“The answer to this question is simple.
All the money that you take from the company for personal use is considered income for the purposes of determining child support. What is tricky is that when people think of their income, they think of the amount showing on their T1 income tax return. For people who own their own businesses, this is not always the case.
“So, what specifically determines child support?”
If you are a business owner that is married, we use the Federal Child Support Guidelines to determine the amount of child support that you’ll have to pay. If you’re not married, we use the Alberta Child Support Guidelines. These two guidelines basically state the same thing. To read the full details of each guideline, click the drop-down menu below. Or, continue reading to get a break-down of what these guidelines mean in layman’s terms.
“Federal Child Support Guidelines:”
(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.
(1) Where a parent is a shareholder, director or officer of a corporation and the court is of the opinion that the amount of the parent’s annual income as determined under section 16 does not fairly reflect all the money available to the parent for the payment of child support, the court may consider the situations described in section 17 and determine the parent’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 parent 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 parent establishes that the payments were reasonable in the circumstances.
Both guidelines essentially state that regardless of your marital status as a business owner, both you, your ex, and the courts will be looking very closely at the amount that you are claiming as business expenses. The courts, if they feel it is justified, can use the entire pre-tax income of your corporation to determine the amount of child support that you should pay. This is clearly a worst-case scenario, but one that has to be taken seriously. The court’s want to know how much you are actually taking out of the company. They are not concerned with what is appropriate from the perspective of the Canada Revenue Agency. An item can be perfectly acceptable as a write off (lowering your taxable income) and at the same time be income for the purposes of child support. Mortgage payments, cell phone bills, and vehicle loans are some examples of items that the court will scrutinize to determine how much of your costs are truly business related. To help you start thinking of what specific expenses are truly business related, there are some great resources and tools such as mysupportcalculator.ca that provide calculators that factor in your self employment income and business expenses to give you a rough idea of what you will pay in child support.
“Can you give me an example?”]
The Alberta courts have been clear. Money that a payor describes as a business expense must be used solely for business purposes. If there is personal use at least a portion of that expense can be added back to the payors income for the purposes of child support to the limit of the company’s pre-tax income. (Wildeman v. Wildeman 2014 ABQB 732)This is equally true of any payments made to non-arms length third party’s. If you pay your family or your new partner a salary out of the company, you had better be able to justify that salary. It must be market rate and the position must be required for the functioning of the organization. As an example, if you pay your new girlfriend as a bookkeeper, you cannot pay her more than you would a person who only provided bookkeeping services. And, you must be able to show that your business requires the services of a bookkeeper. If you cannot meet this standard, any amounts that you pay your new girlfriend will be considered income in your hands for the purposes of child support.
“That sounds like a lot of work. Is it really necessary to provide all this info?”
What is particularly difficult for the business owner in this scenario is that the courts have said that the onus is on the business owner to prove that payments from his pre-tax income are in fact business expenses. The Alberta Court of Appeal, quoting the British Columbia Court of Appeal stated, “The onus is on the payor to provide the necessary evidence that the corporation’s pre-tax income is not available to the payor” Henderson-Jorgensen v. Henderson-Jorgensen 2013 ABCA 328 (para 12). This was an appeal of a case, where the business owning spouse chose not to provide specific and compelling information about the nature of his business expenses. That choice was an expensive one. Essentially, the position of the judge was that the business owner is in the best position to provide information about his own company; therefore, he has the responsibility for proving that the expenses in question actually relate to the business.
“What is the best strategy then?”
In the end, the best strategy is to be upfront and transparent in regards to the amount of money that you take out of the company, as well as the expenses that you run through it. If you choose not to be forthcoming, the courts may assume that you have something to hide.
