In most cases, the amount of child support a parent has to pay is determined by their income. For an employee, this is generally simple to calculate and is usually set out at line 150 of the employee’s tax return. However, many Albertans earn income from self-employment. It can be complicated to assess that parent’s income for the support of their child as line 150 may not accurately reflect how much money that parent actually has available.
Once the value of a business is determined, the divorcing couple must then decide how they will split the value. Under our tax laws, a self-employed person is allowed to deduct business expenses from their total income. Recently, the Alberta Court of Appeal, in Cunningham v. Seveny, 2017 ABCA 4, stated that people who have an interest in a business bear the burden of proof to demonstrate that certain business expense deductions are reasonable for the purposes of calculating income for child support. A self-employed parent must provide full financial disclosure to the other parent along with explanations of their compensation and benefits. The reasonableness of an expense is not necessarily determined whether the expense is allowable under the Income Tax Act. The court will look at the personal benefits the parent receives such as the personal use of the business’ vehicles, computers, cellphones, travel, and entertainment expenses. Expenses that are not reasonable can be “added back” to their income. The court then “imputes” the new income on the self-employed parent and uses it to calculate child support.
If a self-employed parent does not provide adequate disclosure of their compensation, benefits, and explanations for their expenses, a judge can draw an “adverse inference”. This means that a judge can make a presumption that the evidence was not provided because it would hurt that person’s own case. For example, if information about an expense is not provided, a judge can assume a high percentage of the expense was for the parent’s personal benefit and add most of it back to their income.
As with all matrimonial property, the person who owns the business has a positive duty to disclose all relevant information about the business so it can be properly valued.In some cases, it may be necessary to have an accounting professional review a business’s financial statements to provide an opinion of what the self-employed parent’s “guideline income” should be set at to calculate child support.
The same evaluation of a self-employed person’s income can be done to calculate spousal or partner support as well.
Dividing Matrimonial Property
When married people separate, all property (except for a few exemptions) that the couple has accumulated throughout the marriage is divided equally between them. If a self-employed person runs an unincorporated business (ex. a sole proprietorship), the equity in the business assets they own under their own name are also matrimonial property to be divided. If a self-employed person runs an incorporated business, the value of the shares in that business are matrimonial property. The value of the shares is determined by the equity in the business assets along with other considerations that affect the value such as long-term contacts or name recognition.
If a self-employed person runs an incorporated business, the value of the shares in that business are matrimonial property. One way to think of the value of a business is consider what a third-party would pay to buy that business. For example, if one party owned a restaurant as an incorporated business, the value of that restaurant would be determined by the equity in the physical assets (such as the equipment, furnishings, and building), the debts owing to creditors (such as the bank, suppliers, and Canada Revenue), and the expected earnings (which would be affected by how well known it is, where it is located, whether it has regular customers or events, how long it has been in operation, etc.) These kinds of factors all come in to play when a buyer considers how much to pay to buy that restaurant.
Since many business owners are unlikely to actually sell their business when they divorce, it may be necessary to have a professional business valuator provide an opinion on the value of the business. As with all matrimonial property, the person who owns the business has a positive duty to disclose all relevant information about the business so it can be properly valued. In the very least, this includes providing copies of financial statements, tax returns, bank account statements, copies of cheques issued to the business owner, and information about other benefits the business owner or their family members have received. It may be necessary to provide additional records.
A self-employed parent must provide full financial disclosure to the other parent along with explanations of their compensation and benefits. Once the value of a business is determined, the divorcing couple must then decide how they will split the value. One person can buy the other out with cash, they might transfer other property (ex. the matrimonial home) equal in value, or they might transfer their shares in the company. Whenever transfers are made it is important to consult a tax expert and review the business’ incorporating documents to ensure the transfer is advisable and allowable.
There are many benefits to being self-employed. However, self-employment should not provide an opportunity for a parent to pay less than what is appropriate in child support or to shield a spouse from receiving their share of matrimonial property. Rather, the benefits of self-employment should extend to the whole family.
About Sarah Dargatz
