Family Law and the Corporate Veil
We have in Canada the opportunity to create a legal entity that we refer to as a Corporation. A Corporation is a separate legal entity from that of the creator and has "the capacity and the rights, powers and privileges of a natural person," although not rights under the Charter of Rights and Freedoms.
The major purpose in creating corporations is to conduct business as an entity separate from the owner(s), thereby limiting the personal liability of the owners, and/or Directors and Shareholders of the corporation, to the value of the corporation's wealth. The individual owner's assets are protected as the corporation, and the owners, are separate legal entities. They are taxed separately too. If the corporation suffers economic difficulty, the individuals who are affiliated with the corporation as owners, directors or shareholders, are not subject to personal liability for the debts of the corporation. Incorporation is seen to be supportive of increased investment in the economy as risk to the personal assets of individual investors is minimized.
Sometimes, however, corporations are used to defeat potential creditors, including spouses who may be entitled to spousal or child support, and not for the purpose of reduced risk investment. Since child support and spousal support depend on the income of the payor, if the payor is essentially "hiding" money within the corporation to avoid or reduce spousal or child support, the Court may review the tax records of the corporation and "go behind the corporate veil" and allocate certain corporate monies to the "personal income" of the owner. Even though Canada Revenue Agency permits certain tax deductions for the corporation, say, for example, the cost of an automobile, meals, entertainment etc., that does not mean a Court won't convert those deductions into income for the purposes of spousal and child support. The Court is not bound by the rules of Canada Revenue Agency.
Courts are inclined to "pierce the corporate veil" and expose the owner of a corporation to personal liability in a family matter, especially when a corporation is directed solely by one individual whose corporation is the alter ego of that person. The purpose incorporation is to encourage investment at reduced risk, and not to shelter money from spouses and children.
Bryan Embree is an Associate at the law firm of Cobb & Jones LLP.