How to Calculate Child Support for Business Owners in BC

To calculate child support for business owners in BC, one must look at the corporation’s pre-tax corporate income, add any income reported on the business owner’s T1 General Tax returns, and any non-market rate salaries or wages paid out to ‘very close’ third parties like new romantic partners or spouses. After that, see whether business expenses are legitimate and used for business only. And whether any of the business’s retained earnings should be added back to annual income. There is also a myriad of other factors involved, such as ‘grossing up’ dividends and in some circumstances.

Yes, I know it is complicated, so complicated. So read below to better understand what the above means. But I can’t promise you will understand all of it. I had to learn these things for years as a child support lawyer. 

Is Corporate Income Included in Calculating Child Support for Business Owners?

Yes of course. Income for child support is income from all sources. But many business owners leave money in their corporation and declare a lower-income personally. That is clearly not fair in some circumstances.

Many corporations or businesses are profitable and earn more money than the owner needs to use.

For example, your business may earn a net income of over $1,000,000 per year, and you may not need all of this income to live, so you may only take out $100,000 for yourself. Many business owners only take a portion of their corporate income for personal use and leave the rest in the corporation. The portion of the corporate income you take out to use for your personal expenses is then declared in your T1 general as either salaries or dividends and you pay taxes on it. So if you took $100,000 out of the corporate income and paid yourself, your T1 General reflects that. The remaining $900,000 is left in the corporation and you do not have to pay personal taxes on it. If you have to pay child support in BC, you might argue that your income is only $100,000. I can promise you the other parent will disagree.

The above scenario means that now you have savings in the corporations that you do not need to pay personal taxes on until you decide to take them out – whenever that may be. When you get older and become retired, you can take out the savings in the future. At that time and depending on how much you take out, they become taxable. They also do not form a part of your income until you decide to use them personally. This becomes an issue when the other parent says your true income is not the $100,000 declared but is actually $1,000,000 – you are just keeping most of it in your corporation and for your own benefit.

How do you resolve the above issue when it comes to determining corporate income for child and spousal support in BC?

You look at concepts like working capital, long-term debt, short-term debt, future liabilities, risks, bonding requirements, capitalization requirements related to lending agreements, corporate expansion plans, etc. Depending on the nature of the corporation, you may be able to exclude the $900,000 from your corporate earnings if you can show that the money is needed by the company. This is a very complicated subject and cannot be captured in this blog.

As you can see above, paying child support based on $100,000 or $1 million can mean losing or gaining fortunes. It is best to have full knowledge about your right and obligations by contacting our child support lawyers.

Are Business Expenses Deductible for Calculating Child Support for Business Owners in BC?

Only legitimate and standard business expenses are deductible when determining income for child support purposes in BC. Expenses or parts of expenses that are determined to be personal will be added back to the income of the person having to pay child support in BC. For example, writing off your entire lease payments on your car as a business expense when you only use your car 50% of the time for business, means that 50% of your reported lease expense will be added back to your income for child support purposes.

Salaries Paid to Your New Partner or Family May Not Be a Deductible Expense

Paying a high wage to your new partner or family and deducting it as a business expense may not fly when calculating income for child support purposes. In many situations, that new girlfriend or family member may not even work for the corporation and the income is only paid so that the business owner saves taxes. Even if the spouse or family member works at the business, you need to make sure that the wages paid are market wages that you would pay to a stranger working for the business.

I have seen some situations where a business owner pays $150,000 to his bookkeeper who turns out to be his girlfriend. A bookkeeper’s standard salary may only be $50,000 per annum. In these situations, $100,000 of the wages will be added back to the income of the business owner for child support purposes.

What Does “Grossing Up” Mean When Calculating Child Support in BC?

Grossing up generally means adding tax savings back to the income of the payor for child support purposes in BC. This happens when the business owner pays him/herself in dividends (eligible or non-eligible), earns cash income or pays him/herself by way of shareholder loans rather than wages.  This is because the Child Support Tables all assume T4 dollars, so adjustments need to be made to reflect any tax savings.  The portions of the expenses which are not legitimate would also need to be grossed up to account for the fact that, because they’re written off entirely, no taxes get paid on them.

Do you have a headache yet? Yes, I thought so. I had a headache about corporate income for child support purposes for several years until I figured it out. So let’s talk because you will likely lose fortunes in child support if you do not properly analyze business income for child support purposes.

Contact our award-winning child support lawyers for more information at 604-974-9529 or get in touch.