Basic Rules for Determining Guideline Income when a Payor has a Company

1.    Starting point is Line 150 income from the Income Tax Return.

2.    Replace any reported dividends by actual dividends (dividends are usually grossed up for reporting).

3.    Look at Financial Statements of closely held corporation:

a.   Go through each expense on the Statement of Income and Expenses – add in to income any personal expenses that are written off through the company. Typical examples: personal gas and vehicle expenses, entertainment, food, cell phone, office.

b.   Look at the wages expensed in the company – add back in any wages over and above value received for any “non arms length” employee (i.e. a child, new spouse or former spouse).

c.   Scrutinize wage paid to payor – was it reasonable given the work done? Is the shareholder/payor arbitrarily paying himself a lower wage? There has to be income available to pay a higher wage for this argument to work. If there is money available to pay a higher wage AND the wage paid to the shareholder is arbitrarily low, add back an amount to make the wage competitive (so long as that amount is not more than the net company profit).

d.   Is the corporation writing off non-cash expenses and if so, consider how much of that expense should be added back to Guideline Income, if any. The biggest non-cash expense is usually depreciation/amortization. ALWAYS add back in depreciation of a building or land. For depreciation of equipment, vehicles etc. consider the life of the asset vs. when it will have to be replaced. If it is an asset that will not be replaced for a long time, then add back some of the depreciation. Look at C.R.A.'s guidelines for depreciation. If they allow a type of asset to be fully depreciated over 5 years and if the shareholder will be replacing the asset before 5 years or at 5 years, do not add back depreciation. If the shareholder will be replacing the asset long after 5 years, add back the depreciation associated with that asset -- or some portion of the depreciation. Adding back in depreciation is often a guess and comes from a "gut feeling".

e.   Does the corporation have a net income or net loss? If there is a net income, is there a good reason for the corporation to keep some money in the corporation? (i.e. big capital outlay). If the net income is money that the shareholder would have taken out of the company but has chosen not to, to keep his income low (for whatever reason), add it back in. If there is a net loss, deduct it. When adding back in net profit consider what was done with respect to wages -- the amounts added back in cannot be more than the net profit and you can't add the profit in twice.  

f.   What is the status of the shareholder’s loan account? Did the shareholder pay into the company (in which case there is an amount owing to the shareholder which is an asset if matrimonial property is being considered as well) or alternately get some money out of the company tax free to redeem a shareholder’s loan? This gets really complicated. If a payor is not paying himself a wage but basically living by repayment of a shareholder's loan, then add that in to the income. If the payor is advancing money to the company, theoretically, that should be deducted from the income -- if it came from his wages and not from some other source. This is pretty complicated and very fact driven as there may be a number of different scenarios leading to this situation.

This is a very general summary of the way to determine Guideline Income when a payor has a closely held corporation. If the company is complex and has subsidiaries it will be even more complicated. Accountants have more specific, precise tools and considerations to use.. Often you will need the help of an Accountant. Often you will need not only the Financial Statements but the General Ledger so you can see the details of every expense in each category. This is a guideline only and not intended to be a substitute for legal and accounting advice.

© Marilyn Herrmann

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