Determine the available income for child support payment purposes
At the time of divorce, things to think about for both parties are numerous. Determining the amount of alimony may be a source of conflict. To determine the amount for support purposes, we must initially determine the available income to be used to calculate the amount of support. Thus, this calculation should be as accurate as possible. It can be alimony for child or spousal support or for both. In all cases, it is imperative that the result of the calculation consider all the information available. Family lawyers usually use a software that allows them to calculate the support payable by any of the former spouses. When the client is employed by a third party, the calculation is simple and usually fairly straight forward. In the event that this person is a business owner or self-employed, the calculation can be much more complex.
Why can the calculation be different depending on the case?
For example, for a business owner that owns shares in a company, some items may need adjustment. Indeed, the situation of the owner of shares in a company is different from an employee. Sometimes, an owner of shares in a company has additional benefits. Often, family lawyers will entrust the calculation mandate to a Chartered Professional Accountant (CPA) that is also a Chartered Business Valuator (CBV). The determination of the adjustments to be made requires good knowledge of accounting basics and a solid understanding of business finance.
Items that require special attention
Starting from the customer’s total income, the CPA-CBV knows where to look in order to proceed to the necessary adjustments.
The starting point is the total income at line 150 of the federal personal income tax return. For the owner of shares in a company, we look at the following:
- Is there any income splitting with family members?
- Is there a part of the company’s profit that is available to the owner?
- Are there any personal expenses paid by the company?
- Are there any unrecorded cash sales?
If the owner of a company is splitting income, the split amount should be added to his income. The split amount to be added would be the amount over the compensation, that would be paid to a third party for the same work, which is paid to a family member. The main purpose of income splitting is usually to reduce the total income tax of the family.
Does the company make a profit? If this is the case, is part or all of it available to the owner? For a company earning active income (versus a holding company for example), several factors must be evaluated such as the debt-to-equity ratio. The lower the debt-to-equity ratio, the more likely some or all of the company’s profits are available. The higher it is, the less likely it is that profits are available. We must also look at the company’s investment projects, etc. We must also make a distinction between the owner owning 100% of the shares of the company and a minority shareholder. In the case of a minority shareholder, it is possible that we do not make any adjustments, depending on the circumstances.
Does the company pay any owner’s personal expenses and are these expenses shown as expenses in the income statement? If the answer is yes, these personal expenses must be added to the owner’s income. A gross up amount must also be added to consider that the owner will not have to pay personal income tax on the money used to pay these expenses. For example, the car expenses, cellular phone and hobbies can be considered.
Are there any unrecorded cash sales? If this is the case, these should also be added to the owner’s income, along with the tax gross up, just like the example for personal expenses paid by the company.
When this kind of mandate is entrusted to a Chartered Business Valuator (CBV), he assists the family lawyer. Indeed, the CBV determines available income for support payment purposes in the case that one of the former spouses is a business owner or self-employed. The lawyer can then use that information to determine the exact amount of support to be paid by either party.
