As your start scanning the beginning of this article, you find yourself quickly feeling a sense of frustration and anxiety about how to deal with your separation, divorce or family law case.
Most people know you need the professional advice of an experienced family lawyer to solve your separation, divorce and family court issues before these matters just keep getting worse and worse.
Fortunately, you’ve come to the right place to solve your family law issues.
When you come to your first meeting with Thomas O’Malley, you will quickly find out how to protect your family law rights with a solid separation agreement or effective representation in family court.
STOP and imagine yourself with your separation, divorce or family court case finally settled so that you can move on with your life.
Put another way, picture that you have actually settled the difficult and sometimes complicated family law issues in your case when you have used the excellent family law services of Thomas O’Malley, a skilled and dedicated family lawyer.
It begins by taking the first step. Call Thomas O’Malley today at (905) 434-8837 to schedule your initial consultation with him. It’s time to protect your future!
Child Support and Higher Income Earners
The Child Support Guidelines set out the amount of child support that a payor parent must pay based on the payor parent’s income and the number of children that they have.
The Child Support Guidelines set out specific amounts of child support for payor parents with incomes ranging from no income to an income of $150,000 or more.
When the payor parent has an income of more than $150,000, the Child Support Guidelines state that child support is not necessarily the amount of child support specifically set out in the Child Support Guideline tables.
In Ontario, for example, the payor parent with one child should pay $1,254 per month on the first $150,000 plus 0.74% on income over $150,000 in child support. The payor parent with two children should pay $1,992 per month on the first $150,000 plus 1.15% on income over $150,000 in child support. This parent must pay $2,581 per month on the first $150,000 plus 1.49% on income over $150,000 in child support when they have three children. For four children, the child support amount is $3,064 per month on the first $150,000 plus 1.76% on income over $150,000. For five children, the child support amount is $3,466 plus 1.98% on income over $150,000. When the payor parent has six or more children, the child support amount is $3,806 per month on the first $150,000 plus 2.18% on income over $150,000.00.
However, the presumed child support amount for payor parents with an income of more than $150,000 can be changed when the court considers the child support amount based on the Child Support Guidelines table amount or the presumed child support amount is inappropriate. Section 4 of the Child Support Guidelines states:
Where the income of the spouse against whom a child support order is sought is over $150,000 the amount of a child support order is
- the amount to be determined under section 3; or
- if the court considers that amount to be inappropriate,
(i) in respect of the first $150,000 of the spouse’s income, the amount set out in the applicable table for the number of children under the age of majority to whom the order relates;
(ii) in respect of the balance of the spouse’s income, the amount that the court considers appropriate, having regard to the condition, means, needs and other circumstances of the children who are entitled to support and the financial ability of each spouse to contribute to the support of the other; and
(iii) the amount, if any, determined under section 7 [eg. post-secondary education expenses and extra-curricular activities].
The court will first determine the income of the payor spouse. Then the court will determine the Child Support Guidelines table amount that the payor spouse should pay for child support based on the payor parent’s income and the number of children that they have.
When the income of the payor parent is over $150,000, the court can change the Child Support Guidelines table amount when the court considers this amount to be inappropriate in the circumstances of any particular case.
However, the Child Support Guidelines table amount is presumed to be the appropriate amount. Therefore, a payor parent seeking a child support amount different from the table amount bears the onus of rebutting the presumption that the table amount is the proper amount and they must do so by clear and compelling evidence.
The child support amount should meet a child’s reasonable needs. For children of higher income parents, reasonable needs include reasonable discretionary income. A payor parent who claims that the table amount is inappropriate must, therefore, show or prove that budgeted child expenses are so high that they exceed the generous range within which reasonable disagreement is possible.
In short, the payor parent must demonstrate that the budgeted child expenses are unreasonable. Table amounts that so far exceed a child’s reasonable needs that they become a transfer of wealth between the parents or spousal support under the guise of child support will be inappropriate.
How does the court determine whether the Child Support Guidelines table amount is inappropriate? The court must look at these factors to determine whether the Child Support Guidelines table amount is inappropriate: the condition, means, needs, and other circumstances of the children, and the financial abilities of both spouses. When the court finds that the table amount is inappropriate, the court will again examine these same factors to determine the actual child support amount payable.
When it is found that the Child Support Guidelines table amount is inappropriate for a high income earner, it is important to remember that a payor parent must pay at least the Child Support Guidelines table amount for the first $150,000 of income. It is in respect of the balance of the spouse’s income above $150,000 that the court will consider various factors to determine the total child support amount payable.
Important Examples of Child Support Cases
For Higher Income Earners
Several recent cases show the type of detailed analysis that is involved in calculating the child support for high income earners, business owners, and executives.
The husband in an important case was a very successful business owner. His company generated a gross income of $10 million in 1998. His yearly income was $2.5 million. He had one son. The trial judge ordered the husband to pay the Child Support Guidelines table amount of $17,000 per month.
The Court of Appeal stressed that the basic needs of the child are not the only factor when you have a wealthy support payor. Child support must include reasonable discretionary expenses. Reasonable discretionary expenses are expenses for vacations, sports activities, savings, nice housing and other expenses that reflect a higher income earner’s actual lifestyle and affordable lifestyle if they chose to live in this way. As the Court of Appeal explained, “what may be an extraordinary expense in a family of modest means may be a typical expense in a wealthier family. Accordingly, the higher the level of wealth enjoyed by the parents, the more inappropriate the consideration of basic need becomes. The reasonableness of discretionary expenses replaces the concept of need.”
The Court of Appeal explained that the Child Support Guidelines table amount of $17,000 per month was much too excessive even when you take into account reasonable discretionary expenses in view of the husband’s significant income. The Court of Appeal ordered a new trial on the appropriate child support amount in this case since it did not have sufficient findings of fact about the means, needs, and other circumstances of the child.
The parents in one court decision were married for eight years at the time of separation. They had four young children. The husband earned an averaged annual income of $1.4 million during the last five years of the marriage. Then the husband’s income doubled to over $4.1 million in the year following the date of separation. The Child Support Guidelines table amount for the payor husband with an income of $4.1 million was over $65,000 per month.
The trial judge ordered the payor husband to pay $16,000 a month for child support based on the family’s accustomed lifestyle and modest spending pattern. The mother challenged the trial judge’s conclusion and appealed her case to the Ontario Court of Appeal.
The Ontario Court of Appeal concluded that the trial judge erred in his conclusion that child support should be $16,000 per month. The Court of Appeal explained that the trial judge based his conclusion on the lifestyle of the parents and their pattern of spending during the marriage. The trial judge erred because he did not take into account the husband’s significant increase in income after the parents separated. Next, the trial judge did not examine whether the proposed options for expenses in the mother’s proposed budget were reasonable in the context of the large increase in the husband’s income.
The Ontario Court of Appeal explained that important factors in deciding whether the Child Support Guidelines table amount is appropriate or not are the established family lifestyle and a family’s pattern of expenses. In this particular case, the trial judge was justified in finding that the Child Support Guidelines table amount was inappropriate based on the family’s lifestyle and pattern of expenses.
However, the trial judge did not take into account the husband’s large increase in income and the wife’s proposed budget items when he established the child support amount. The Court of Appeal explained that you have to look at the following four factors when you are examining the condition, means, and needs of the children and the financial capacity of each parent in determining the appropriate child support amount for high income earns:
- The established family lifestyle during the marriage or relationship
- The family’s pattern of spending
- Any increase in the payor parent’s income after the parents have separated
- The proposed budget of the recipient parent in light of any increase in the payor parent’s income.
In this particular case, the Court of Appeal stated that the children were entitled to benefit from the husband’s large increase in income. The court can also take into account new spending options in a recipient parent’s proposed budget that are reasonable in light of a substantial increase in the payor parent’s income.
The children’s basic needs in this case amounted to a figure of $12,000 per month.
Then the Court of Appeal examined the discretionary expenses that the mother proposed in her budget. The Court of Appeal would include $6,000 a month for the purchase of a family cottage in Muskoka since the children had vacationed in this area frequently and the parents had apparently discussed buying a cottage in this area.
The Court of Appeal justices allowed $3,000 per month for skiing and golf expenses since such expenses were reasonable “for children of such a wealthy parent”. They held that an additional $1,000 monthly for vacation and travel was justified. The mother received another $8,000 monthly for future savings for the children. They also allowed $2,000 per month for miscellaneous expenses for the children, including recreational and other activities.
The Court of Appeal disallowed the monthly expense of $16,600 for a Florida residence and membership in a golf club.
In short, the Court of Appeal concluded that the appropriate amount of child support in this case was $12,000 for basic monthly expenses and $20,000 per month for discretionary expenses for a combined total of $32,000 per month.
The payor parent in a recent case was a radiologist in the United States. He had one child. He earned $418,576 in 2003 and $409,353 in 2004. The monthly Child Support Guideline table amount was $2,907 and $2,845 for these two years. The child expense budget totalled $1,512 per month, including special expenses. The payor father argued that the Child Support Guideline table amount was inappropriate and that he should pay an amount that was less than the table amount. The mother requested that the father pay the full Child Support Guidelines table amount plus some additional expenses.
The trial judge explained that the mother’s actual budget for the child was less than half of the Child Support Guidelines table amount. The trial judge found that the payor father had made a case that the Table amount was inappropriate since the mother did provide evidence in the form of a budget or other testimony that established additional reasonable or proposed needs of the child. The court stated that the child basic needs were satisfied with the monthly expenditure of $1,233.
The court then had to determine the appropriate child support amount in this case. The court considered the important factor of the comparative lifestyles of each parent that was set out in each parent’s financial statement. The trial judge found that the father should pay an additional $675 per month to the mother for reasonable needs in comparison to the father’s expenditures for food, gifts, recreation and vacation.
However, the trial judge explained that the determination of the actual amount of child support includes both expenses for a child’s basic needs and reasonable discretionary spending. The court determined what amounted to reasonable discretionary spending by again looking at the comparative lifestyles of each parent. The court explained that the two categories of housing and savings were relevant factors in comparing each parent’s lifestyle for determining the child support amount.
The father spent just over 26 per cent of his net monthly income on his mortgage principal and interest and property taxes. He had a surplus of just over 16 percent of his net monthly income. The mother would have to spend about $1,380 per month to fund expenses on housing and savings in a proportionate way compared to the father. The court decided that the father should pay an additional sum of one-half of $1,380 or $690 a month as a measure of reasonable discretionary spending for the child’s benefit.
The court concluded that the father had to pay approximately $2,598 per month for child support when the amount for basic needs ($1233), reasonable needs in comparison to the father’s expenditures for food, gifts, recreation and vacation ($675), and reasonable discretionary spending, especially respecting housing and savings ($690), are added together. The final figure of $2,598 per month is only a few hundred dollars below the Child Support Guidelines table amount.
This case is valuable since it shows the detailed analysis that is involved in determining the appropriate child support amount when the payor parent earns more than $150,000 per year.
Business Income and Child Support
You must determine a business person and entrepreneur’s income before you can determine the appropriate amount of child support that must be paid. How do you determine a business person’s income for child support purposes?
Self-Employed Persons and Entrepreneurs
When a self-employed person or entrepreneur is determining their income for child support purposes, courts will often review more than just the business owner’s personal income tax return to determine their income. In fact, an entrepreneur has the onus of proving the validity and entitlement of tax deductions that they are making.
Courts will even add back into an entrepreneur’s income expenses which Revenue Canada has determined to be appropriate business expenses where the court does not agree that these expenses are valid tax deductions for the purpose of calculating a business owner’s income for child support. Courts will impute income to an entrepreneur who unreasonably deducts expenses from income. Section 19(2) of the Child Support Guidelines specifically recognizes that the reasonableness of tax deductions is not governed by whether the tax deduction is permitted by the Income Tax Act.
A business owner or entrepreneur will find income imputed to or added to their stated income when they live a lifestyle that exceeds their stated income.
When the court adds additional income to the entrepreneur’s stated income as a result of disallowing certain expenses as tax deductions and/or the failure of the entrepreneur to disclose income, it will “gross up” their income to arrive at the amount of gross income that the business owner would have to earn to end up with the net income that he has earned through his business if they actually paid the full amount of tax on their income.
In a very interesting case of a small business owner and entrepreneur, the husband and wife were married for 16 years. They had two children. The husband was an electrician. He had a significant income from his independent electrical contracting business. However, he claimed that he ceased operating his business and became an employee of another company with an annual salary of $55,000. The husband organized matters so that payments from this other company were made to the husband’s company for the electrical work that he performed.
The court found that the husband’s business was a vehicle for paying personal expenses and that the real income available to the husband when he operated his business as an independent electrical contracting business was $78,706 in 1998, $127,178 in 1999 and $132,000 in 2000.
The court then explained that the husband’s use of a corporate vehicle to earn income and pay personal expenses in 1998, 1999, and 2000 resulted in substantial tax savings to the husband. This meant that the husband had significantly more real income than he would have if he had been required to pay tax on personal income on the high figures he had earned during the 1998-2000 period. Therefore, the trial judge grossed up the husband’s income to reflect true gross income that he would have to have for a net income of $78,706 in 1998, $127,178 in 1999 and $132,000 in 2000. He found that the husband’s income for 1998 should be grossed up from $78,706 to approximately $125,000, from $127,178 to $215,000 for 1999, and from $132,000 to $224,000 for 2000.
The husband argued in the Ontario Court of Appeal that the trial judge should not have grossed up his income after he calculated the husband’s real income from his business. The Ontario Court of Appeal rejected this position. The Court of Appeal concluded that it was fundamentally unfair to permit a situation in which you would impute the same income for child support purposes to two parents, one earning a salary of $128,000 and paying tax of $48,000 and other receiving business income of $128,000 and paying tax of $5,000. The Ontario Court of Appeal explained that “the fundamental principle is that the Court must estimate the actual means which the parent has available for child support. If less tax is paid, more is available.”
In short, the Ontario Court of Appeal agreed that you can gross up an entrepreneur’s income to reach their true gross income that they would have to earn in order to have the net income that they earned from their business after the full amount of tax was paid on the gross income.
Shareholders, Directors and Officers of a Company
Section 18 of the Child Support Guidelines permits the court to attribute business or corporate income to a shareholder, director or officer of a company as personal income to the business owner. Section 18 states:
18. (1) Shareholder, director or officer- Where a spouse is a shareholder, director or officer of a corporation and the court is of the opinion that the amount of the spouse’s annual income…does not fairly reflect all the money available to the spouse for the payment of child support, the court may…determine the spouse’s annual income to include
(a)all or part of the pre-tax income of the corporation, and of any corporation that is related to that corporation, for the most recent taxation year; or
(b)an amount commensurate with the services that the spouse provides to the corporation, provided that the amount does not exceed the corporation’s pre-tax income.
(2)Adjustment to corporation’s pre-tax income.In determining the pre-tax income of a corporation for the purposes of subsection (1), all amounts paid by the corporationas salaries, wages or management fees, or other payments or benefits, to or on behalf of persons with whom the corporation does not deal at arm’s length must be added to the pre-tax income, unless the spouse establishes that the payments were reasonable in the circumstances.
The key point is to know how the courts actually attribute income to business owners and entrepreneurs for child support purposes when they review section 18 of the Child Support Guidelines.
Courts review various factors to determine whether they should attribute business or corporate income to business owners and entrepreneurs for child support purposes. These factors include:
- Because of the separate legal entity of the corporation, should there be a general reluctance by the court automatically to attribute corporate income to the shareholder?
- Is there a business reason for retaining earnings in the company?
- Is there one principal shareholder or are there other bona fide arm’s length shareholders involved?
- What is the historical practice of the corporation for retaining earnings?
- What degree of control is exercised by the spouse over the corporation?
- To what extent is the availability of access to pre-tax corporate income restricted by the ownership structure?
- What restrictions on availability are imposed by nature of the corporation’s business, including the amount of capital equipment required, the nature of the industry in which the company operates, the outlook in terms of expansion or contraction, the level of debt as well as any banking or financing restrictions?
Courts have added different portions of corporate income, or none of the portion of the corporate income based on the particular facts of the situation.
The business owner in one case started a sheet metal company involved in heating, ventilation, and air-conditioning contracting. The husband was a 50 percent shareholder in the company. The other 50 percent shareholder was independent and stood at arm’s length to the husband. The business was capital intensive and the company was required to self-finance work in progress on each major project.
The wife argued that 50 percent of the retained earnings of the business should be added or imputed to the income of the husband for the purpose of calculating child support. The husband argued that the retained earnings of the business were not available to him for payment of child support.
The court decided that it was not appropriate to add any portion of the retained earnings of the business to the husband’s income. The court stressed that the past financial history of the business clearly showed that the business had maintained a reasonable level of retained earnings and that the husband had not arbitrarily had the business retained earnings increased so that he received a lower salary, thereby decreasing his child support amount as well. The court stated:
In my view the financial statements of [the business] do not disclose an historical manipulation of either retained earnings or salary. In other words, it is not a situation wherein the records disclose that the [husband] began to depress or diminish his salary or dividend income subsequent to the imposition of child support obligations; and it is not a situation wherein the corporation began to dramatically increase its retained earnings following the onset of child support obligations. There is, in my view, no evidence that the money taken by the [husband] and his partner by way of salary, was in any way, out of proportion with general industry standards, or in any way inconsistent with their position as co-owners of a young business operating in the construction sector.
The court also recognized that the business required its level of retained earnings to self-finance its capital purchases and its actual work projects as well the fact that the company also faced some serious financial problems.
In short, courts are not likely to add or impute business or corporate income to a payor spouse for child support purposes when the payor spouse can demonstrate or show that retained earnings have not been manipulated or changed when child support obligations become an issue and a certain level of retained earnings are actually required to operate the business, such as paying for work projects that are in progress.
In another case, part of the husband’s income was from a corporation that he solely owned. His corporation was doing very well but he decided to pay himself only a modest salary of $64,500. The corporation had revenue of over $8.7 million and the company’s entire profit was kept in the corporation as retained earnings.
The court held that the corporation’s retained earnings had to be added to the husband’s income since the husband had no logical business reason for keeping earnings in the company. The company did not require retained earnings for contingencies. The business had no need for inventory, warehouse space, bank loan servicing, cyclical seasonal peaks or valleys in sales, allowance for bad debts, nor any need for expensive capital acquisitions, such as equipment and vehicles.
The court also based this decision on the fact that the business never had a historical practice for retained earnings until the year before the trial in the husband’s family law case. The court concluded that the husband had no valid business reasons to retain earnings in the corporation in the previous year and, therefore, these retained earnings were added to the husband’s income. The court imputed income to the husband in the amount of $406,383 and he was ordered to pay $4,427 per month in child support.
A business owner or entrepreneur can receive a significant one-time or non-recurring payment from the sale of their business or other business activities. This can have a significant impact on the amount of child support and spousal support that a business owner must pay.
The husband in one case had an annual income that ranged from $500,000 to $2 million. He had a net worth of $3 million. He had a $3 million capital gain from the sale of his business. He invested $425,000 of this capital gain into another business. The court held that this $3 million capital gain minus $425,000 invested into another business had to be included in the husband’s income.
The court then determined that it was only fair if the capital gain amount was carried over a three-year period. If the capital gain amount was not carried over three years, the Child Support Guideline amount for one year would be over $19,000 per month. However, the court found that this amount was too high. By averaging the capital amount over three years, the child support amount is more appropriate for each of the three years.
The court also imputed pre-tax corporate income of $237,000 to the husband since this amount did not seriously undermine the finances of the corporation and this amount was available to the husband.
The court ordered the husband to pay child support based on the capital gains averaged over three years as well as his other income that he earned during each of the years in this three-year period.
Ongoing Financial Disclosure
When you negotiate a separation agreement or a settlement with a spouse who is paying child support and/ or spousal support to you, I highly recommend that your separation agreement, settlement, or court order have specific terms or provisions about ongoing financial disclosure about your spouse’s business interests and income.
I suggest that you make sure that the following type of terms are included in your separation agreement or settlement:
- The payor spouse shall provide to the other spouse on or before June 1st of each year in which child support and/or spousal support is payable commencing June 1st [of the current year], a copy of each of the following:
(a) The payor spouse’s complete income tax return with all information slips and schedules for the immediate preceding year and shall also provide, when received, a copy of their notice of assessment, and notice of reassessment, if any, for that year;
(b) All statements and other documents verifying their income form all sources in the year in which disclosure is being made, to include satisfactory proof whether any bonus or any other form of payment or remuneration is or will be paid from their company or business in that year (and if any bonus or any other form of payment or remuneration is not received by June 1st this is to be provided forthwith upon the recipient spouse receiving notice of the bonus or any other form of payment), such proof to consist of copies of any resolutions of the board of directors, the pay statement or pay ledger evidencing the actual payment, shareholder ledger, the latest year-end statement from the payor spouse’s company, and if there is a liability for any bonus or any other form of payment shown on the year-end financial statements, documents indicating the bonus or other payments payable to the payor spouse.
(c)The following documents with regard to the payor spouse’s company:
- Most recent year-end financial statements;
- Any resolutions regarding payment of dividends or bonuses in the year covered by the financial year-end statements, and to the date of disclosure;
- A statement showing the breakdown of all salaries, wages, management fees or other payments or benefits paid to, or on behalf of, persons or corporations with whom the payor spouse’s company does not deal with at arm’s length; and
- Particulars, with support documents, of any taxable benefits that the payor spouse has received in the year covered by the year-end financial statements and to the date of disclosure.
- The recipient spouse shall provide the payor spouse, on or before June 1st of each year in which child support is payable, a copy of their complete income tax return with all information slips and schedules for the immediately preceding year and, when received a copy of their notice of assessment and notice of reassessment, if any, and also all pay statements and all other documents verifying their income from all sources in the year in which disclosure is being made;
- Child support shall be varied effective June 1 of each year in accordance with the incomes of the parties and the Child Support Guidelines; and
- In addition to the annual financial disclosure required herein, each party shall forthwith notify the other of any change in employment, with full particulars and supporting documents, forthwith upon the change occurring, and any other material change in his or her income, forthwith after the change occurs, and in the case of the payor spouse, if they are entitled to any bonus or any other form of payment from their company, in any year, paid otherwise than in May, they shall forthwith advise the recipient spouse of this and provide satisfactory proof of this bonus or any other payment including the documents set out in paragraph 1(b) set out above.
Strategies For Business Owners and Entrepreneurs
If you have set up a company by incorporating your business, you must carefully examine the issue of the pre-tax income of your corporation. Where your company has a history of retained earnings well before the issue of separation from your spouse arises, you can argue that you cannot use the retained earnings as part of your personal income. You are in an even stronger position when you require the retained earnings for legitimate company operations, jobs, and projects.
It is absolutely critical that you and your lawyer hire an excellent expert accountant to provide evidence that retained earnings are required for the ongoing operation of your business. You must demonstrate that there are real business reasons for having retained earnings in the company. You must carefully examine your financial obligations to your lenders and creditors. A certain portion of retained earnings will normally be required to deal with loan obligations and other contingencies.
If you are a small business owner, you must carefully document every deduction that you have claimed for income tax purposes. You must demonstrate that these expenses are reasonable for your business.
The more you are prepared, the better your opportunity to reach a reasonable settlement with your spouse about the amount of your income for determining child support and spousal support.
What Every Higher Income Earner
and Business Owner Who is Getting Separated or Divorced Should Know
About How To Protect Their Family Law Rights!
Today, more than ever in this more legally-complicated world, you need the assistance of an experienced and skilled family law and divorce lawyer to settle your legal issues in your separation, divorce or family court case.
You’re invited to call Thomas O’Malley, an accomplished and dedicated family lawyer and author of Canadian Divorce and Separation Made Easier, to find out how to protect your family law rights and reach a successful settlement with your spouse.
When people like yourself who have worked hard to get where you are in life, they call on Thomas O’Malley to protect their family law rights, negotiate a solid separation agreement for them, and represent them successfully in family court.
Call his office now at (905) 434-8837 to get started on protecting your family law rights. In fact, it’s the best way to solve your family law issues with your spouse. It’s time you gave him a call.