Guideline Income for Self-Employed Persons
Running your own business is both exciting and challenging. Where child support issues are concerned, calculating a self-employed person’s Guideline income can be fraught with argument.
This begs the question: how much child support do I pay and what are the legitimate reasons that my company’s revenue can be excluded from the child support calculation?
Those who are employed often know their hourly wage or yearly salary and can estimate with some degree of certainty how much income they have available for the purposes of child support. This is not always the case for business owners whose income is often derived from either a salary that they pay themselves or from dividends.
When someone is required to pay child support to their spouse that person is known as the “payor” and the spouse receiving child support is known as the “payee”.
The starting point under Section 18 of the Federal Child Support Guidelines is that all of a payor’s pre-tax corporate income is considered to be available income for the purposes of determining a payor’s child support. This means that your company’s gross profit amount is used in calculating how much you can afford to pay in child support.
It is the responsibility of the payor to prove what portion of the pre-tax income is not available to the payor. For example, corporate tax or working capital are necessary business expenses that can be excluded.
The Courts have held that the money needed to maintain the value of the business as a viable going concern will not be available for support purposes. To this end the Courts will take into consideration legitimate business needs in determining what portion of the pre-tax corporate income is available to include in determining child support: Kowalewich v Kowalewich, 2001 BCCA 450, at para 58-59.
The presence of other shareholders will also affect how much of the pre-tax corporate income is available; however, fraudulent share purchases for the purpose of lowering one’s child support obligations can be made void pursuant to the Fraudulent Conveyance Act, RSBC 1996, c 163 and may also lead to penalties.
Necessary Business Expenses
The following have been found to be acceptable and necessary business expenses or acceptable reasons why all of the pre-tax income is not available:
- Monies needed as working capital or to maintain the enterprise as a viable business: Bennet v Bennet, 2015, BCSC 699, at para 83;
- Corporate tax: Jeffery v Motherwell, 2006 BCSC 140;
- Cash reserves for depreciation for real estate businesses: Hollenback v Hollenback, 2000 BCCA 620;
- Retained income to repay corporate debt or obligations: Christie v Wilson, 2010 BCSC 1823, at para 23-25;
- Business expansion plans: Kowalewich v Kowalewich, 2001 BCCA 450, at para 58, and Teja v Dhanda, 2009 BCCA 198;
- Using corporate income to pay down a corporation’s mortgage(s): McKenzie v McKenzie, 2014 BCCA 381, at 103;
- The accumulation of capital reserves for the purposes to upgrading equipment, and the purchase of a larger facility to be competitive in the marketplace: Evanow v Lannon, 2018 BCCA 208, at para 63-66;
- The volatility of a company’s earnings from year to year can support that a reasonable amount of the corporate pre-tax income is not available and must be kept as a reserve: Chapman v Summer, 2010 BCCA 237, at para 33.
In addition to the pre-tax income, all amounts paid by the corporation as salaries, wages or management fees, or other payments or benefits, to or on behalf of the persons with whom the corporation does not deal at arm’s length must also be added to the pre-tax income, unless the payor can establish that the payments were reasonable in the circumstances.
If you are in a family dispute, consider calling one of Baker Newby’s family law lawyers to advise you on your rights and to assist you with your case.