British
Columbia
Child Support and Spousal Support
Guidelines Update – High Net Income Cases for Self-Employed Spouses
For a number of years, the writer has been involved in cases
involving the proper calculation of income available to paying spouses who run
their own businesses. The important
feature of these cases is that we must make sure the paying spouse fairly
allocates his income to his own living expenses as well as the living expenses
of his separated spouse and children who may be living with that spouse whether
on a full-time or shared custody basis.
It is important to note that when a person is a
self-employed professional or business person that their tax return may not
always accurately reflect the true income that is available to fairly pay for
spousal and child support.
In the recent British Columbia case of Hausmann v. Klukas, an application for retroactive correction of child support payable by a
husband who ran his own business for the benefit of his children was brought by
his ex-wife. The husband had failed to
provide timely disclosure of his finances as ordered in past Court decisions.
The Court viewed section 18 of the Child Support Guidelines
which indicates that a Court may depart from using the Tax Return line 150
income of a paying parent when that guideline income figure does not fairly
reflect all of the money that may be available to that spouse to fairly pay
child support. The case also dealt with
when retroactive support for children should be payable and focused on the concept
of there being some fault on behalf of the paying spouse. In this case, the Court found the fault was
his failure to produce financial disclosure as had been ordered in past cases.
The Court of Appeal also looked at section 18 of the Child
Support Guidelines which allow the Court to look at the pre-tax profit of a
professional or business to determine what the true money available to the
person in controlling the company or professional practice was. It is important to note that you must add
back the wages and management salaries paid to the person controlling the
company to the pre-tax profit in order to determine what the true money
available to the paying spouse was.
Further, if legitimate business reasons require money to be
kept in the company to maintain the business in tough economic times or to
purchase inventory or other property to expand the business, not all the pre-tax
profit will be allocated as available for paying spousal or child support.
In the case of Hausmann,
the BC Court of Appeal dealt for the first time with the issue of who bore the
onus of showing a need for the pre-tax profit to be retained in the company for
legitimate corporate purposes as opposed to having all the money from the
pre-tax profit being used by the Court to calculate a maximum amount payable for
child and spousal support.
The Court found that the following test should apply:
- 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 Bart Kowski 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.
The Court noted in the current case the husband had not
tendered any evidence that would substantiate a clear need to retain monies in the
company. Based on these facts, the Court
of Appeal attributed all of the pre-tax corporate income to the husband for the
purposes of the calculation of child support.
The Court of Appeal also pointed out that it was not a
correct calculation to use the increased and retained earnings of the company
as a measure of what profits were available to the company in addition to the
tax return income of a payor for purposes of the calculation of spousal and
child support. The Court indicated that the
pre-tax income being the profits of the company after management and salaries
to the owner but before corporate taxes and any dividends paid to the owner was
the proper approach to take.
This is an extremely complex area of law that requires an
experienced counsel to review corporate, tax returns, and financial records
often with the assistance of a certified business evaluator.
If you have a case involving a professional practice or
business, please do not hesitate to contact me for assistance.
I am often told by my BC Family Law clients that they suspect family assets or family money have been hidden or gone missing near the end of a marriage. To avoid this problem I recommend you keep a close eye on assets, bank accounts, company financial statements and credit cards amongst other assets and liabilities. Make copies of financial documents and keep them is a safe place and act immediately if you suspect fraud against you.