From Write-Offs to Pay-Ups: How Courts Impute Business Income

In family law, determining a spouse’s income is essential to calculating proper child and spousal support. When your ex-partner is an employee, the process is usually straightforward: line 15000 of their tax return often reflects their true income.

But what happens when they are self-employed or own a corporation? This can complicate the picture significantly. Courts in Alberta have tools to ensure fairness in these cases.

What Does It Mean to “Impute” Income?

Imputing income means the court assigns a higher income to a spouse than they report, usually because the court finds their actual income does not fairly reflect their ability to pay support. This often arises when a spouse is self-employed or has access to corporate income and benefits that aren’t clearly disclosed.

Corporate Owners and the Federal Child Support Guidelines

Under subsection 18(1)(a) of the Federal Child Support Guidelines (“FCSG”), the court may include a corporation’s pre-tax income in the support payor’s income if their reported income does not reflect the money available to them. Courts consider:

• The spouse’s ownership interest in the corporation;

• Personal expenses paid by the corporation (e.g. vehicles, phones, housing); and

• Whether the corporation is being used to shield income from disclosure.

  
  

This issue came to a head in Morin v. Morin, 2022 ABCA 389, where a father involved in 14 companies reported an income of $67,000. Despite his late expert report and vague explanations, the Alberta Court of Appeal imputed his income to $100,000, noting gaps in financial disclosure and unexplained personal benefits.

“The content of the disclosure must be sufficient to allow meaningful review… and must be sufficiently completed and comprehensive that… a court can readily decide what amount… fairly reflects income.” – Cunningham v. Seveny, 2017 ABCA 4

Business Deductions: Not Always What They Seem

A business owner can deduct many expenses for tax purposes, but that doesn’t mean those expenses are valid deductions when determining support obligations. Under subsections 19(1)(g) and 19(2) of the FCSG, if a spouse deducts unreasonable expenses, courts can add those amounts back into income. Courts are especially cautious with “hybrid” expenses which often benefit the individual personally (e.g. vehicles, meals, home offices, or travel).

The Alberta Court of Appeal reinforced this principle in C.L.E. v. B.M.R., 2010 ABCA 187, stating that courts must go beyond tax returns to determine true income.

The Impact of Incomplete Disclosure

If a spouse fails to provide full financial information, sections 23 and 24 of the FCSG allow courts to draw adverse inferences and impute income accordingly. Courts may assume that the non-disclosing spouse has higher income than stated, particularly where financial information from corporations is vague, missing, or appears manipulated.

Capital Gains and One-Time Income Events

Non-recurring income like capital gains is another challenge. According to Schedule III of the FCSGs and the case Ewing v. Ewing, 2009 ABCA 227, courts will consider whether it’s fair to include these gains, especially if they come from asset sales or retirement funds. Factors the court will consider include:

• whether the gains are reinvested;

• whether the gains are used for income; and

• whether the gains are truly reflective of disposable income.

  
  

Key Takeaways for Spouses Navigating Support Where Business Ownership is Involved

• Line 15000 is not always the whole story. Courts can look at corporate pre-tax income and personal benefits received from a business.

• Hybrid or unreasonable deductions can be scrutinized and added back into income for support purposes.

• Lack of disclosure can lead the court to impute a higher income than reported.

• Expert reports must be thorough and timely. A late or incomplete report, like in Morin, may not be enough to convince the court.

• Capital gains may or may not count toward income, depending on context and whether the money is reinvested or used personally.

  
  

When corporate ownership is at play, setting income for support is rarely simple. If you believe your ex-spouse is underreporting income or hiding behind a corporation, legal advice can be critical to ensure proper support is determined. At Stokes Law LLP, we can help you navigate these complex financial issues with clarity and experience.

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