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Our top Surrey child support lawyers know that the federal child support guidelines calculation is largely based on the income of the paying parent.  If you don’t calculate the income properly  you won’t obtain the correct Surrey child support amount.

But what happens when the personal living expenses of a parent are paid for, either directly or indirectly, by his or her own company, and are not actually reported as income?  In addition, how should the Court deal with an explosive growth of pre-tax profit from a company owned by one of the parents, which is also not reported as income?  Don’t make a huge mistake and accept too little child support because you didn’t obtain proper legal advice. Get help.

The tenacious James Cudmore of our offices just had a great victory on this issue in a Northern BC family law case he was acting for the mother in The BC child support decision of Stevens v. Stevens, 2012 BCSC 1698, where the father of two children owns a Guest Lodge located on the Alaska Highway, just north of Fort St. John, that offers lodging, a restaurant, a general store, gasoline sales and recreational opportunities for its patrons.

As the one-half owner of the business and for tax planning purposes, most of the father’s living expenses are either directly paid for by the business, or arise out of his actually living at the Lodge.  The expenses paid for by the business include: lodging, automobile expenses, food, utilities, vacations and more.  The mother argued that these non-monetary benefits ought to be assessed and included in the compilation of the father’s income for the purpose of child support calculations, and the Court agreed.

Watch For Tax Free Personal Benefits Through The Company

The Court noted as follows:

[15]  Section 19(1) of the Guidelines provides a non-exhaustive list of circumstances in which the court may impute income: Bouroque v. Gerlach, 2006 BCCA 157, 267 D.L.R. (4th) 304. The circumstances listed in section 19 include instances where:

(a)        the spouse is intentionally under-employed or unemployed, other than where the under-employment or unemployment is required by the needs of a child of the marriage or any child under the age of majority or by the reasonable educational or health needs of the spouse;

(d)        it appears that income has been diverted which would affect the level of child support to be determined under these Guidelines;

(f)         the spouse has failed to provide income information when under a legal obligation to do so;

(g)        the spouse unreasonably deducts expenses from income;

[16] Several authorities have supported the addition of an imputed amount of benefits received by a payor from a corporation to the payor’s Guidelines income, including:

a.     Morgan v. Morgan, 2000 BCSC 371, where the Court determined it was “appropriate to impute income to the respondent of the additional benefit of free housing and an automobile provided at no cost” where the respondent failed to provide income information as required by law. The Court imputed an additional $36,000 to the respondent’s income.

b.     Halani v. Jeraj, 2001 BCSC 1155, where the plaintiff received free room and board, the occasional use of a company vehicle and the occasional use of company credit cards for his personal use. Master Barber, after finding that the plaintiff was purposefully under employed, imputed a total income of $40,000which included declared income of $11,599 with the difference between those amounts being an assessment of the value of company-paid personal benefits.

c.     Jenkins v. Jenkins, 2012 NSSC 117, where the Court stated at para 24:

. . personal benefits paid on behalf of a shareholder, officer or director  by a corporation will be considered in the calculation of income, often by adding that amount back into the pre-tax corporate income that thus becomes available as income for support purposes as noted in Hrenyk v. Berden2011 SKQB 305.

[17]  At the hearing, the respondent did not deny that many of his personal expenses are paid for by the Lodge. The financial statement filed by the respondent on January 6, 2012 makes no reference to rent or mortgage payments or food costs other than $50 per month for food outside the home…

[18]  I find that the respondent receives considerable benefits from the payment of living expenses by the Lodge… I find that the cost of benefits including lodging, food, utilities, vacations and other expenses which are for the personal benefit of the respondent but paid by the Lodge must be considered when imputing the respondent’s Guidelines income.

The Business Owner’s Tax Return Often Understates True Income

The Court also had to decide how to account for a very significant increase (almost 700% growth) in pre-tax profits retained by the Lodge over the course of three years, with the most significant growth occurring in the last of the three years.

Specifically, the Court had to decide whether the entire amount of pre-tax profit, or some portion of the same should to be imputed into the payor’s income and, if so, should it be averaged or should some other formula be used. As the Court noted, the central question in that allocation is whether there is a need for some or all of the pre-tax profit to be retained in the company for legitimate corporate purposes.

Section 18(1) of the Federal Child Support Guidelines provides that:

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 the 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, 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.

As the Court noted:

[23]  The Court of Appeal in Hausman v. Klukas, 2009 BCCA 32, discussed the onus of showing the need for the pre-tax profit to be retained in the company and at paragraph 51 set out the following test:

[51]  … there is an “emerging presumption” that pre-tax corporate income will be assumed to be available to a payor unless evidence is led to the contrary. These authorities state that the onus in the circumstances is on the payor. As discussed in Jeffery v. Motherwell, 2006 BCSC 140, 36 R.F.L. (6th) 377, at para. 13:

The onus is on the payor to provide the necessary evidence that the corporation’s pre-tax income is not available to the payor. The court should not have to ferret out the necessary information from inadequate or incomplete financial disclosure…

The Court went on to say that:

[25]   There is very little evidence of business circumstances which would require retention of the pre-tax profit in the Lodge…

And further that:

[27]    Accordingly, I find that the respondent’s share of the pre-tax profits should be added to the other four components of income for the purpose of imputing income under the Guidelines. What remains is for me to make a finding as to whether the pre-tax income to be imputed to the respondent is the most recent amount of pre-tax profit attributable to the respondent or whether there should be an averaging of the pre-tax income over the taxation years of 2009-2011.

Regarding this calculation of “whether the pre-tax income to be imputed to the respondent is the most recent amount of pre-tax profit attributable to the respondent or whether there should be an averaging of the pre-tax income over [the three most recent years]”, the Court noted that:

[28]  Section 17(1) of the Guidelines deals with the pattern of income of the payor and states:

17.(1) If the court is of the opinion that the determination of a spouse’s annual income under section 16 would not be the fairest determination of that income, the court may have regard to the spouse’s income over the last three years and determine an amount that is fair and reasonable in light of any pattern of income, fluctuation in income or receipt of a non-recurring amount during those years.

[29]  As set out above, the pre-tax income attributable to the respondent has increased significantly over the last three years … with income varying widely … although growing consistently in that time, it would normally be difficult to determine if the income will continue to climb or is more likely to fluctuate up and/or down. The only evidence before me regarding incomes post fiscal 2011 is that of the respondent who has stated that “earnings have increased recently as Toad River, [the Lodge], is now connected to the electricity grid and we do not have to pay to generate our own electricity.”

[30]  Is the most current pre-tax income attributed to the respondent, i.e. $106,018.50, or an average of the last three years, which I calculate to be $59,123, or possibly some amount in between those figures, the fairest determination of pre-tax income to be imputed to the respondent?

Ultimately, Court found that the significant increase in pre-tax profits were likely to level off and remain at the most recent level, due to “[the Lodge having] access to the B.C. Hydro grid, [and therefore significantly] reducing [it’s power generating] costs,” meaning that an averaging of income over three years was not appropriate.

Instead, the Court imputed income to the father of the full amount of the pre-tax profits in its most recent year, in addition to the Court’s estimate of the living expenses paid for either directly or indirectly by the Lodge, and used this much higher number in its calculation for child support owing by the father moving forward.

The calculation of income for the purposes of both child and spousal support can be fairly complicated when it comes to business owners.  Lorne MacLean, Q.C., and the experienced lawyers at MacLean Law are here to help.  Please feel free to contact us now to discuss your needs.