Key Takeaways
- A tax return is where the analysis starts, not where it ends. Where a parent controls a private corporation, the line 15000 figure often reflects what they chose to pay themselves rather than what was available to them.
- Section 18 of the Federal Child Support Guidelines allows a court to include all or part of the pre-tax income of a corporation, and of any related corporation, in a parent's guideline income where the reported figure does not fairly reflect all the money available to the parent for the payment of child support.
- Section 19 of the Federal Child Support Guidelines allows a court to impute such amount of income as it considers appropriate in the circumstances, which include nine listed situations, among them where it appears that income has been diverted in a way that would affect the level of child support, where expenses are unreasonably deducted, and where a significant portion of income comes from dividends taxed at a lower rate than employment or business income.
- Where the other parent controls a corporation, Section 21 entitles you to three years of corporate financial statements plus a breakdown of every payment made to people the corporation does not deal with at arm's length.
- These cases are usually won on disclosure rather than argument. The documents either show what happened or the refusal to produce them can speak for itself.
One of the more common messages our firm receives reads something like, "my ex recently incorporated, the tax return now shows a modest salary, and the lifestyle has not changed at all." It is a reasonable thing to notice, and the law has a structured answer to it.
Where a parent is an employee, guideline income is usually a short exercise. Where a parent controls a private corporation, the number on the tax return is a decision that person made, not a fact about what the business produced. Alberta courts are familiar with this, and the Guidelines give them several routes to a fairer figure. This article explains those routes, what you are entitled to see, and what the analysis actually looks like in practice.
If you are looking for how child support is calculated generally, our guide on what counts as income for child support in Alberta covers the tables, Section 7 expenses and the wider framework. This article is about the narrower and harder question of getting to a real number when a company sits in the way.
Which Law Applies
For married parents who are divorcing, child support is determined under the federal Divorce Act and calculated under the Federal Child Support Guidelines. For parents who were never married, and for separated parents who are not seeking a divorce, Alberta's Family Law Act applies, with provincial guidelines that closely mirror the federal ones on income determination. The sections discussed below have provincial counterparts, so the analysis is broadly the same either way.
Why the Tax Return Understates It
There is nothing inherently improper about an owner paying themselves a modest salary. There are ordinary commercial and tax reasons to leave money in a company, and a business genuinely needs working capital. The difficulty is that the same structure that is perfectly legitimate for tax planning can also produce a support figure that bears little relationship to what the household actually lives on.
The usual mechanisms are not exotic. A salary is set at a level chosen by the person setting it. Profits are retained in the corporation rather than distributed. Compensation is taken as dividends instead of salary. Personal costs, vehicles, travel, meals, phones, are run through the business. Money is drawn as a shareholder loan rather than as income. Salaries appear on the books for a new spouse or a family member whose contribution to the business is difficult to identify.
Some of that is aggressive. Much of it is ordinary. The point is not that any of it is wrongdoing, but that little of it is visible on a T1, and all of it affects what a court may treat as available for the support of a child.
What the Guidelines Actually Allow
Four provisions matter, and they escalate.
Section 16 is the starting point. Guideline income begins with total income from the T1 General, adjusted in accordance with Schedule III. For a salaried employee this is often the end of the exercise.
Section 17 addresses patterns. Where the court considers that the section 16 figure would not be the fairest determination, it may look at income over the previous three years and set an amount that is fair and reasonable in light of any pattern, fluctuation, or non-recurring receipt. This is the provision that matters where income swings, or where a good year is followed by a conveniently poor one.
Section 18 is the corporate provision. Where a parent is a shareholder, director or officer of a corporation and the court considers that the section 16 amount does not fairly reflect all the money available to that person for the payment of child support, the court may include all or part of the pre-tax income of the corporation, and of any related corporation, for the most recent taxation year. Alternatively it may attribute an amount commensurate with the services the person provides to the corporation, so long as that amount does not exceed the corporation's pre-tax income.
That is a significant power, and it is worth reading the language carefully. It is not limited to money that was actually paid out. It reaches pre-tax income of the company itself, and it extends to related corporations, which matters where an operating company sits under a holding company.
Section 19 permits imputing income. The court may impute such amount of income as it considers appropriate in the circumstances. Nine circumstances are listed, and several of them are aimed squarely at this situation. Income that appears to have been diverted in a way that would affect the level of child support. Property not reasonably used to generate income. Failure to provide income information when legally required to do so. Expenses unreasonably deducted from income. A significant portion of income derived from dividends, capital gains or other sources taxed at a lower rate than employment or business income. Being a beneficiary under a trust and being, or going to be, in receipt of income or other benefits from it. The list also covers intentional under-employment or unemployment, being exempt from paying federal or provincial income tax, and living in a country whose effective rates of income tax are significantly lower than those in Canada.
These provisions are permissive rather than automatic. Each says the court may. A judge is not obliged to add corporate income or impute an amount simply because a corporation exists, and the burden of putting forward a coherent case generally rests on the parent asking for the adjustment. One exception matters in practice. Once a court looks at the corporation's income, salaries, wages, management fees and benefits paid to people the corporation does not deal with at arm's length must be added back unless the owner shows they were reasonable.
A low personal tax return is not necessarily evidence of a low income when a corporation sits behind it, and the financial statements usually say more than the T1.
Speak to a lawyer about your situation →What You Are Entitled to See
This is where many of these cases are decided, and it is the part people tend to underestimate.
Section 21 sets out what must be produced. A parent who is self-employed must provide, for the three most recent taxation years, the financial statements of the business or professional practice, together with a statement breaking down all salaries, wages, management fees and other payments or benefits paid to, or on behalf of, persons or corporations with whom that parent does not deal at arm's length.
A parent who controls a corporation, or who under the Alberta Child Support Guidelines holds an interest of 1 percent or more in a privately held corporation, must provide, for the same three years, the financial statements of the corporation and its subsidiaries, together with the equivalent breakdown of non-arm's-length payments made by the corporation and every related corporation.
Read that second requirement again, because it is the one that opens the file. The non-arm's-length breakdown is precisely where a salary paid to a new spouse, management fees paid to a related company, or benefits routed through a subsidiary will appear. It is not an optional courtesy. It is part of what the Guidelines require to be produced.
In Alberta's Court of King's Bench the practical vehicle is usually a Notice to Disclose, which compels a defined package of financial material within a set period, or an application for production where that is not answered. Failure to provide income information when under a legal obligation to do so is itself one of the listed grounds for imputing income under section 19, which means stonewalling is rarely a safe strategy.
What the Analysis Looks Like in Practice
Once the statements arrive, the work is accounting before it is law. Several things are usually worth examining.
Retained earnings. Money left in the company is not automatically available for support, and a business may have genuine reasons to retain capital. Equally, retention is not a complete answer, and a pattern of accumulating cash while reporting a modest salary invites the section 18 question directly.
Shareholder loans. Amounts drawn from the company and recorded as a loan rather than income deserve attention, particularly where the balance grows steadily and repayment appears theoretical.
Non-arm's-length salaries. Where the payroll includes a spouse, partner or relative, the question is what work is actually being done for the money.
Discretionary and personal expenses. Vehicles, travel, meals, memberships and home office costs run through the company reduce corporate income while supporting a household. Schedule III already adjusts for certain items, and section 19 addresses expenses unreasonably deducted.
The mix of salary and dividends. A shift toward dividends changes the tax treatment of the same underlying money, and section 19 of the Guidelines lists deriving a significant portion of income from dividends or other sources taxed at a lower rate than employment or business income as a circumstance the court may consider.
Timing. A corporation that appears shortly before or after separation, or a compensation structure that changes at the same time, is not proof of anything on its own, but it is a pattern courts are familiar with.
In files of any size this analysis is usually done with a valuator or forensic accountant rather than by argument alone. Their report is what turns a suspicion into evidence a court can act on.
When a High Earner Changes Jobs
A related question arises when a parent with a high income leaves a well-paid position, often to start a business of their own, or moves to a lower-paying role around the time of the separation. The first figures from a new business are often low, and the question becomes whether support should rest on what the parent now reports or on what they could earn.
Section 19 of the Federal Child Support Guidelines deals with this directly. The court may impute income where a parent is intentionally under-employed or unemployed, unless the under-employment or unemployment is required by the needs of a child of the marriage or any child under the age of majority, or by the parent's own reasonable educational or health needs. The Alberta Child Support Guidelines contain the same rule, referring to a child of the parents.
Courts may treat a deliberate choice to earn less as intentional under-employment even where avoiding support was not the purpose, and the inquiry tends to focus on whether the parent is earning what they reasonably could, given their qualifications, experience, health and the work available to them. A genuine career change or a reasonable business venture is not ruled out. The reasons for the move, how long the lower income is likely to last and whether the new venture is a realistic path back to similar earnings may all bear on whether income is imputed, and how much.
Where income is imputed, the figure may be anchored in the parent's recent earnings or in what someone with similar qualifications could earn. A parent who changes jobs remains subject to the obligations to provide income information, and failing to provide it when legally required is a separate ground for imputing income. Our guide to imputed income in Alberta covers early retirement, going back to school, health and the other grounds in more detail.
What This Does Not Mean
Some realistic expectations are worth setting.
Corporate income is not simply added to a parent's income as a matter of course. The provisions are discretionary, and courts are generally alive to the fact that operating businesses need capital and that stripping a company can harm the very income stream that supports the child.
The exercise also costs money. Full corporate disclosure and an accountant's analysis are worth the expense where the amounts at stake justify it, and are often not worth it where they do not. That calculation is worth making honestly at the outset rather than discovering it two years in.
And the result is a range rather than a certainty. Two competent professionals can reach different figures from the same statements, which is one reason these matters resolve by negotiation more often than by judgment.
What to Do First
Start with the documents rather than the argument. Ask for the full section 21 package, including the non-arm's-length breakdown, for three years. Note what is produced and what is not, because the gaps can themselves be evidence.
Keep your own record of the household's actual spending during the relationship. A lifestyle that plainly exceeds a reported income can be a legitimate and persuasive starting point for the question a court will be asked.
Get advice before making an allegation. There is a meaningful difference between saying a spouse is hiding money and demonstrating that reported income does not fairly reflect what was available, and the second is what the Guidelines actually ask.
Frequently Asked Questions
My ex incorporated right after we separated. Does that prove something?
Not on its own. Incorporating is common and often has ordinary tax reasons behind it. What matters is what changed alongside it: whether reported income fell, whether the household's spending changed, and what the corporate statements show about money retained in the company. Timing is a reason to look closely rather than a conclusion.
Can a court order support based on money that stayed inside the company?
It can. Section 18 of the Federal Child Support Guidelines allows a court to include all or part of the pre-tax income of a corporation, and of any related corporation, in a parent's guideline income where the reported figure does not fairly reflect all the money available to the parent for the payment of child support. It is discretionary rather than automatic, and a business's genuine need for working capital is part of what a court weighs.
What documents am I actually entitled to?
For a parent who controls a corporation, section 21 requires the financial statements of the corporation and its subsidiaries for the three most recent taxation years, plus a statement breaking down all salaries, wages, management fees and other payments or benefits paid to people or companies the corporation does not deal with at arm's length. The non-arm's-length breakdown is often especially revealing.
What happens if they simply refuse to produce the corporate records?
Refusing rarely helps. Failing to provide income information when under a legal obligation to do so is one of the listed circumstances in section 19 for which a court may impute income, so the practical result is often a higher figure than full disclosure would have produced, along with potential cost consequences.
Do I need a forensic accountant?
In files of any size, usually yes. The analysis of retained earnings, shareholder loans, non-arm's-length payments and discretionary expenses is accounting work, and a court generally needs an expert opinion rather than an argument. Whether the cost is justified depends on the amounts at stake, which is worth assessing honestly at the outset.
Does this apply to spousal support as well as child support?
Income determination for spousal support generally draws on the same Guidelines framework, so the same corporate analysis is usually relevant to both. The way that income is then applied differs, because spousal support depends on entitlement, length of relationship and other factors rather than a table.
Can income be imputed if my ex leaves a high-paying job?
It can. Section 19 of the Federal Child Support Guidelines, and the same section of the Alberta Child Support Guidelines, allows a court to impute income where a parent is intentionally under-employed or unemployed, unless that is required by the needs of a child of the marriage (a child of the parents, in the Alberta version) or any child under the age of majority, or by the parent's reasonable educational or health needs. A court may look at what the parent could reasonably earn, and a genuine career change or business venture is weighed on its own facts.
Speak With a Calgary Lawyer Who Reads the Statements
These files are not won by asserting that a spouse is hiding money. They are won by obtaining the right documents, reading them properly, and putting a coherent income case in front of a court or across a negotiating table.
At Cunningham Family Law, William Aadil Musani brings a corporate, tax, and mergers and acquisitions background to every high net worth divorce file, which means corporate financial statements, shareholder loans and compensation structures are familiar material rather than something to be referred out. Our division of corporate assets practice deals with the same structures on the property side.
If the other parent in your matter controls a company and the reported income does not look right, contact us or email info@cunninghamfamilylaw.com for a confidential consultation.
The information provided in this article is for general informational purposes only and does not constitute legal advice. Every situation is unique, and the outcome of any legal matter depends on the specific facts and circumstances involved. Reading this article does not create a solicitor client relationship. If you need advice about your particular situation, please contact a family lawyer directly.
William Aadil Musani is a Calgary family lawyer and the founder of Cunningham Family Law. Before family law, he practised corporate law, tax law, and M&A with international firms and a Tier-1 Canadian tax boutique, experience he now applies to financially complex divorce and separation matters. More about William →