Family Law Principles that we can learn from Thompson v. Thompson 2013 ONSC 5500 (Corporate Pre-Tax Income)
The complexity of divorce court proceedings often extends beyond the immediate concerns of child custody and spousal support. This complexity is amplified in cases where financial disputes arise, particularly when one or both parties involved are shareholders, directors, or officers in a corporation. A case that perfectly illustrates this intricate scenario is the Thompson v. Thompson case. This case provides an in-depth and detailed examination of how the attribution of corporate pre-tax income is handled in such situations, offering valuable insights into the legal nuances involved.
section 18 of the Guidelines allows the court to attribute to a party all or a portion of the pre-tax income of a corporation owned by them. This attribution is done when the court is convinced that the party's income doesn't fairly reflect all the money available to them for the payment of child support.
This law plays a crucial role when one party attempts to artificially manipulate their income through a corporate structure for the purpose of avoiding child support obligations. However, it's important to note that evidence of manipulation or bad faith is not necessary to invoke section 18.
Contrary to some misconceptions, section 18(1) refers to the corporation’s “pre-tax income” for the most recent year only, not to the company’s “retained earnings.” This is an important distinction as retained earnings do not necessarily represent cash in the bank that shareholders can take out as income.
The party proposing that a portion of the corporate pre-tax income should be attributed to the other party carries the burden of proof. Once they have successfully demonstrated their case, the party with a vested interest in the corporation is then required to provide a valid explanation as to why the decision not to withdraw a portion of the earnings was reasonable from a business perspective.
The court considers various factors, including the historical pattern of the corporation for retained earnings, the type of industry the corporation is involved in, the company's debt level, and whether the amounts taken out of the company by way of salary are commensurate with industry standards, among others.
If the court determines that it is appropriate to attribute a portion of the corporate pre-tax earnings to a party, the question of what portion of that income should be attributed arises. The nature of the party’s interest in the corporation plays a significant role in this determination.
In conclusion, the Thompson v. Thompson case offers a rich, detailed exploration of the nuances of corporate income attribution in divorce cases. This case stands as a beacon, highlighting the intricate interplay between divorce law and corporate structures, and the complexities that can arise when these two realms intersect. Therefore, it underscores the importance of comprehensive legal and financial analysis in ensuring fair and equitable outcomes in divorce cases involving corporate structures.
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