British Columbia Family Law Blog

    The British Columbia family law lawyers at the Vancouver family law firm of MacLean Family Law provide the following update on BC child support and BC  spousal support obligations of a self-employed spouse. We have previously written about how the child support guidelines in British Columbia and BC spousal support advisory guidelines both use the same mechanism to calculate income for the paying spouse. In most cases when the paying spouse is an employee the calculation of income is very easy. However, when the paying spouse is self-employed the calculation of income is more problematic. The guidelines were designed to ensure a fair balancing of ensuring proper spousal and child support is paid in British Columbia and allowing the company to prosper. In recent months two British Columbia cases from RBC Court of Appeal have established that in most cases the pre-tax profits of a corporation will be used in addition to the tax return income of the spouse to controls the Corporation. We summarize the most recent case of a self-employed professional by providing the facts and analysis below.

Parties:

 

APPELLANT: Wife, aged 37, non-practicing lawyer, imputed annual income of $25,000

RESPONDENT: Husband, aged 42, medical professional, imputed annual income of $425,000 at trial (changed to $630,000 on appeal)

CHILDREN: 1 child of the marriage, age 5

 

Case Summary:

 

At trial, court found that husband’s income as determined by s. 16 of the Federal Child Support Guidelines (using line 150 of latest income tax return) was not the fairest method of determining income.

 

Instead, trial judge looked at s. 18, which allows the court to look at corporate pre-tax profits if this produces a fairer determination of income.

 

Using s. 18, court found husband to have annual income of $425,000, which was a portion (but not all) of the husband’s corporate pre-tax profits. Based on this amount, the court ordered the husband to pay child support of ~$3,500 per month and spousal support of $10,500 per month. There was no time limitation on the spousal support order.

 

The wife argued on appeal that the court should have adopted an income of $630,000 for the husband, as that was the total amount of income available to him from his corporation. (100% of corporate pre-tax profits)

 

The Court of Appeal agreed with the wife, and raised the husband’s income to $630,000 for child support purposes. No mention was made of a change to the husband’s income for spousal support.

 

Based on Guidelines amount, result of appeal would change husband’s child support obligation from $3,500 per month to $5,046 per month. No change in spousal support obligation of $10,500 per month based on appeal.

 

Analysis:

 

At trial, the judge found that s. 16 of the Guidelines would not be a fair way of determining the husband’s income. The husband’s most recent tax return did not reflect what income is available to him, as money was deliberately left in his company to obtain a preferential tax rate.

 

The husband admitted that the earnings available to him from his corporation for that year were approximately $630,000. However, the evidence showed that even when the parties were married, the husband never took as much money as was available to him out of the company. There was also no suggestion that he was leaving money in the company after separation in an attempt to reduce his support obligation.

 

The trial judge arrived at an income of $425,000 for the husband, using s. 18 of the Guidelines but taking only a portion of the available income from the husband’s company. In doing so, the judge referred to Kowalewich v. Kowalewich, 2001 BCCA 450, which said at paragraph 44: “A court’s effort to ensure fairness does not require a court to second-guess business decisions nor…to ‘place the largest available shovel in the company store.’” Further, at paragraph 54, Kowalewich says: “The Guidelines allow a court to include all of the pre-tax income of a corporation for the most recent taxation year. They do not require it.”

 

In the appeal of Teja, the wife argued that, while in certain types of corporations such as a manufacturing or sales concern there were valid business reasons for leaving money in a company, those reasons have less validity in a professional corporation such as the husband’s. The Court of Appeal agreed with the wife, stating at paragraphs 12-13:

12     In my opinion, the trial judge misapprehended the court's reasons in Kowalewich, which, unlike the case at bar, was concerned with a corporation for which the corporate income method was the fairer method of determining income for the purposes of calculating child support under s. 18 of the Guidelines. Such corporations include certain types of manufacturing or sales concerns which may need to use corporate income to take advantage of business opportunities, for expansion, to protect against the possibility of business downturns and the like. It was in that context that the court described the factors to be considered to 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.

13     The Kowalewich factors have, in the circumstances of this case, no application by reason of the personal services nature of Dr. Dhanda's corporation and the absence of evidence regarding any legitimate calls on the corporation's pre-tax corporate income for company purposes. Dr. Dhanda has, through hard work and relative thrift, been able to accumulate significant savings represented by the retained earnings of the company. What he has not demonstrated is that there are legitimate calls on the pre-tax corporate income of his company, other than his desire to build up savings in the company. Through the Guidelines, Parliament has said that children are entitled to support based on the full income available to the payor spouse. The payor's desire to accumulate savings, to the detriment of the child, is not a legitimate factor to consider.

 

The court then used all of the husband’s available pre-tax corporate profits in calculating his income for the purpose of child support. The court noted the difference between the type of corporation in Kowalewich (where the business was a retail operation with several outlets) and in Teja (which the court described as a ‘professional corporation’). This distinction led to a different set of valid reasons for keeping money in the corporation.

 

The fact that the husband in Teja kept money in the company prior to separation due to his desire to accumulate savings was of no consequence, as the Guidelines show Parliament’s intention to entitle children to support based on the full income available to the payor spouse.

 

The court also distinguished Teja from Hausmann v. Klukas, 2009 BCCA 32. In Hausmann, there was found to be a deliberate attempt by the husband to keep income in his company in order to reduce his support obligations. No such suggestion was made in Teja.

 

Finally, the court stated that it would not address the issue of whether it would be unfair to the husband to include income amounts over $150,000 per s. 4 of the Guidelines, as the parties did not argue the applicability of s. 4 at trial.

 

Spousal Support:

 

At trial, the judge set the husband’s spousal support owing at $10,500 per month, based on income imputed to the husband of $425,000. The trial judge said at paragraphs 57-60:

57     Mr. Rose for D.D. [the husband] argues that his income for Guidelines purposes should be set at $350,000 on the basis that he works time and a half all of the time, and he is entitled to a fair compensation for himself for the time he works. R.T. [the wife] is receiving $315,000, and there is no evidence that either she or K. [the child] did without on the support that has been paid.

58     While the argument may seem attractive and novel, I was given no authority that suggests that a payor who works double the time and earns double the money only needs to pay support based on half of his or her earnings. While the Guidelines allow the court to increase the income of underachievers, the Guidelines do not reduce the income of overachievers. However Professors Carol Rogerson and Rollie Thompson, the authors of Spousal Support Advisory Guidelines: A Draft Proposal (Ottawa: Ministry of Justice and Attorney General 2005) at pp. 85-87 proposed that the ceiling be set at $350,000 and thereafter discretion rather than any formula be applied to determine spousal support. D.D. concedes that R.T. is entitled to compensatory support.

59     Mr. Rose also reviewed in detail R.T.'s expenses and reduced them for items such as Pilates, running clinics, and personal interest courses. He also argues there is no need for R.T. to move out of her mother's house and pay rent. In short, he argues that R.T. does not need any more than she currently receives and can live well on less than what she currently receives.

60     The determination of the amount of spousal support is not based solely on need. Under s. 15.2 of the Divorce Act, R.S. 1985, c. 3 (2nd Supp.) it is an amount the court thinks reasonable taking into consideration the condition, means, needs and other circumstances of each spouse.

 

The trial judge refused to “cap” the husband’s income for the purpose of support at $350,000, and the Court of Appeal did not review this decision. However, although the Court of Appeal increased the husband’s income for the purposes of child support from $425,000 to $630,000, they did not state that this also applied to the husband’s income for the purpose of spousal support. (paragraph 15)

 

The Court of Appeal made no mention of s. 11.3 of the Spousal Support Advisory Guidelines, which suggest a “ceiling” of $350,000 for the purpose of calculating spousal support through the SSAG. The SSAG states that this ceiling is not a cap, and does not bar the use of the formulas for incomes above $350,000. Rather, it suggests that the SSAG may have less significance for high incomes due to the complexities arising from calculating support at those levels.