When a married couple living in Ontario decides to undergo a marital separation, both parties must provide thorough disclosure of all relevant financial information. Known in Family Law as Financial Disclosure, this is a crucial part of the divorce process because it allows for both people to be fully informed of each other’s financial circumstances.
Furthermore, this information shapes the various specific legal obligations (such as spousal and child support) one spouse may have towards the other, and to their children.
But if one partner is also an independent business owner, and is responsible for acquiring and tracking his or her own income, is it possible for that party to claim little or no income?
In short, yes. But there is more to this issue.
An entrepreneur who had not incorporated their business generally has to report business income using something called the accrual method of accounting. This means they have to report everything that they earn within a fiscal year, regardless if they received payment yet. But they can also deduct allowable expenses, (business use of a car, equipment, etc.) within that fiscal period in which they incur them – whether or not the expenses are paid for yet.
This is one possible way a spouse could skew their business income to try and decrease the amount of child or spousal support they may be obligated to pay. In other instances, he or she could try to conceal assets by stating that the business is failing and therefore making less, or by keeping poor or no financial records.
The good news is that there are steps one can take to prove that their soon-to-be ex spouse is not being honest about how much they make.
A spouse should have a general idea about how much revenue their partner’s business generates in a year. If through Financial Disclosure the owner claims the business is not bringing in much money, but their personal standard of living (spending money on travel and dining out) does not match up with the disclosure, that is often a good indication that they are concealing some financial information.
After Financial Disclosure, the business owner’s most recent income tax returns should be reviewed. If the couple has children together, this will be an important step for assessing child support. Pursuant to the Federal Child Support Guidelines, line 150 in those[tax] documents might not accurately and fairly reflect your current income or include all the money available to you for child support purposes. Additions to annual income stated on line 150, including capital gains and capital losses, and capital cost allowance for property, may alter the amount of child support owed. Furthermore, while parties may be entitled to deduct items from their income under the Income Tax Act, some of those same deductions will not available to them for purposes of income determination under the Child Support Guidelines.
If the true figure of the self-employed spouse’s income is still not confirmed after these first two steps, the opposing party may have to hire a professional to do forensic accounting. The accountant will analyze the business owner’s financial information, and will prepare a report as to what that business owner’s true income is, based on their professional opinion. Those findings can, and often are, used in legal proceedings.
If inconsistencies still remain, then the final course of action would be to ask a Court to impute an income for the self-employed spouse. This means that the party’s income will be altered/determined based on what a judge believes the person has the capability to earn, or is in reality earning, even though evidence may not exist to support this income amount.
Are you concerned that your self-employed ex is being dishonest about finances? Contact us today and allow our team of experienced family lawyers to help you.