole owner, and the extent of control is a question of fact determined on the shareholding, the shareholder agreement and how the business is actually run.

What counts as a discretionary expense?

Commonly a vehicle used mainly privately, travel with limited business purpose, meals and entertainment, generous home office claims, and salaries to family members who perform little work. These may be proper for tax purposes and still be added back for support.

What happens if I do not disclose corporate records?

Income can be imputed under section 19, and courts draw adverse inferences from non disclosure. The imputed figure is frequently higher than full disclosure would have produced, and costs consequences often follow.

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Support When Income Sits Inside a Corporation

How is support calculated when income is retained in a corporation?

Speak to a Family Law Lawyer

Two Honest People, Two Different Numbers

Looking Through to the Company

Expenses That Are Really Personal Consumption

What You Could Earn, Not What You Chose To

What will child support cost?

Frequently Asked Questions

Corporate Income and Support | Ontario | Lexaltico LLP

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