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Divorce & Family Law This forum is for discussing any of the legal issues involved in your divorce.

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  #11 (permalink)  
Old 10-23-2015, 12:19 PM
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Yes, so when a parent has control over a corporation, they can choose to leave their earnings withing the corp (instead of paying out as salary) as a mechanism for lowering their income for support calculations. That is why parents are required to disclose financials for any corporation they control (either as outright owner or via a controlling/directing membership on the board). So the question is - what is a reasonable level of retained earnings for that particular business?

http://www.justice.gc.ca/eng/rp-pr/f...ep5-etap5.html

Last edited by dinkyface; 10-23-2015 at 12:30 PM.
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Old 10-23-2015, 12:42 PM
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Mcj, so it is 90k accumulated over 3 years?
I.e. her income was underreported by 30k in each of those years?
If you were to accept that, then in future she has no need to accumulate more retained earnings, so her income going forward should be imputed as 30k + her last-3-year-average.
Assuming those numbers are all pre-tax. If they are post tax, then gross up by 33% (for 25% tax) or more.
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Old 10-23-2015, 12:45 PM
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Quote:
Originally Posted by dinkyface View Post
Yes, so when a parent has control over a corporation, they can choose to leave their earnings withing the corp (instead of paying out as salary) as a mechanism for lowering their income for support calculations. That is why parents are required to disclose financials for any corporation they control (either as outright owner or via a controlling/directing membership on the board). So the question is - what is a reasonable level of retained earnings for that particular business?

Step 5: Calculate annual income - The Federal Child Support Guidelines: Step-by-Step
Well, yes and no. They can pay it out to themselves in salary, if the cash is available. As I said, its a balance sheet item and is on the balance sheet to make the balance sheet balance.

The physical cash may have been used up in a Capital Item purchase or other expenses.

The $80000 in retained earnings may now be represented by the computer system upgrade, the new vehicle purchase, legal expenses (for the business), etc, etc.

If you think about it from a personal perspective.....your T4 says you made $100000 last year. How is that $100000 represented this year? $35000in taxes and deductions, $15000 in mortgage payments, $10000 deposit on a car, and the list goes on. You still made that $100000 even if you don't have any of it left in cash.

There really isn't a typical amount for retained earnings. And it doesn't have to ever come out of the company unless the company dissolves.

When judges want corporation balance sheets, etc. they're looking for personal expenses filtered through the business. For instance, is the business paying your home phone, insurance, car payments?? If so, the judge will consider that income to the person despite the retained earnings of the corporation.

As an example, the retained earnings of the company I work for is substantially higher than $80000. However, the retained earnings amount is not what's available to me in liquid funds. It's what's available to me if I sold assets.

You are better off looking for those filtered personal expenses, comparing the wage she pays herself to others that are traditionally employed doing similar work, or finding personal assets that also appear on the company balance sheet - like the new Mercedes that the company makes a monthly payment on, but her mother (who isn't employed by the company) drives.
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Old 10-23-2015, 01:10 PM
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In this case, the parent indicated it hasn't been spent, but is being kept to fund possible future gaps in her personal income. There are no other employees/contractors.
Agree on the personal vs business expenses search.

Interesting read here. https://www.google.ca/url?sa=t&sourc...EjxwRXpZlV8KZw

"... the Court of Appeal’s decisions of Hausmann v. Klukas, [2009] B.C.J. No. 121 and Teja v. Dhanda, 2009 BCCA 198. These cases, particularly Teja, make it clear that an incorporated professional or the controlling shareholder of a business bears a heavy onus to show why all of the pre-tax income of the corporation should not be included in the calculation of Guidelines income."

Last edited by dinkyface; 10-23-2015 at 01:15 PM.
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Old 10-23-2015, 01:13 PM
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A good indicator that someone is shovelling personal expenses through their corporation is the lack of increase in retained earnings year to year. If the company made $80000 since incorporation (say 4 years), they've averaged a profit of $20000/a over those 4 years. And, if the profit all of a sudden isn't being generated, I'd ask myself why? Where are the profits going then? In small corporations, owned by one person, it is highly probable that the retained earnings account is only augmented at fiscal year end - when the profits (or losses) are realized. It could be that the business model is no longer profitable, or that the industry has changed, etc. but if the business historically generated profit from Year 1....it will take some explaining to state why they are no longer profitable.

If she's living a million dollar a year lifestyle, yet only pays herself $25000/a - then she is funneling expenses through the business that should be personal.

If you have the company's financial documents for 3 years, you should do a year over year comparison of the income account and the expense accounts. You may see income went down while expenses increased.
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Old 10-23-2015, 01:21 PM
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Quote:
Originally Posted by dinkyface View Post
In this case, the parent indicated it hasn't been spent, but is being kept to fund possible future gaps in her personal income. There are no other employees/contractors.
Agree on the personal vs business expenses search.
Based on that answer from her, I'd do the year over year comparison.

There shouldn't be gaps in her personal income if she is drawing a salary from the corporation. If the retained earnings are unspent, then, that is what would be used to do the salary to her in those "short income" months.

Until the corporation dissolves though, she doesn't have to do anything with those funds - unless the court finds that she is funnelling her personal expenses through the business in order to evade child support.

Again, my investigative ears perk when I see a previously profitable company all of a sudden generate 0 profit. 0 is a very difficult number to get to in accounting. If the books were legit, the number should be negative or positive and have cents in it. If it's a straight up ZERO, I'm thinking how statistically possible is that??
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Old 10-23-2015, 01:29 PM
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Quote:
Originally Posted by dinkyface View Post
In this case, the parent indicated it hasn't been spent, but is being kept to fund possible future gaps in her personal income. There are no other employees/contractors.
Agree on the personal vs business expenses search.

Interesting read here. https://www.google.ca/url?sa=t&sourc...EjxwRXpZlV8KZw

"... the Court of Appeal’s decisions of Hausmann v. Klukas, [2009] B.C.J. No. 121 and Teja v. Dhanda, 2009 BCCA 198. These cases, particularly Teja, make it clear that an incorporated professional or the controlling shareholder of a business bears a heavy onus to show why all of the pre-tax income of the corporation should not be included in the calculation of Guidelines income."
That's absolutely right.....

except that....corporations are taxed at a different rate than personal income. If someone draws from their business, they have paid tax on the business income (20%) and will now pay tax on it personally as well. A very good reason why the retained earnings may not realize to the person in cash. So, the earnings of one year (10000) are reduced to 8000 through corporation tax, and the 8000 will be taxed at the personal rate, leaving the person with 50% of those retained earnings.

except that it's always easy to justify keeping reserves for growth.

except that a certain amount of cash may be needed by the business for business reasons (ie, I have to provide cash bid bonds on some tenders).

the nature of the business will indicate whether the above should be done or not.

Accounting really isn't as cut and dry and the judge, in the above quote, seems to think. Why should they pay CS on the $10000 earnings when, in reality, they only got $8000 pretax from the corporation?

(Numbers are all hypothetical).
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  #18 (permalink)  
Old 10-23-2015, 01:32 PM
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MS Mom provides an excellent explanation.

This would make a good "sticky" if we are still doing that on this form.
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Old 10-23-2015, 04:08 PM
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Thank you all for your input. Very much appreciated.

I am not an accountant so it's not always easy for me to understand these statements. I trust my lawyer with things like this however, I like to ask questions from others to make sure I am asking him the right questions.

Here is what I know:

- ex is a consultant. No capital, no employees, just a home office and an office on-site with her client of over 5 years provides. I don't see a need for future capital purchases either.

- company car is paid for.

- The company is incorporated of which she is the sole owner or shareholder.

- It appears the company has made very little profit in the last 3 years and one year reported a loss. I would say that an average of 80K - 90K has always remained in her retained earnings.

Question is, why can't I impute this amount into her income> She is the corporation, this money is accessible to her and should therefore be included when calculating child support. What am I missing here?
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Old 10-23-2015, 04:43 PM
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Is that even possible, so show no profit in a year when retained earnings are increased?

Also - your lawyer isn't an accountant either....
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