Announcement

Collapse
No announcement yet.

Income from self employment - how to determine CS?

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Income from self employment - how to determine CS?

    Hi, I'm new here. I'm wondering, where the payor is self-employed and his line 150 is calculated after he has deducted business expenses, is there a standard way to determine his total income for the purposes of child support?

    I know that 'hard' and 'soft' expenses are considered differently for the purposes of determining child support, and that 'soft' expenses may be added back in. I feel that many of his deductions either give him significant personal benefit, or are not legitimate business expenses.

    I really dont want to take this through a court process if we can negotiate something otherwise. He is suggesting we just go with his line 150, or come up with some random number to add to it. My position is that I have no idea what his actual total income is, nor do I know what his real business expenses are, so I have no idea how we would manage to do this. I also think that in future years he will be less honest with me about what he deducted and what was legit/not so legit, so I have no idea how we would do this moving forward.

    I understand that the court can analyze expenses (is this an extremely tedious process, and could we have it done independently?), or they can impute an income to the payor. I will go this route if necessary, but it is going to lead to a ton of hostility and I would like to avoid that if at all possible.

    Does anyone have any suggestions? Thanks in advance.

  • #2
    My ex is self-employed. I had it specified in our divorce agreement that he has to provide me with all of his income and expense documentation (detailed) by Jan 15 of each year. I would NEVER go on his line 150 as I could care less how and when he pays his taxes and how he reduces his taxes payable. My divorce judgment also specifies which expenses are allowed in the annual recalculation. Anything that is payment for a capital asset (equipment, for example) is disallowed. Be sure to request business bank account statements and GST/HST filings to substantiate any and all income and expenses.

    I would recommend talking to the accountant (if he uses one) and requesting his detailed income statement. Does your husband do his own accounting? Does he use a software program (Quick Books, Simply Accounting)?

    It imperative that honest, full disclosure is achieved to determine fair support (Child or Spousal). I certainly would be persistent and get these documents. If you have limited financial experience you can ask an accounting firm to assist you.

    Yes the court most certainly can impute income to both you and your husband.

    Comment


    • #3
      I find it amusing that expenses can be written off with the blessing of the CRA, but that family law is willing to recognize these writeoffs as being bogus.

      One of the few situations where family law has it right.

      Comment


      • #4
        Thanks very much for the info.

        He is not my husband, I have had primary physical custody of our child since she was born. He has her far less than 40% of the time. I understand my income does not enter into the child support calculation (though it does for section 7) due to this circumstance.

        I have VERY LITTLE financial knowledge! Ahhh! So, it would not be unwieldy then to go through his claimed expenses one by one? He is the sole employee of his business. He does use a 'bookkeeper' but I am not sure if she is an accountant per se.

        Would he likely have each expense documented individually somewhere? He is trying to tell me that he has categories (ie 'office supplies') and is indicating that he has no idea how to look at the items in those categories.

        I know for an absolute fact that he writes off many things that are not legitimate business expenses. I want those added back before child support is calculated, but I do not intend to be difficult about the real expenses.

        How would this happen via a court process? I have a low income (student) and am eligible for legal aid. I know however that legal aid services are limited. He would have to pay his legal fees up front and I know this would enrage him, so want to avoid it.

        However, he is being far from forthcoming, and has been intentionally deceptive ('expenses? no, line 150 is my GROSS income, yeah!').

        So there would likely be a 'detailed income statement' that would itemize his claimed expenses, that I could ask him to provide via his bookkeeper?

        Also, would this be something I could do via mediation? He seems eager to just figure this out ourselves, I am sure because he does not want his expense sheet examined in a courtroom. But I feel like I am doing most of the work of figuring out how to go about this, and he is pleading stupid (and is legitimately not brilliant in this area, but is also wanting to just pay based on his 150 if he can make that happen).

        Comment


        • #5
          Originally posted by Janus View Post
          I find it amusing that expenses can be written off with the blessing of the CRA, but that family law is willing to recognize these writeoffs as being bogus.

          One of the few situations where family law has it right.
          Ha!

          Well I think there is bogus (many of his are in my personal situation), and then expenses that CRA would consider legit but which are of considerable personal benefit so should be added back in.

          My understanding is that family law does not seek to make judgments on legitimacy by CRA standards. Which I am glad about.

          He verbally told me he earned 100,000 last year, and now says his income tax report will say 60,000. I also know many of the specific expenses he has claimed are not legit because he verbally told me before we fell out over child support, and can probably prove it at least circumstantially by comparing expenses to emails wherein he told me the details of travel plans for example.

          Ugh what a nightmare. I want to do this as peacefully as possible, but he needs to pay his child support on the income he had before the luxuries he has enjoyed and claimed as business expenses.

          Comment


          • #6
            It is very interesting indeed. One small item is what he pays to his so-called assistant/gf. While CRA may allow it I most certainly do not. One year he claimed 60% of personal home expenses and CRA allowed it. I've never claimed more than the square footage of my office but not my ex!!!!

            I recall during my JDR with the lawyers and judge (divorce) I looked across at my ex and I realized we were both not following the extensive discussion about this area between the lawyers & judge. IT was almost comical. My ex and probably had stunned "road kill" looks on our faces.

            Comment


            • #7
              Elecktra - I don't think in your case you need to be an accountant. If you can manage to work with a spread sheet you can probably come up with your own calculations. The trick is going to be to get the documents. It is very, very important to ensure you get corroborating documents for anything he gives you. If you specify this from the start you will save yourself alot of grief and anxiety down the road. Requesting corroborating information is a reasonable request. It is the same as requesting pay stubs and would be viewed the same.

              A bookkeeper (even a lousy one) would be able to provide you with the information you require.

              I have my fingers crossed that he uses a computerized accounting program. If you can get the detailed accounting statements, along with bank statements (not difficult if he uses a separate bank account for business), GST/HST filings then that should be a great start.

              Comment


              • #8
                There really should be some sort of guidelines in place for dealing with this type of thing...

                My partner has business expenses, ones that he would not occur if he had a different job. He is in the sales business and travels to different towns every week to work. With this job comes major travel expenses, mainly gas, but then he has the added insurance premiums for using his vehicle for business, plus the maintenance on the vehicles is much higher. Since January 1, 2013, he has put 4014 km of his vehicle, all for work. He has a detailed log of this, and on weekends we use my van, as we save his car for his business (since it gets so much use during the week, we don't use it on the weekend).

                He is obviously writing off all his vehicles expenses, which in reality, really don't amount for that much of a deduction, but for him it is a legit deduction. Sure he would have expenses if he traveled to any other job, but not even close to the expenses he has now. He also had to purchase a lap top, which we would not have, had he not needed it for work. We have my lap top and a desk top, plus a tablet, so another lap top was not even on our mind, until this new job.

                It is always hard with these types of expenses... as far as I know, he has not spoken to his ex about how to work these expenses, but other than his vehicle expenses and a few office expenses (lap top, binders, etc) he has minimal expenses. He spends about 6 hours a day at home working on paperwork a day, but because we do not have a separate room for an office, he is not bothering writing off business use of home expenses, unless we build an office in the Spring, at which time he will write off the expenses, but would be added back for Child Support purposes.

                Comment


                • #9
                  It doesn't matter if he said he inflated his expense. It doesn't matter if you believe he does. The only thing that matters is what you can show to the courts.

                  If he inflates his expenses how do you know if it is $1,000 or $10,000? How can you prove either figure?

                  The Family Law Act requires income disclosure. Normally that means a tax return. You have every right to at minimum require a copy of his tax return. As a self-employed individual he must file a statement business activity and summary of his expenses.

                  The expenses that family law would normally discount because they were of personal benefit would show on his tax return. Things like a vehicle, cell phone, home office. That doesn't mean a tax return is the complete picture, but it gives a reasonable place to start and it is a reasonable thing to ask for.

                  You mention office supplies. These are legitmate business expenses, GAAP require they be included on the balance sheet. Unless you have a warrant to search his office and take inventory of how many pens and paperclips he has, you are wasting your time.

                  If he is claiming a $60k net on a $100k gross, that is not unreasonable depending on his business. If he is inflating expenses, he is not misrepresenting the full $40k of expenses. You would be lucky to get proof of a fraction of that. To get that proof you will have to go to court for disclosure, and then require an audit. The cost of all of this would be considerable, and you would only show his income going up by probably $10-15k. Out of that, any increase in child support would be about $140 a month. So decide if it is worth it.

                  Comment


                  • #10
                    Apparently it DOES matter that he said he inflated his expenses. I was told that I would file a Motion to Change along with a motion for an interim increase in support. I was told to list the expenses that he has claimed that he told me were not legitimate, and then on the 'a' form to list what/when/where he told me such. I am also to list lifestyle extravagances that do not match his stated income.

                    This type of evidence is apparently considered legitimate to begin a process of looking at his income and expenses. Then I was told the court could impute an income up to his total earnings. (He does have some legit business expenses so I would acknowledge that and expect to not see his total earnings imputed as personal income).

                    Are business expenses listed on his tax return? He provided me with a '5 year tax summary' but all that is listed on there is his total income, net income, and taxable income AFTER expenses have been deducted. I have no idea how much money he actually took in total.

                    I have no desire to count his paperclips. But I know for an absolute fact, unless he was lying to me which I do not believe he was, that he has listed some outrageous things as business expenses. So for example under travel, if he were required to document exactly where he traveled and whether he could relate it to his business (he cannot), he would be in trouble. Same thing for ridiculous household expenses. I do not want to get too detailed but some of it would be pretty humorous to the court.

                    Comment


                    • #11
                      BF it sounds as though your husband's business expenses can be corroborated. If the primary place of business is the home then a proportionate amount (% sq ft) would be acceptable to CRA. Is CS not on a scale or a range? I admit I know little about CS calculations. I suppose the car lease for business would have to be negotiated as an expense item for support but I can tell you that I would examine the lease of said vehicle carefully. If there is a carry over residual value then that might likely adjust income. I'm no accountant. I believe lots of things would be determined on the type of job your husband does as well. Sales positions are an entirely different category (real estate would probably have it's own set of rules). "Self-employed" is a broad based term.

                      One problem my ex came across was trying to claim his g/f to do his books and then claiming an accountant at the same time. Naturally we only accept the accountant's fees as a legitimate business expense. What we did, for purposes of determining SS, was review average expenses over a 5 yr period. Then the individual expense categories were examined and anything where there was a capital expenditure (equipment, vehicles). My position is, and always will be, is how he opts to do his income taxes is of no concern to me. If he wants to be dishonest then that's fine. I think my advantage was that I did the company bookkeeping for several decades and I know, first hand, how he tries to fudge things. OF particular interest to me is when he submits his maintenance/repair bills. Often he has work done on equipment and then complains and he gets credited many thousands of dollars. All it took was 5 minutes to point this out to the judge, (along with the bogus invoices from other trucking companies), who ordered detailed financial documents be submitted by him on an annual basis. The one thing I didn't request at the time was detailed banking statements. It didn't even occur to me at the time (stupid me). Depending upon how far-fetched this year's pile of paper is, I may very well request this.

                      I do know that if individuals are dishonest in their submissions or try to create a smoke screen to confuse, it isn't uncommon for income to simply be imputed by the judge. I am told that it is often imputed for many tens of thousands of dollars higher than the individual actually makes. So a person has to ask themselves if dishonest financial reporting is really worth it in the end. I think not.

                      Of course it is important for BOTH parties to provide full financial disclosure. Part-time under-the-table work is becoming more and more traceable (thanks to the social network world we live in). So I think if you demand documents you have to be prepared to provide same in kind.

                      Comment


                      • #12
                        I don't request or receive my ex's tax returns - they are irrelevant. I did, however, see one last year and I laughed at it. It absolutely amazes me how people get away with some things! Oh well, good for him. Doesn't affect me one way or another.

                        A simple order for full financial disclosure would be in order. Failing that you request he be imputed at 100k a year. Cooperate or suffer the consequences. I'm sure legal aid can handle that.

                        Comment


                        • #13
                          Okay, so if I went the legal route I would simply request full financial disclosure, and this would require him to show his total business earnings and expenses?

                          And I'm sorry that I am really dumb about this, but what can I just ask from him directly? He must have an itemization of expenses somewhere, right, given that he has a bookkeeper who is ethical as far as I know?

                          I figure I will ask him for whatever information will tell me his total earnings and list his expenses, or to sign up for mediation.

                          Comment


                          • #14
                            Arabian... there is no lease for the vehicle... we bought it outright 2 months before he even started this job, before he even applied or knew about the job. While we thought about leasing in the spring, it really makes little sense to us because he travels so much, and most leases have a set number of kms, with his job there is never a known amount of kms. Some days he puts in under 100km, other days it is over 400km.... I suppose after a full year on the job he could re-evaluate and see, but at this time, when we purchase, we pay up front for things.

                            As for the rest of it, I am not too sure how it works... he keeps saying he is self employed, yet tells me he will get a T4... to my knowledge, a T4 is issued to employees by their employer, so in my eyes, he is an employee with business expenses, so I don't know if that changes anything. We are going to see an accountant when he received his T4 to go over everything. We usually do our own taxes, but this whole self employed or employee with business expenses is too complicated for me at this time (really I just don't have the time to research everything required).

                            To the OP- Mess provided good advice... even if he is inflating some of his expenses... do you have the proof or failing that, how much are you willing to spend to find out? What happens if his expenses are legit, are you prepared to have to pay his court costs? Just because you have legal aid does not mean you will not have to pay court costs if you lose. You really need to examine your situation and see if it will actually be cost affective...

                            Comment


                            • #15
                              I dont know if it will be cost effective or not.

                              I DO know that he claimed fairly extensive travel that was not related to his business but were 'spiritual retreat' type events. I can prove that based on how he labelled the travel in scheduling emails to me, vs the dates he claimed business travel, I'm sure.

                              Car rentals, gas, etc for personal travel.

                              He has a home office and claims cleaners for the whole house, etc.

                              He also claims other so-outrageous-they-are-humourous household expenses.

                              He has a lot of gall as a person (honestly an objective observation, I would have always said that about him), and is not the most financially knowledgeable person, so I have no doubt there are many more things than I know about appearing as expense claims, but which are not related to his business in any way.

                              I understand credibility means a lot. I am very sure I could provide enough evidence (ie. emails to me about personal travel that coincide with claimed business travel), and more reporting of verbal disclosures (ie. him telling me he was claiming car rentals and gas for personal trips - including for trips I went on with him!), that his credibility to the court would be seriously compromised.

                              I would imagine this would lead the court to be likely to impute an income to him, no?

                              I want to avoid this route if at all possible. But I'm not convinced that proving my case would be so terribly impossible or uneconomical.

                              Comment

                              Our Divorce Forums
                              Forums dedicated to helping people all across Canada get through the separation and divorce process, with discussions about legal issues, parenting issues, financial issues and more.
                              Working...
                              X