Child Support-- Imputing Income -- Shareholder Loans

In a detailed summary of relevant case law relating to the question whether a court may impute income to a parent who receives payments by way of shareholder’s loans in a private corporation, Colford J, of the New Brunswick Court of King’s Bench, in CRP v NDP, 2023 NBKB 197 at 249-266, observed:

?[249]? A review of case law across the country confirms the issue is a live one in that there are considerably conflicting decisions on whether a partial or full repayment of a shareholder’s loan should be imputed as income. In the end like many legal issues, determinations appear to be fact driven.

[250]? Recently the Alberta Court of Queen’s Bench has this to say in Wilson v HGolmes, [2022] AJ No 269 Q.L. at para 63:

The orthodox view is that a shareholder's loan balance (money owing to him or her by the corporation) is not income to the shareholder, either as a static number or on full or partial repayment to the shareholder:?Rudachyk v Rudachyk,?1999 CanLII 12271?(SKCA) (para 11: "There is no question the repayment of a shareholder's loan is not?income?...");?Merrifield v Merrifield,?2021 SKCA 85(para 43);?Dai v Ding,?2019 ONSC 6118?(Gilmore J.) (para 281); and?Walshe v Walshe,?2021 MBQB 259?(Menzies J.) (para 41).

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[252]? Conversely, there also been many cases where courts in other jurisdictions have imputed income on the basis that the shareholder loan was being underutilized to produce income within the meaning of section 19(1)(e) of the FCSG, (see Waese v. Bojman, 2001 CanLII 28221 (ONSC).

[253]? Similarly, section 19(1)(e) has also been applied in circumstances where the corporation owed a significant amount of money to the shareholding spouse and interest was not being paid on the funds, (see Tauber v. Tauber) 2001 CanLII 28234 (ONSC) and Kerr v. Evland [2014] O.J. No. 3032).

[254]? ??In Hogan v Hogan,?2004 Carswell Ont. 3896?[2004 CanLII 31372?(ONSC)] at para 137, the court was very prepared to impute income to the payor spouse based on repayments to his shareholder loan account. …

[255]? Similarly, in Pallot v Pallot [2010] B.C.J. No. 1600,the Court found the share? holder loan account represented monies available to Mr. Pallot under s. 18(2) of the FCSG. In that case, the court determined that the shareholder loan account was being utilized and treated by the defendant as monies available to him. In the Court’s view this was not an uncommon business practice.

[256]?Courts have also engaged s.18(1) of the FCSG where a support obligor does not receive income from a corporation in which he or she is employed and of which they are a shareholder director or officer, but receive only repayment of a shareholder loan. When considering an adjustment under s.18, the Court must strike a balance between maintaining the ongoing operations of the company and determining an amount of income that fairly reflects the amount of money available for the payment of support.

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[258]?Our Court of Appeal in C.(M). v. O.(J) [2017] N.B.C.A. No 15 addressed facts similar to those before the court in this instance. …

[259]?The Court had this to say about shareholder’s loans and the motion judge’s treatment of the account in paragraphs 17-19 of the decision:

17. …..As was found by Marshall J. in W. (M.J.) v. W. (B.J.), 2006 ABQB 2006, a shareholders loan is a “means by which a company has free use of capital” to assist in its operations. For small corporations, these loans may be “an integral part of a successful operation”. The maintenance of a shareholder’s loan account accords with the “basic approach of drawing as little as possible from the company and returning profits to the company” as a means of supplementing working capital. Marshall J. concluded such a loan is “very similar to an asset such as the shares in a company. It is, in effect, part of the Company structure” (see paras. 26-27). It is not “income” to the shareholder but is considered a return of principal.

18. In Vincent v. Vincent, 2012 BCCA 186, the court concluded the following:

Clearly, both the income and capital dividends were available to the father for personal use and thus for child support. He chose to invest them in Robannah by way of a shareholder’s loan in 2007, thereby increasing his equity in that company. In Hausmann, Kirkpatrick J.A., writing for this Court, noted at para. 11 that shareholders’ loans are properly treated as equity, not debt, just as retained earnings are equity, not cash (at para. 66). [para. 55]

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19. In Chekowski v. Howland, 2013 ABCA 299, the court observed “each case must be decided on its own facts” (para. 14). In the case at bar, Mr. C. bore the onus to establish the shareholders account was in essence a repayment for funds he advanced to sustain the operation of the company and therefore they were not available to him for child support. The motion judge concluded Mr. C. did not discharge that onus. I would not interfere with her decision.

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[264]? I agree with Ms. P that there is more money available to Mr. P than what is apparent from his guideline income. Mr. P has not in my view, discharged the onus of establishing the due to shareholder accounts were used solely as a repayment of funds advanced by him to sustain the operation of the company. …

[266]?Accordingly, for the years 2016 to 2023, Mr. P ‘s income will be imputed in the amounts set out by Ms. P and summarized previously pursuant to sections 19(1)(a) and (h) of the FCSG. The exception being the sum identified for 2017, which properly calculated from the audited financial statement is $55,727.00.