Article written by Jackie Porter
Owning a business is challenging enough in the best of times. Now throw in a divorce. For some, the strain can be more than the average business owner can manage. Along with meeting the demands of the business you may be concerned about the assets that will be left over to keep the business going after the divorce is finalized. Not to mention the new financial obligations that the business will need to cover such as spousal and child support. Can your business financially withstand all these new expenses? Read on for information you need if you own a business you will use to pay child and spousal support.
Paying Out Your Ex From the Company’s Assets
When you own a business, you know that sometimes it can be a struggle to get the bank to understand your income. Whether its qualifying for capital to help the business grow or to get them to extend you cash to cover next months payroll. You are now getting ready to negotiate your separation agreement or divorce settlement… How will they evaluate what your business is worth? Your company barely hung on over the last 2 years during COVID. Now as reopening disruptions in the economy take place, your business income has taken a nosedive.
You’re now worried about what you may owe your ex when it comes to dividing family property. You’re also concerned about how much you will be expected to pay to in support payments? Your income from the business will now need to support two households. This divorce came at the worst possible time, as your business tries to regain its financial footing.
What are the Guidelines for Calculating Support and Family Property?
If you have T4 income the process for calculating support and family property is relatively simple. If you are self-employed or own a private business calculating how much income you earn in your business each year is not always easy to figure out. What are the guidelines for calculating support and family property? It’s important for you to know that Federal Child support Guidelines (FCG) determine how support will be calculated. The rules recognize that business owners have several options to reduce income for tax purposes. These include income splitting, taking dividends instead of income or having the business pay for some of your personal expenses.
The process for coming up with support and family property takes income reducing strategies into account. It also involves identifying a number closer to what the business owner could take as income. This is based on the revenues of the business and or what income should be attributable back to them personally. This process is normally conducted by a Chartered Business Valuator (CBV). CBV’s are called on in a divorce to provide an independent assessment of the income that should used to calculate spousal and child support . It’s also used to value your business to calculate Net Family Property in the divorce settlement.
How Will Net Family Property Be Calculated as it Relates to My Business?
Keep in mind that the process for calculating the value of a business for net family property division is not as clear. Assets the business owns can be difficult to appraise when it comes to its true value. So, it’s crucial to enlist a competent CBV to determine the value of your business shares. This includes the good will of the company along with other assets the business may own. Sometimes more than one CBV may be called upon if there is a dispute in the value of the business.
A common error that business owners make when determining what their ex may be entitled to in equalization payments is to assume that their spouse will receive 50 percent of the value of the shares. (Based on the date marriage and the date of their separation.) That is not typically the scenario. A more accurate calculation of the ex-spouse’s entitlement would be based on 50 percent of the increase in the price of the shares from the date of marriage to the date of separation.
What if I Don’t Agree with the How My Business Assets Are Being Calculated?
If you do not agree with the number used to calculate your equalization and support payments, get a second opinion. You can also apply to the courts to reduce the amount you will owe for support if your business has recently suffered a significant financial blow. Perhaps there are fewer assets and additional loan obligations not considered at the time of your valuation. The key to making the case for reduced payments, is having up to date financials in place. This would include recent financial statements, tax returns and profit and loss statements of the business. This is where building a trusted team of professionals including your lawyer, accountant, financial planner to ensure you have a better understanding of what to expect during the divorce process, as you contemplate your divorce and factor in the financial health of your business at this time.