How is Vancouver Self Employed Support Calculated?
Our Vancouver Spousal Support lawyers are aware of the pitfalls that face both support paying and support receiving spouses when they are involved in Vancouver Self Employed Support disputes. Unlike employed spouses, spousal and child support cases involving self employed spouses require more scrutiny to determine guideline income so a proper support award is paid. In cases involving the available income of business owning spouses, professionals who operate a professional corporation, real estate developers and others who can control their income, a careful analysis of company financial statements needs to be undertaken. Our Vancouver Self Employed Support lawyers handle complex support negotiations and court hearings regarding company pre-tax profits and we will work with you to ensure a just and proper result. When our high net worth clients are involved in a Vancouver Self Employed Support case, the stakes are huge. We cannot let the paying spouse’s company’s ability to make profits be impaired but we must also ensure that no end run around fair spousal and child support occurs.
Lorne MacLean, QC has made a reputation as being a tenacious, no nonsense, negotiator and more importantly he is revered by his high net worth clients as a savvy trial lawyer in cases involving company pretax profits and spousal and child support.
MacLean knows you NEVER USE THE BUSINESS OWNERS PERSONAL TAX RETURN AS THE STARTING POINT FOR INCOME FOR SUPPORT PURPOSES.
He was also one of the first lawyers to argue successfully that sometimes the paying spouse’s tax return income is too high when they own a company for tax planing reasons or when the monies withdrawn by the owner put the company in a deficit position.
A Vancouver Self Employed Support case requires deft handling by a highly skilled lawyer to prevent an unfair result or even worse a financial disaster.
Earlier Vancouver self employed support cases were very aggressive in dealing with pre-tax company or professional practice profits. BC courts routinely used the majority of the self employed profits made in the fiscal year to the guideline income of the paying spouse and added them to the money drawn out by the business owner. More recent cases focus on cash flow needs for the business to ensure the “golden goose” that provides the profits for the separated family unit is not killed and there is increased deference to business owner’s decisions on how to use income they make.
A Vancouver Self Employed Support case will involve looking at the businesses’ need for working capital for:
- expansion
- replacement of buildings or equipment
- bad debt
- risk of economic slowdown
- new business ventures
- payment down of debt
- compliance with banking requirement
- compliance with shareholder agreements
- contingencies to deal with law suits
- monies needed by a new business to keep it solvent where cash flow needs are not yet clear
What Are Pre Tax Profits and Why Should I Care?
In a case just released this week Mr. Justice N. Brown gave a great review of what the court considers when determining what a business owner’s real income is for child and spousal support purposes:
Legal Principles for determination of Guidelines income
[27] In K.S.F. v. S.M.F, 2011 BCSC 1563, I reviewed case law on the subject of determination of total income under the Guidelines.
[37] … Usually, the total income of a spouse in a given year can be based on the “Total Income” a spouse reports in their T1 General Tax form issued by CRA: Guidelines, s. 16. But if a spouse’s pattern of annual income shows this would not be the most fair and reasonable way to fix Guidelines income for support purposes, the judge may consider fluctuations in a spouse’s income over the previous three years. The judge can also consider nonrecurring income during that three-year period and fix an amount the judge finds proper: Guidelines, s. 17(1).
[38] If the effects of a nonrecurring capital or business loss do not give a fair picture of a spouse’s annual income, the judge may impute an amount for total income they find proper: Guidelines, s. 17(2).
[39] If a spouse is a shareholder of a business … and the judge believes a spouse’s T1 “Total Income” does not fairly reflect all the money available to the spouse to pay support, the judge may consider the spouse’s income pattern over the previous three years: Guidelines, s. 18(1).
[40] The judge can also include in the spouse’s total income all or part of the corporation’s pre-tax income: Guidelines, s. 18(1)(a). Alternatively, the judge may fix an amount that agrees with the services the spouse provides the corporation, so long as the amount does not exceed the corporation’s pre-tax income: Guidelines, s. 18(1)(b).
[41] Unless the spouse shows that all amounts for salaries, wages or management fees were reasonable in the circumstances, s. 18(2) of the Guidelines requires the judge to add those amounts back to pre-tax income of the corporation.
[28] Further, more specifically on the subject of pre-tax earnings and retained corporate earnings, the following authorities were noted at paras. 43 – 47:
[43] In Kowalewich v Kowalewich, 2001 BCCA 450, 92 B.C.L.R. (3d) 38 [Kowalewich], Huddart, J.A., writing for the Court, stated at paragraph 40 that a judge should not look only to the value of a spouse’s pay or their services to the company they own or control. At paragraph 42, she explained the purpose of the Guidelines is
… to permit an impartial assessment of “money” available to a spouse to pay child support. They are not just about actual income as a parent directly or indirectly determines it to be.
[44] Huddart J.A agreed at para. 43 of Kowalewich with comments Justice Martinson made in Baum v. Baum (1999), 182 D.L.R. (4th) 715, 7 R.F.L. (5th) 231 (B.C.S.C.), at para. 28:
[28] Valid corporate objectives may differ from valid child support objectives. The purpose of s. 18 is to allow the court to “lift the corporate veil” to ensure that the money received as income by the paying parent fairly reflects all of the money available for the payment of child support. This is particularly important in the case of a sole shareholder as that shareholder has the ability to control the income of the corporation. [Authorities omitted].
[45] However, a judge tasked with determining a spouse’s total income under the Guidelines can consider the value of a spouse’s services to the company; sometimes, this will be a fairer basis for doing so: Kowalewich, at para. 65.
[46] But in a case such as this, where the husband exercises total control over AGB’s finances and where the wife’s continuing partial share ownership is an immaterial consideration because she had no financial control at all, I should focus on the total income the husband had available to him to pay child and spousal support. To determine his total annual income, I should therefore consider pre-tax corporate income, non-arms length transactions without value to the company, inappropriate expensing and any other unjustified diversions … that effectively deprived [the child] or the wife of the support they were entitled to: Kowalewich, at paras. 48-50.
[47] For child support, Huddart J.A. stated at paragraph 45 of Kowalewich that to determine whether a spouse’s “Total Income” fairly reflects money available for child support, a court might ask
… what an objective well-informed parent would make available for child support in the circumstances of a particular business over which the parent exercised control, having regard to the objectives of the Guidelines, the underlying parental obligation to support children in accordance with one’s means, and any applicable situation in s. 17.
[29] I then considered how much pre-tax corporate income should be incorporated into the payor’s annual income at paras. 48 – 49, 51 – 54 and 58:
[48] Pre-tax corporate income often represents an “owner’s entrepreneurial capacity and investment” and a source of income “an intact family would utilize”: Kowalewich, at para. 48. But this is not always so. As Huddart J.A. noted, a court’s effort to ensure fairness does not require it to second-guess business decisions, but to make a fair assessment of how to share income for family and business purposes: Kowalewich, at para. 44. This test requires a judge to consider evidence of legitimate business calls on pre-tax income before including an expense in corporate pre-tax income: Kowalewich, at paras. 58-59.
[49] Neither the pre-tax profit of a company nor its losses are automatically included in annual income. The Guidelines allow, but do not require inclusion. Inclusion is not the default position: Kowalewich, at para. 54.
[51] Referring to findings made by the two different judges presiding below, Huddart J.A. stated that money the spouse needed to maintain the value of the business as a viable going concern would not be available for support purposes and should not be included in determining annual income: Kowalewich, at para. 58. She also noted that in Hollenbach v Hollenbach, 2000 BCCA 620, the trial judge recognized it was a legitimate business purpose for a real estate business to set aside a reserve for depreciation. In addition at para. 60, she noted the parties had not asked the accountants giving evidence for their opinions on the company’s need to finance a planned expansion.
[52] Dorgan J., one of the trial judges hearing Kowalewich, canvassed several categories of business purposes she thought were legitimate in that case. These were noted at para. 61 of Kowalewich. They included: a reasonable salary for management; an adjustment for a store closure; money needed for expansion; depreciation; economic downturns; and a return on the paying spouse’s capital investment. Huddart J.A. did not criticize the categories. She found, however, that the trial judge had attributed too much of the pre-tax corporate income to Mr. Kowalewich’s income: Kowalewich, at para. 62.
[53] The pattern of pre-tax income in a small business … can rise and fall for any number of reasons, ranging from souring economic conditions to strategic accounting for tax purposes. A responsible owner of a business dedicated to selling and installing auto glass would likely need to reserve against economic slowdown and declining sales; as well as for deferred maintenance, depreciation, and possible tax liabilities. The owner, looking at all their information, including fluctuations in sales and earnings, has to make sure the business can continue operating in the future. This obviously indirectly benefits not only the company, but also a spouse or child eligible for support.
[54] In sum, Kowalewich confirms a judge should not make an order that prevents the paying spouse from running their business as profitably as possible, or that prevents them from making good business decisions. But the owner spouse must state business income and allocate expenses honestly and transparently. Expenses must be reasonable and for legitimate business purposes, considering all the circumstances. The reasonable needs of a child and spouse entitled to support must be balanced fairly against legitimate business calls on pre-tax corporate income. If the paying spouse fails to so act, the court will see to it.
[58] I note as well that in Kowalewich, neither the Court of Appeal nor the judges at trial had much in the way of specific or clear evidence on business purposes before them. Some findings can rest on evidence about the nature of the business and judicial discernment of the capital needs of the business.
[Emphasis added.]
[30] In Reis v. Bucholtz, 2010 BCCA 115 at para. 48, Justice Groberman held the paying spouse bears the onus of establishing that pre-tax corporate income is being kept by the company for business purposes on the civil standard of a balance of probabilities. The evidence in support should be clear: Jeffery v. Motherwell, 2006 BCSC 140 at para. 13.
Top Family Lawyers Dig Deep Into Company Financials
A skilled lawyer like Lorne MacLean, QC will review personal benefits buried in business deductions and add back both spouse’s salaries to the pre tax profits and look at entertainment, travel, cell phones, vehicle expenses amortization, capital gains ( they must be doubled!) and retained earnings.
[42] VIE appears to be viable, but to maintain viability it will need capital to purchase new and replacement equipment, storage facilities, and some outside office management, especially if the respondent is to find time to widen the scope of geographical locations, type and complexity of projects the company undertakes. Such business expansion would likely strengthen the company’s finances and help fence out market vagaries. Otherwise, as a young company, VIE will remain financially vulnerable. VIE’s retained earnings at a given time are subject to legitimate business calls and the amount recorded is not necessarily representative of freely available funds.
[43] The cases recognize what might be characterized as the “deft touch” a judge must use when dealing with small businesses and their retained earnings. Usually, owners know their businesses better than anyone else. They are more attuned to the competitive forces and economic vagaries it faces, the capital it requires, and the foreseen or foreseeable expenses it will incur. The payor carries the burden to prove the business legitimacy of expenses and retained earnings. But as Huddart J.A. noted in Kowalewich, a court’s effort to ensure fairness does not require it to second-guess business decisions; rather it must fairly assess how to share income for family and business purposes. In turn, this requires the court to consider evidence of legitimate business calls on pre-tax income before including an expense in corporate pre-tax income: Kowalewich at paras. 44 and 58 – 59.
[44] As noted earlier, Baum reminds us that valid corporate objectives may differ from valid child support objectives and that the purpose of s. 18 is to allow the court to “lift the corporate veil” to ensure the payor’s stated income includes all money available for the payment of child support. Of course, “all of the money” is not equivalent to whatever might be the current figure for retained earnings on a balance sheet at a given time. That acknowledged, the children of a marriage are a parent’s primary responsibility. Their financial needs can become a greater priority than, say, growing the company. The nature and extent of that priority is a matter of balance and proportion. The court’s role is to assess the circumstances as would a reasonable parent informed of all pertinent financial and personal facts.
[45] In this case, I find the respondent has established on a balance of probabilities that VIE, a relatively new business must retain earnings to, among other things, properly manage business fluctuations, float the company during times of illness, fund necessary equipment purchases, and cover deferred or otherwise pending and anticipated expenses, as detailed in the respondent’s affidavit and the letter from counsel, attached as Exhibit “E” to the respondent’s first affidavit.
[46] These are legitimate business requirements. The current figure for retained earnings does not represent an uncommitted pool of income that can be drawn down for non-business purposes as if the respondent faced no constraints, or as if VIE’s earnings and productivity would not see any negative impact.
[47] In this case, the children’s call on retained earnings is not for the necessities of daily living; rather, it is almost all for s. 7 expenses. The respondent has continued to pay basic child support for three children, two of whom are adults, who are either working or attending school. Such circumstances moderate the forcefulness of calls on the retained earnings.
[48] I fix the respondent’s annual Guidelines income at $105,000.
Vancouver Self Employed Support cases need to be resolved with a deft touch so the business, professional practice or development venture thrives. Any other result jeopardizes all family members at a time when they most need financial security. Contact us if you or your spouse own a family business, practice or venture to ensure you don’t sell yourself or your company short.
