Vancouver Business Owner Support Lawyers handle cases where pre-tax profits and the income of business owners, professionals and proprietors involve extra income not shown on their personal tax returns. Often there is a dispute over whether or not that additional income can drawn out because it may be needed to maintain, expand, or protect the business from hard times.
How does a BC and Calgary court decide spousal and child support when it involves a self employed business person or professional?
The business owner, or professional, paying spouse wants to keep the business afloat but the recipient spouse wants to ensure that they and their children’s needs are not sacrificed to let the business owner hoard money to build a financial empire.
A new case from the BC Court of Appeal deals with the issue of not killing the Financial “GOLDEN GOOSE THAT LAYS THE GOLDEN EGG”. Our Vancouver Business Owner Support Lawyers know earlier cases could sometimes take too little or too much money out of a business in child support and spousal support disputes. This new case reiterates the test the BC Courts should apply to fairly set proper child and spousal support.
Over time, the Courts of BC have developed a principled approach that fairly divides the pre-tax income retained in a practice to ensure it is fairly used to support family members after separation without jeopardizing the viability of the family business. Vancouver Business Owner Support Lawyers explain that different rules apply to companies who need greater stores of capital to buy equipment, buildings and to expand, than apply to holding companies or professional practices.
Lorne N MacLean, QC heads our high net worth business and professional practice family financial dispute teams in BC and Calgary. Our team of top rated* Vancouver Business Owner Support Lawyers has offices located in Vancouver, Surrey, Kelowna, Fort St John and Richmond BC.
We have the largest Mandarin speaking family law team in Western Canada.
Vancouver Business Owner Support Lawyers 1-877-602-9900
In today’s blog Lorne N. MacLean, QC reviews the needs of a business to retain monies to buy a building which reduced available money to pay spousal and child support. MacLean acts for high net worth individuals in trials, Appeals, mediations and arbitrations across BC and in Calgary. His firm has been repeatedly selected as Vancouver’s Top* Family law Firm.
A new BC Court Of Appeal case helps our Vancouver Business Owner Support Lawyers and clients settle cases or failing that obtain the proper results in Court:
In 2018 Evanow v. Evanow BCCA 208 the court dealt with need of a business owner to buy a business to house his medical imaging supply company and decided that half of the reserve he claimed each year to save up to buy the building was reasonable:
Deduction of Capital Reserve
[53] Dr. Lannon submits the judge erred by permitting Mr. Evanow to deduct a capital reserve from his income in order that his business could purchase a building in Vancouver. For his part, Mr. Evanow argues the judge made no reviewable error in permitting him to deduct half of the capital reserve claimed.
[54] Mr. Evanow submitted that $128,000 in each of the relevant years was necessary as a capital reserve to permit him to purchase a building for his companies. He submitted that this capital reserve must be deducted from the calculation of his pre‑tax income. The judge agreed with Mr. Evanow that a capital reserve could be deducted; however, the quantum of the deduction was reduced to $64,000.
[58] This Court considered the principles surrounding s. 18 of the Guidelines in Kowalewich v. Kowalewich, 2001 BCCA 450. In outlining the approach a court ought to take pursuant to s. 18, Huddart J.A. said in the following oft‑cited paragraphs:
[41] I note the use of pre‑tax corporate income as a basis for the determination of child support does not strip a spouse of his available money. It is to use available money as a measuring rod for the purpose of fixing annual income and thus the amount of child support.
[42] I suggest that at the root of these provisions is a concept not unlike that of income earning capacity well known to the law of support obligations in the pre-Guidelines era, as this Court noted in Van Gool v. Van Gool (1998), 59 B.C.L.R. (3d) 395. Courts have long imputed to underemployed parents the amount they could earn if working to capacity. The Guidelines affirm that approach in s. 19(1)(a) and (e). 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.
[43] In this regard, I find helpful the view Justice Martinson expressed in Baum v. Baum (1999), 182 D.L.R. (4th) 715 at para. 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.
[44] A court’s effort to ensure fairness does not require a court to second-guess business decisions nor, as Justice Pitfield so colourfully noted in Stamoulos, supra, at para. 44, to “place the largest available shovel in the company store.” What it does require is that a spouse’s allocation of pre‑tax corporate income between business and family purposes be assessed for fairness by an impartial tribunal when parents cannot reach agreement on priorities as they would in an intact family and may upon separation under s. 15(2).
[59] In Kowalewich, the Court also emphasized the necessity of examining the legitimate needs of the company. Monies that are needed to maintain the business as a going concern should not be included in the calculation of income for the purpose of support payments (paras. 58‑59).
[60] In Hausmann v. Klukas, 2009 BCCA 32, the Court considered what the burden on the payor spouse ought to be in a s. 18 analysis, canvassing the law in other Canadian jurisdictions. At para. 51, the Court endorsed para. 13 of Jeffery v. Motherwell, 2006 BCSC 140, as stating the appropriate onus under s. 18:
Kowalewich has been applied on other occasions by judges of this court and is binding authority. One of those cases Bartkowski v. Bartkowski (2003), 37 R.F.L. (5th) 242 (B.C.S.C. [In Chambers]), albeit dealing with very different factual circumstances in that the payor contended that his line 150 income was inflated to take advantage of tax benefits, the court said this about the authorities post Kowalewich:
I am of the view that these cases reveal an emerging presumption that the corporation’s pre‑tax income will be assumed to be available to the shareholder payor for the payment of child support unless compelling evidence is led by the payor spouse to support the conclusion that re-investment is necessary to sustain the company as a viable enterprise. … (para. 51)
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. While Bartkowski says the evidence of the payor must be compelling, I prefer to use the word clear when discussing the necessary evidence of business circumstances as the former word might be taken to suggest a higher standard of proof than is called for by Kowalewich.
[Emphasis added.]
[61] This test was succinctly restated by the Court in McKenzie v. McKenzie, 2014 BCCA 381. In that case, the contested corporate income involved principal payments on mortgages, and the s. 18 question was phrased as “whether [the payor] has provided clear evidence that the amounts paid in respect of the mortgage principal were “necessary to sustain the company as a viable enterprise” and were “not available” to him to pay spousal support” (para. 99). As tailored to the facts of the present appeal, this inquiry becomes whether the contested capital reserve was necessary to maintain Mr. Evanow’s companies as viable enterprises and whether the amount in question was unavailable to him for the purposes of child support.
Vancouver Business Owner Support Lawyers
So for Vancouver Business Owner Support Lawyers and their clients, what is the take away to help them settle their cases? Well using the following Court of Appeal analysis, the test is what is a reasonable amount to draw out and what is the right amount to leave the company practice or venture, so the company can keep generating income to pay child and spousal support over the long term:
[62] Mr. Evanow’s business provides maintenance services for medical imaging technologies used by healthcare professionals. I agree with Mr. Evanow that based on the nature of his business, the comments made by this Court in Teja v. Dhanda, 2009 BCCA 198, are relevant. In that decision, the Court indicated that the s. 18 analysis must “allow the payor to maintain value in the company and permit the company to continue as a viable enterprise and, at the same time, also permit a reasonable amount of income to be available for child support” (para. 12). Teja also acknowledges that corporate income is used to “take advantage of business opportunities, for expansion, to protect against the possibility of business downturns and the like” (para. 13).
[63] There was evidence before the Court that it was necessary to accumulate a capital reserve in the circumstances of Mr. Evanow’s business, which was accepted by the judge…
[64] Mr. Evanow submitted that the combination of these factors necessitated the acquisition of a building in the Lower Mainland. His companies could only continue to be viable if they were able to sell digital equipment, and in order to sell digital equipment the manufacturers and providers of such equipment demand a location in the Lower Mainland from which to conduct sales.
[65] In his reasons, the judge below correctly turned his mind to the s. 18 framework. He accepted the evidence of Mr. Evanow that “a building is required to enable the Companies to be competitive in the marketplace” (OD, para. 178).
[66] On appeal, Dr. Lannon does not contest the necessity of acquiring a building in the Lower Mainland….
[67] I am not persuaded that the judge made any error in determining the amount of the capital reserve. The judge considered the expert reports tendered by Mr. Evanow and Dr. Lannon respectively (OD, paras. 175‑187). The evidence on the cost of real estate came from Mr. Evanow who had discussed the matter with a realtor. There was no contrary evidence….
[69] With regard to the decision to purchase rather than lease a building for business purposes, there was evidence from Mr. Evanow that the features required to house and display the medical imaging equipment included lead-lined partitions and walls, and potential safety concerns, so that the business could not easily be located in ordinary commercial leasehold premises. Mr. Evanow’s evidence regarding the requirement to purchase a building was accepted. It was not unreasonable to do so.
[70] The judge thoughtfully engaged with the evidence tendered at trial and exercised his discretion judicially. In my view, there is no reviewable error in the judge’s reasoning allowing a capital reserve but reducing the amount claimed by one‑half.
Call our top rated* Vancouver Business Owner Support Lawyers today to meet with us across BC and in Calgary at 1-877-602-9900.
*Top Choice Award (2014, 2016, 2017 2018, 2019), Top rated reviews on Google, Yelp, threebestrated, lawerratingz.com. Read more about our awards.
