Will Corporate Retained Earnings be Considered Income for Support?

When determining a parent’s child support obligation, courts will consider the parent’s income. A parent’s income is generally determined by reviewing Line 150 of the parent’s most recent income tax return.

Where a parent earns income through a corporation, determination of the parent’s income for the purposes of support can be more complicated. One reason for this is that business owners may retain some of their income in the corporation.

Section 18(1) of the Federal Child Support Guidelines authorizes courts to impute an income to parents who are shareholders, directors and officers of corporations where a parent’s Line 150 income does not accurately reflect income available to the parent to pay support.

Once a court decides that it is appropriate to impute corporate income to a parent, the onus will be on that parent to show that the retained earnings are reasonable and should not be included in income for the purposes of support. Each situation is different. In some cases, there may be a valid business reason for keeping retained earnings in the corporation.

In Ramsay v Mackintosh, 2013 ABQB 80, the court identified a number of factors for courts to consider in determining whether to exercise their discretion under section 18(1) of the Federal Child Support Guidelines, including:

• The historical practice of the corporation for retaining earnings;
• The restrictions on the corporation’s business, including the amount and cost of capital equipment required;
• The type of industry involved and the environment in which it operates;
• The potential for business growth or contraction;
• The level of corporate debt;
• How the corporation obtains its financing and whether there are banking or financing restrictions;
• The control exercised by the party over the corporation;
• Whether there should be a general reluctance by the Court to automatically attribute corporate income to the shareholder because of its separate legal entity;
• Whether there is a business reason for retaining earnings in the company;
• Whether there is one principal shareholder or other bona fide arms length shareholders involved; and
• Whether there is evidence that the party is using the corporation to avoid support responsibilities.