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Business Owners Beware: Court Can Force Your Hand to Compel Appropriate Child Support

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Business Owners Beware: Court Can Force Your Hand to Compel Appropriate Child Support

Consider this scenario: A separated or divorced parent draws their entire income from a corporation for which he or she is single-handedly “running the show”. That means the parent has considerable discretion in deciding things such as salaries, bonuses, and retained earnings for the corporate entity.

But that parent is also obligated to pay child support, which we know is geared to income.

The question is this: How far should a court go to force the parent’s hand, in terms of withdrawing funds from the corporation to pay that child support?

This was the legal question underlying a case called VanSickle (Elms) v. VanSickle. Specifically, for the purposes of calculating the child support he owed the court had to grapple with whether to impute income to the father – who was the sole shareholder, officer and director of a company he ran from a home office – because he had kept too much of the available money sheltered in the corporation.

To make its ruling, the court undertook a detailed analysis of the finances, structure, and operations of the father’s business. The corporation had no significant debt, and it had a significant cash surplus of more than $150,000. That money, as the father made clear in his evidence, was available for his own personal use when needed. (For example, he took money out of the corporation and declared it as income when he needed funds to pay his legal fees). Also, the court noted the father’s lifestyle since the first child support order had significantly improved; yet he had not had a corresponding obligation to pay added support to his children.

Given that the father had displayed a liberal hand at drawing money out of the corporation for her personal needs, he was equally able to withdraw some money to pay retroactive child support, the court found. There was no unusual hardship to the father in this scenario.

The court also noted (perhaps sardonically) that since 2008, when the litigation between the father and the mother started, the corporation had suddenly and consistently had an upsurge in retained earnings (meaning money that the father kept in the business, rather than withdraw as income). To this observation, the court added:

Although I certainly accept the [father’s] evidence that his business is seasonal and fluctuates and that it is a prudent business practice to retain some earnings in the corporation to make sure monies are available when needed, I am also satisfied that one of the reasons the money remained in the corporation was so that his income was not increased for child support purposes. As I stated earlier, he had no difficulty in taking out additional money from the corporation to pay his legal fees, to purchase a roof, to pay his personal income tax liability or provide a bonus to either he or his wife. As the sole officer, director and shareholder of the corporation, he had sole decision-making authority and is able to access funds as he sees fit.

The court was also somewhat circumspect about the father’s practice of income-splitting with his new wife. While the father had done nothing illegal or inappropriate in choosing to income-split, the court took issue with the amount:

Although I do not doubt that the [father’s new] spouse works hard and is entitled to compensation from the corporation, the amount of that compensation is excessive when considered in relation to the income the [father] receives. For example, despite being the president and sole shareholder of the corporation and working incredibly long hours, the corporation pays the [father’s new] wife the same salary that he receives. In fact, in some years, she received more than he did. … It is also of note that prior to this marriage, the corporation did not employ anyone to do the job [the new wife] was hired to do. …

In the end, the court concluded that the father’s income for child support purposes had been understated. It imputed between $68,000 and over $90,000 in income for each of the three years that were the focus of the mother’s retroactive support claim, and attributed another $5,000 per year to the father’s income on account of the overly-generous income-splitting with his new wife. The court made a few other adjustments, including taking into account certain home-office expenses from which the father also benefited (e.g. meals, telephone, cell phone, internet, fuel, repairs, gas, and insurance).

The result was a court order for annual retroactive child support amount of between $10,000 and $15,000 for each of the three contentious years, to be remitted by the father a rate of $1,500 per month until paid in full.

For the full text of the decision, see:

VanSickle (Elms) v. VanSickle, 2012 ONSC 7340

 

At Russell Alexander, Family Lawyers our focus is exclusively family law, offering pre-separation legal advice and assisting clients with family related issues including: custody and access, separation agreements, child and spousal support, division of family property, paternity disputes, and enforcement of court orders. For more information, visit us at www.RussellAlexander.com