What are the factors used by the courts to determine whether or not a portion of pre-tax corporate income should be included in a party's income for support purposes?

Ontario, Canada


The following excerpt is from PREVOST v. PREVOST, 2017 ONSC 5825 (CanLII):

Justice Chappel in Thompson v. Thompson summarized the case-law relating to section 18. The courts have considered the following factors in determining whether all or a portion of a corporation's pre-tax income should be included in a party's income: a) The historical pattern of the corporation for retained earnings. b) The restrictions on the corporation's business, including the amount and cost of capital equipment that the company requires. c) The type of industry the corporation is involved in, and the environment in which it operates. d) The potential for business growth or contraction. e) Whether the company is still in its early development stage and needs to establish a capital structure to survive and growth. f) Whether there are plans for expansion and growth, and whether the company has in the past funded such expansion by means of retained earnings or through financing. g) The level of the company's debt. h) How the company obtains it financing and whether there are banking or financing restrictions. i) The degree of control exercised by the party over the corporation, and the extent if any to which the availability of access to pre-tax corporate income is restricted by the ownership structure. j) Whether the company's pre-tax corporate income and retained earnings levels are a reflection of the fact that it is sustained primarily by contributions from another related company. k) Whether the amounts taken out of the company by way of salary or otherwise are commensurate with industry standards. l) Whether there are legitimate business reasons for retaining earnings in the company. Monies which are required to maintain the value of the business as a going concern will not be considered available for support purposes. Examples of business reasons which the courts have accepted as legitimate include the following: (i) The need to acquire or replace inventory; (ii) Debt-financing requirements; (iii) Carrying accounts receivable for a significant period of time; (iv) Cyclical peaks or valleys in cash flow; (v) Allowances for bad debts; (vi) Allowances for anticipated business losses or extraordinary expenditures; and (vii) Capital acquisitions. Thompson v. Thompson, supra, at para 92

If the court determines that it is appropriate to attribute a portion of corporate pre-tax earnings to a party, the question arises as to what portion of that income should be attributed. In deciding this question, one of the factors to consider is the nature of the party's interest in the corporation. It has been found to be unreasonable to attribute and amount of income that is disproportionate with the payor party's ownership interest in the company: Thompson v. Thompson, supra, para 93. ANALYSIS OF PRE-TAX CORPORATE INCOME

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