Guideline Income and Corporate Shareholders: Ensuring Fair Child Support

When calculating child support, it’s important to ensure that both parents contribute fairly based on their true financial means. But what happens when one parent earns income through a corporation they own, instead of receiving a straightforward salary?

The Federal Child Support Guidelines recognize this complexity. Special rules are in place to prevent a business owner from hiding or minimizing income to lower their child support obligations. In this blog, we explain how the law looks beyond tax returns and into the actual money available for support when a parent is a shareholder or director of a corporation.

Why the Guidelines Look Beyond Just Salary

For someone who earns a fixed salary, calculating income for child support is relatively straightforward. The Guidelines start with “Total Income” as listed on their tax return (line 15000 on the T1 General), and make adjustments as needed.

However, corporate shareholders, especially those who own all or most of the company, can structure their finances in ways that reduce their declared income. For example, they might leave profits in the company, pay personal expenses through the business, or pay themselves through dividends instead of a salary.

This is where Section 18 of the Guidelines comes in.

Courts are allowed to “lift the corporate veil” and look at the actual pre-tax income of the corporation—not just what the shareholder reports on their personal tax return.

If the court believes that the amount of income declared on the tax return does not fairly reflect the money available to pay child support, it can do one of two things:

1. Include all or part of the corporation’s pre-tax income as part of the parent’s income for child support purposes.
2. Assign income based on the value of services the parent provides to the company (though this cannot exceed the company’s pre-tax income).

Pre-Tax Corporate Income is the company’s income before income taxes are deducted, but after regular business expenses like rent, wages, and operating costs. You’ll find it listed as Profit (Loss) on the corporation’s financial statements, usually on the Statement of Income and Retained Earnings.

However, after the starting point of pre-tax corporate income, the Court will also examine whether the shareholder derived a personal benefit from corporate expenses.

When Business Expenses Have a Personal Benefit Component

Some business owners use their company to pay for things that also benefit them personally (commonly, cell phones or cars), claiming them as business write-offs. While these might reduce their tax bill, they don’t reduce the parents’ obligation to support their child.

The Guidelines allow courts to impute income, or add income back, when a parent unreasonably deducts expenses from their corporate income.

Importantly, just because an expense is accepted by the Canada Revenue Agency (CRA) for tax purposes does not mean it will be accepted for child support purposes. Courts are concerned with what’s fair for the child, not just what’s legal for tax deductions.

Why This Matters

The goal of child support is to ensure that children benefit from the financial means of both parents, just as they would have if the family had stayed together. A child shouldn’t receive less support because one parent has the ability to control how much income they show on paper.

As the court in Baum v Baum explained:

“Valid corporate objectives may differ from valid child support objectives.”

In other words, what’s good for the business may not reflect what’s fair for the child.

The Takeaway

If you’re involved in a child support case and either you or the other parent owns a business, it’s important to understand that income for support purposes might be very different from what’s reported on a tax return. Courts have tools under the Guidelines to dig deeper, ensure transparency, and most importantly, put the child’s best interests first.