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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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  #21 (permalink)  
Old 10-23-2015, 05:37 PM
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Originally Posted by mcj2012 View Post
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?

First of all, as you stated that the company has shown very little profit in the last three years, and once showed a loss. So, from what period are the retained earnings from?

If there has been no fluctuation in the retained earnings account in 3 years, then the earnings are from a prior period, and that would be the period that the cs should be adjusted for. Retained earnings is a cumulative number - ie it is from the beginning of the corporation to last fiscal year end. You can't just add $80000 to her current income to account for retained earnings. In this year, the earnings may only be $1000.

From what you've stated, she's already walking a gray area by CRA standards. If she's on-site at only one location and that is her only customer, she is, an employee of that organization according to CRA. This may be the reason why she incorporated, so she stops having to file tax returns that list her customers and self-employed earnings.

If the company existed and showed an $80000 profit in retained earnings, then one would expect, without any change in business, the same profit would be generated on an annual basis, and retained earnings would increase as the years tick off.

If retained earnings isn't increasing, then she's expensing a pile of items that are not legitimate business expenses. That would be my first guess. And this is common practice in small corporations as taking money out of the company cannot be done without personal taxation. However, running expenses through the company would decrease your day to day living expenses, and decrease the profits of the company, thereby effectively reaching zero.

If she isn't an accountant, and does not use an accountant, she will eventually hit a mark where this won't be tolerated any longer. Think HST remittances .... she charges HST and her remittance to the government is the net of what she charges in HST vs what she has paid in HST. Those personal expenses are now being written off against the HST of the company as well. If CRA audits the corporation, their mandate would be to find illegitimate expenses written off against company income. If HST audits, they're looking for HST not charged, or HST credits taken that you aren't entitled to (because they are not legit business expenses).

Unfortunately, without looking at the balance sheet, its difficult to gauge whether her books are legit based on what you've stated.

As for CS, you need to go back to the period in which those retained earnings were realized and request increased support for that period. The difference in the account from one year to the next will tell you what the company is profiting year over year.

The reason I bring all of this up is that the amount that is in retained earnings now is just a small part of the picture. The expenses she is writing off through the company that are personal, would be considered taxable income by CRA should she ever be audited. Now, judges don't care about the audits, the legalities of taxation, etc. what they care about in this instance "is the person hiding income by using company funds to pay personal expenses".

If each year she shows $5000 in car repairs and maintenance, and then, all of a sudden it shows $15000 in one year, there is maybe $10000 of hidden income. Maybe...

If she shows $2000 in telephone and then it goes to $5000, she's hiding income that way.

If she shows $10000 in fuel expenses and then it moves up to $25000 then she's hiding income.

Those are the numbers you need to concentrate on for each year after the year the bulk of the retained earnings was realized.

As a for instance - I pay all the car repair bills through the company for the company owner's wife. The company owner will often give me little bonuses in a similar way - like paying for my winter tires. They are reasonable write-offs for the company, even if they aren't legit. They don't cause "red flags". And, rest assured, this is common practice in all small companies.
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Old 10-23-2015, 05:50 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....
No that isn't possible. Retained earnings is the account that profit is placed in.

Profit is the net of Income less expenses. If income increases and expenses remain the same, profit increases and retained earnings would increase at the fiscal year end.

Only asset and liability accounts have carry forward balances from prior fiscal years. Expenses and Income are set to zero at the beginning of each fiscal year.

What is likely happening if retained earnings doesn't increase at the same rate as income increases, then the expense accounts are being utilized to hide the income. ie. I'm getting a new inground pool and I have the excavator invoice my company for the work they did in my back yard. The $20000 value on that work should be added to my personal income for the year in which I had the work done in order for someone to calculate the actual child support I owe for that year.

It's odd how people go to the income and asset accounts....it's the expense accounts that tell the story.
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Old 10-23-2015, 06:04 PM
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I agree with you 100% MSMom. My divorce order specifically orders my ex to provide me annually with: "original" invoices; bank statements; GST filings; "original" trade account invoices and statements. Information provided to me revealed ex's actions. Yes once a year I had a great deal of paperwork to go through but it was worth it in the end.

In this instance it might also be useful to request ex provide a copy of her contract a/o personal services contract from her employer/client.

MSMom - you should provide services to people who are going through a divorce. You have excellent investigative skills and ability to explain things which many accountants lack.
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Old 10-23-2015, 06:10 PM
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I would also argue that the ex's reasons for keeping her slush fund for potential future employment is totally unrealistic. Take the maximum amount of EI payable for 52 weeks and let her keep that amount in her rainy day fund.

MSMom- would the retained earnings not be calculated during equalization if the slush fund was amassed during time of marriage?
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Old 10-23-2015, 06:28 PM
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Originally Posted by arabian View Post
I would also argue that the ex's reasons for keeping her slush fund for potential future employment is totally unrealistic. Take the maximum amount of EI payable for 52 weeks and let her keep that amount in her rainy day fund.

MSMom- would the retained earnings not be calculated during equalization if the slush fund was amassed during time of marriage?
That's more a legal question than an accounting one. But, if the retained earnings were realized in a period in which the couple were together, I would argue that it should be equalized. But, I've never received spousal, equalization or any of those items myself, so I'm not 100% sure on the legalities of that.

As the owner of the corporation, she wouldn't be eligible for EI unless she opts in to the program. Then she would only be entitled to it for mat leave, or illness/compassionate leave purposes. I understand the spirit of what you say, but from a business perspective, you wouldn't keep funds for a "rainy day". That's idle money and idle money doesn't make money.

The concentration needs to be on the retained earnings for the period in which they were earned. Otherwise, it's a "savings account" of sorts, and nobody is ordered to pay CS based on the amount in savings.
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Old 10-23-2015, 06:41 PM
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Originally Posted by arabian View Post
I agree with you 100% MSMom. My divorce order specifically orders my ex to provide me annually with: "original" invoices; bank statements; GST filings; "original" trade account invoices and statements. Information provided to me revealed ex's actions. Yes once a year I had a great deal of paperwork to go through but it was worth it in the end.

In this instance it might also be useful to request ex provide a copy of her contract a/o personal services contract from her employer/client.

MSMom - you should provide services to people who are going through a divorce. You have excellent investigative skills and ability to explain things which many accountants lack.
I'm a construction accountant, which is much more in depth than any other industry (also much easier to hide the stuff). I'm also the one that does the "hiding of income" for all intents and purposes, even though it's not to evade any child support or anything like that. Generally, we're doing it to give employees a perk ($$) that they don't pay tax on because it doesn't appear on your pay. The employee still benefits (ie I don't have to spend money on my tires) and the company saves money in corporate taxes. The other example is paying the boss' personal household expenses (construction in nature) which is a (personal) tax free income draw from the corporation. This is what I think the OP's ex is doing. Paying her personal bills through the company in an effort to reduce her profit. Which is why I say look at the expense accounts and see where those profits are being funnelled if it isn't hitting retained earnings. The only way to do this without audit, is a year over year comparison.
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Old 10-23-2015, 07:01 PM
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I once knew a wealthy couple who used to write off a significant amount of household money. They were perpetually always building a new home or redecorating/renovating one. Wife simply had a limited "interior decorating" business and another "construction parts" store. Worked brilliantly for them. They have homes in Hawaii, Phoenix, etc. and lots and lots of subsidiary companies. They favor picking up small failing businesses. Helps their tax position I guess. Oh the exhausting problems of the wealthy....
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Old 10-23-2015, 07:06 PM
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Originally Posted by arabian View Post
I once knew a wealthy couple who used to write off a significant amount of household money. They were perpetually always building a new home or redecorating/renovating one. Wife simply had a limited "interior decorating" business and another "construction parts" store. Worked brilliantly for them. They have homes in Hawaii, Phoenix, etc. and lots and lots of subsidiary companies. They favor picking up small failing businesses. Helps their tax position I guess. Oh the exhausting problems of the wealthy....
Precisely why they're doing it. I recently read a CanLii Case where the husband and wife owned a business. Despite the fact that they only paid themselves $35000 each per year, they lived in a million dollar home, had substantial cash in locked safety deposit boxes and had cars all down the driveway.

The judge got frustrated with the hiding of income. Eventually, at the end of the day, the judge imputed a significant income on the payor of support in order to correctly valuate the income with all the cash transactions that must be going on. He didn't care about the legalities of those transactions, he simply stated that it was income for the purposes of calculating child support.
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Old 10-27-2015, 01:37 PM
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Appreciate it the response @Arabian/msmom. I have good questions for my lawyer (if he ever decides to return my calls or emails! I will save that for another post!)

I still don't understand why I can only use this amount during the year it was made. the money sits in the corporate account year after year when she can pay this to herself. There is no reason for it to be in there as mentioned she has no capital expenses, no employees and no office space outside of her home. So this sits in the account every year, she does not want to pay it out to herself because it means less payout to herself = less child support. Seems unfair. I thought child support is based on all available income and I would say this income in available to her. Not paying it out to herself means I get to pay the difference (as we use the set off method). Smart on her!!
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Old 10-27-2015, 01:48 PM
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It could be cumulative, but the earnings themselves pertain to a specific fiscal periods. What you are suggesting is equivalent to having to pay child support based on your salary and the balance of your savings account, each year. She only earned the money once, it isn't being earned annually.

I don't disagree that there are some underhanded tactics going on here. But, you need to trace back the earnings from year to year and recalculate the CS based on her Salary + the Earnings for that year.

File a motion to have her earnings imputed to include both her salary and the retained earnings of her sole ownership business for each year. Then, propose a "call it even" strategy and save yourself the frustration and the money on the lawyers.
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