Ruling ensures similar treatment of assessing support even if payor has an incorporated business
The B.C. Court of Appeal has clarified in a recent decision the appropriate method to determine income available for child support for payors who have incorporated businesses.
In Quinton v Kehler, Justice Peter Willcock - writing on behalf of a three-judge panel that included Justice Bruce Butler and Madam Justice Mary Saunders - said guidelines for determining child support should ensure “consistent treatment” of spouses and children who are in similar circumstances. The treatment should not differ based on whether the payors of the child support have an incorporated business and are in a position to lower the income used to determine support.
The case in question deals with the obligations of the respondent Kehler. He is the sole shareholder and director of a professional corporation. The issue in this appeal was whether the chambers judge erred in assessing his available income to determine payable child support.
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The chambers judge had ruled that according to s. 16 of the Federal Child Support Guidelines, the respondent’s available income was set out in the “total income” at line 150 of his T1 tax form.
In her appeal of this ruling, the appellant Quinton argued that because the respondent derives significant income from his corporation through dividends, his available income for child support purposes should instead include his corporation’s pre-tax corporate income. This method would be under s. 18 of the Guidelines.
The appellant relied on the opinion of a CPA who calculated the respondent’s income according to s. 18. The CPA added amounts paid by the corporation, such as wages, salaries, and management fees, to its pre-tax income.
The respondent’s CPA instead calculated his income, using s. 16, by adjusting the dividend income to reflect the actual cash dividends received and reported that the respondent retained no excess money at the end of each year.
The respondent’s CPA calculated his income, using s. 16, by adjusting the dividend income to reflect the actual cash dividends received. His CPA reported that the respondent retained no excess money at the end of each year.
S. 18 of Federal support guidelines a “fairer method”
Justice Willcock said in a Sept. 15 ruling that under the s. 18 approach, the corporate income method is “likely to be the fairer method” of determining income of an individual who wholly controls a corporation.
“This method allows a court to include all income available for child support an intact family would utilize,” he said.
The Guidelines set an amount of child support as a variable percentage of pre‑tax income, Willcock said. The choice between s. 16 and s. 18 analysis “is a choice of measuring rods where the objective is to select the most accurate measure of the payor’s pre‑tax income.
“The Guidelines treat pre‑tax income as an amount available to pay child support despite the fact that some portion of that amount will not be cash available after tax is paid. In this case, determining Guidelines income in accordance with s. 18 will fairly reflect all the money available to the spouse for the payment of child support.”
As well, he said, “where that approach is appropriate, pre-tax corporate earnings, not retained earnings or earnings after payment of taxes, are the starting point for an assessment of Guidelines income.” He added that “where a company is wholly owned by the payor, the onus is on the payor to provide evidence that his pre-tax corporate earnings are not available.”
Justice Willcock also clarified that “where the Guidelines refer to ‘money available for the payment of child support,’ they do not mean ‘money available to pay child support after payment of taxes’.”
Similarly, he ruled that a cash-flow analysis like that used by the respondent does not serve the Guidelines’ objectives.
If pre‑tax corporate earnings are not considered to be available for the payment of child support, because corporate taxes are able to be charged or levied, Willcock said, “the Guidelines income of unincorporated partners and the Guidelines income of incorporated partners will be set at different levels, which might be appropriate for tax purposes (in part because the tax system is designed to equalize the taxes paid by each), but cannot have been the intention of the drafters of the Guidelines for whom consistent treatment of spouses in similar circumstances was an objective.”
A useful analysis for considering s. 16 and s. 18
The decision in Quinton v Kehler provides a useful analysis of when to consider s. 16 and s. 18 of the Guidelines, Chantal Cattermole, partner at Clark Wilson wrote in a blog posting on the case. It will be particularly helpful “when a payor spouse is incorporated."
She also wrote that it clarifies the method of determining the available income of incorporated individuals to calculate child support and provide guidance for applying s. 16 and s. 18 of the Child Support Guidelines.
Nicholas Davies, Senior Associate Lawyer with MacLean law firm in Vancouver, says that s. 18 of the guidelines are a valuable tool in dealing with a situation where personal expenses are paid by the company rather than the individual.
“Section 18 allows the judge to say, ‘Hey, wait a minute, the income tax return is not truly reflective of the cash that’s available because the payor has chosen to leave that money within the company.’” Regardless of how the payor arranges his or her taxes, the judge can decide what income should be the basis for support.”
Scott Booth, with Jenkins Marzban Logan LLP in Vancouver, says that while the decision in this case is consistent with similar cases that have been decided in the past on this issue, it does make things clearer.
“If we were just going to use corporate after-tax income, not only would that contradict the scheme of the Guidelines, it would be treating those who mainly earn income through corporations and who split their income with, say, half salary and half dividend, preferentially to the person who is just on salary.”