The Myth of the Child Support Guidelines

The promise that the Federal Child Support Guidelines would reduce the need for litigation can now be exposed as a myth.

In the last decade, courts across Canada have struggled with interpreting the Guidelines. Inordinate amounts of court time have been spent deciphering its provisions, from the analysis of what constitutes “40% parenting time” to questions arising from the term “special and extraordinary expenses”.

None of these difficult legal concepts compare, however, with the barrage of cases and confusion resulting from Section 18 of the Guidelines. This section has turned family law generalists into commercial litigators.

Section 18 authorizes the court to consider not just a parent’s personal income, but also the pre-tax corporate income of a corporation of which the parent is a shareholder, director or officer. The court is empowered to determine if there is “money available” for child support (and by analogy spousal support) by scrutinizing a parent’s business, including related corporations, a partnership, proprietorship or professional practice.

So, why is this exercise so complicated? An Ontario case, Beneteau v. Young 2009 CanLII 40312 ONSC, provides a good illustration. The main issue was the amount of “money available” to the payor parent for child support. Each of the parties retained a chartered accountant/business valuator to assist the court in its deliberations. The expert evidence was an overabundance of riches, as the court considered eleven separate reports prepared over a period of seven months.

The trial judge had to descramble the business affairs of the corporation, which included cash transactions, personal and family expenses charged to the company and corporate credit cards used for non-business purposes.

After seven days of trial, the court held the “money available” amounted to $200,000.00. I can’t begin to guess what the costs of conducting this trial were,
but seven days, two lawyers, two experts and eleven expert reports is astounding.

However, the issues arising from Beneteau v. Young do not even begin to tell the whole story. Family law lawyers have fallen into various traps as they maneuver through Section 18. Some of the more difficult issues include:

1. The confusion between pre-tax corporate income and retained earnings. Retained earnings are not cash in the company and are not pre-tax corporate income, but represent shareholder’s equity. Chutter v. Chutter 2008 BCCA 507; Hannah v. Hannah 2010 SKQB 369;

2. Whether a shareholder who owns less than fifty percent of the company is in a control position. There is a substantial difference between a company that is wholly owned by the payor parent, and one in which the payor is not the controlling mind. Pallot v. Pallot 2010 BCSC 1146. However, while control is a factor to consider, it is not the sole factor. T.L.B. v. R.B. 2010 BCSC 710;

3. Utilizing section 18 to reduce the level of Guideline income from that shown on the payor’s personal tax return. For example, where a bonus is paid to a shareholder that is returned to the company for use as working capital. Bartkowski v. Bartkowski 2003 BCSC 720;

4. The impact of an increase in a shareholder’s personal wealth, particularly on a child support variation application where the payor’s personal net worth has dramatically increased. Royer v. Butler 2010 BCSC 667;

5. Situations where the payor parent does not draw income, but relies on tax-free shareholder loan repayments. Hesse v. Hesse 2010 ABQB 314

6. The unique corporate attributes of personal services corporation, including doctors and lawyer’s practices. Teja v. Dhanda 2009 BCCA 198;

7. Whether debt repayment, working capital, funds retained for business downturns, expansion plans and retirement savings are “legitimate calls” on corporate income. Hausmann v. Klukas 2009 BCCA 32; Hesse v. Hesse 2010 ABQB 314;

8. What the impact is of restrictive bank covenants and terms in shareholders agreements, such as capital costs allowance policies, on the payor’s access to corporate income.

9. The notion of “double-dipping”, where income paid to a shareholder also represents a family asset, such as bonuses or exercised stock options, to be divided between the parties. Boston v. Boston 2001 SCC 43; Pallot v. Pallot 2010 BCSC 1146

10. The applicability of section 18 on interim support applications. Courts, not surprisingly, are deferring the complicated analysis to trial judges. Hannah v. Hannah 2010 SKQB 369.

While it may be true that for those with employment income, the Guidelines provide a simple calculation, it is also a fact that millions of Canadians are engaged in business, and it is this group that find themselves mired in expensive litigation.

Family law lawyers, now more than ever, need to have their accountant’s telephone number on speed dial, or risk making costly mistakes.

Lawdiva aka Georgialee Lang