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Child Support During a Pandemic: How Has the Pandemic Impacted Child Support Payments from Self-Employed Payors?

Child Support During a Pandemic: How Has the Pandemic Impacted Child Support Payments from Self-Employed Payors?

By:

Posted December 6, 2021

The COVID-19 pandemic has had global implications across all areas of industry. In some cases, the pandemic has been catastrophic to entire industries such as airlines and travel. In other industries, such as technology, income has increased and business has escalated quickly. Employers and companies did not know how to react to the onset of COVID-19 restrictions and protocols. Regulations and financial circumstances were changing constantly. As time progressed, businesses had a better understanding of their obligations.

In Ontario, this has resulted in the family courts more closely scrutinizing pre-tax corporate earnings which can be controlled by a support payor. The Federal Child Support Guidelines establish a standard of support to ensure that children continue to benefit from the financial means of both spouses after separation. If the payor spouse is a salaried employee, calculating support is usually straightforward.

Determining income for child support purposes, and spousal support purposes, can become complicated when one of the parties is self-employed or a shareholder, officer or director of a corporation.  Section 18 of the Child Support Guidelines provides a framework within which the court may determine whether to include in a spouse’s income, for support purposes, all or part of the most recent year’s pre-tax corporate income of a corporation that the spouse is a shareholder, director or officer of. The purpose of section 18 is to enable the courts to conduct a fair accounting of the money available for the payment of child support and is designed to address the unfairness which would result if a spouse was to artificially manipulate his or her income through a corporate structure for the purpose of avoiding child support obligations.

In these circumstances, the courts can review a number of factors in order to determine whether all or a portion of a corporation’s pre-tax income should be included in a spouse’s income. A review of the case-law relating to section 18 indicates that courts have considered the historical practice for retained earnings, the nature of the industry that the corporation is operating in, business plans, level of debts, covenants or other restrictions, whether salaries are on par with market, whether there are legitimate business reasons for retaining earnings in the company, and the payor’s proportionate ownership interest in the company.

It has been widely recognized by the courts that business income may legitimately decline due to the COVID-19 pandemic. However, some payors attempt to use this decline for “self help” purposes. Therefore, the courts are now considering issues such as cash-flow risks arising from the pandemic as justifications for the continued retention of pre-tax corporate income in the company. These include the prospect of contract terminations or breaches by customers, potential collection issues, payroll and other operating expenses that would need to be paid if customers defaulted on contracts or payment arrangements, as well as the potential liability for the repayment of management fees previously received. The courts are also considering whether businesses had lay offs, accepted government grants and loans and how those funds were used.

If these declines in income are temporary, there may be an expectation for support payors to return to paying their full support obligations once their businesses resume normal operations. The courts do not look favourably upon parties who use the pandemic as a strategic reason to reduce their support obligations.

This blog post was written by Alison Boyce, a member of the Family Law team.  She can be reached at 613-566-2081 or at alison.boyce@mannlawyers.com.

 

 

 

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