Imputing Personal Corporate Income

[SomeGuy]

Hello All.... I'm a newbie... did a search but couldn't find anything directly related to this so please bear with me if its been addressed.

I'm an incorporated IT Contractor with a highly variable income (one year close to zero, next in 6 figures, next in between those extremes).

Historically, I have kept money from my 6 figure years in my corportation, taken much less in salary, then dipped into the corporation when my income is much lower. This makes a whole lot of sense from both a budgeting and tax point of view. In the long run, there are no retained earnings in the Corporation.

This year will be a significant one in terms of income. This year also has the potential to be the year which the spousal support payments will be calculated on. I am (as usual in a good year) drawing a significantly lower T4 salary than overall income.

Couple of Questions:

1) I've heard mixed reports about what will be used for support... i.e. My T4 income or my overall corporate income for the year ??

2) If it's my overall corporate income, how is the difference imputed given my books aren't done, there are corporate taxes, expenses, etc ?

3) Also if its my overall corporate income, would it make sense to T4 out my entire earnings.... even if that means much higher taxes ?

Appreciate any kind of advice or pointers to relevant threads

[arabian]

I can only comment on SS as my son was of adult age when we divorced.

SS is in part a negotiated issue. As you are aware, much depends on you and your ex's age in combination with the length of time you were married. Of course if You have minor children that affects the SS.

If your wife has good legal counsel they will calculate your income for the purposes of determining SS on the business income - expenses. You have control over what you can pay yourself and that is why your business finances will be of great interest to her.

If your wife does not have good legal counsel you can likely get away with just averaging out your tax returns over the past 3 - 4 yrs.

[billm]

I'm almost identical to you.

We agreed to use my corporate profit, adding in what every I pay myself.

Any corporate expenses that have a personal benefit (mostly just home office and cell), are 75% added back, and grossed up. Ends up being about 9% expenses off of gross receipts.

This makes how much I retain in the company etc, irrelevant.

If I do have income which is not attributed to my company that is on my personal tax return, that would be added in to my income as well.

This income is what is used for CS calculations updated yearly based on the previous year.

My SS is not based on current incomes so it is not relevant to your question.

[OrleansLawyer]

Appreciate any kind of advice or pointers to relevant threads

For people with variable income, an average of your total income would be a fair place to start. If it gets taken to court, the variety of outcomes increases.

If your wife does not have good legal counsel you can likely get away with just averaging out your tax returns over the past 3 - 4 yrs.

His wife's counsel is less important than his. Competent representation would be unlikely to advise him to accept a particularly high income year defining his support obligations when that year does not represent his overall financial situation.

[arabian]

^agree - many family lawyers have little business experience and are not comfortable reading over income & expense statements. This can be an advantage or a disadvantage, depending upon who has the sharper lawyer. I'd put the income on a spread sheet and perhaps look at it over the past 5 yrs. which would lessen the impact of an unusually slow or, alternatively, active income earning year. Underemployment isn't really a good excuse here as he did have the company funds to fall back on in slow times. I think it sounds like he uses the company funds as a personal line of credit and it could be argued as such.

[SomeGuy]

Thanks for the responses guys...
It is, unfortunately, an extremely litigious situation (long story).

Billm... very helpful...

This is absolutely not a line of credit... I like my time off and live well within my means... she is financially immature and is trying to establish a good year as the baseline..

Thanks again...

[arabian]

I'm just being the "devil's advocate" here so you can hopefully know what to anticipate from the other side. With that said, emphasize your business cycle and the volatile nature of the IT biz. I'm sure you can dazzle everyone with enough charts and graphs to get them to want to get through everything as quickly as possible.

biggest hurdle is to agree on the basis of your income as BillM has mentioned

[fingerscrossed]

Hmm. I do the opposite. I work in IT as well and I pay myself through a payroll company a good salary and dividend out any retained earnings. As such my T4's for the last 3 years have been pretty consistent; they have salary and dividends declared which is the whole revenue really.

I claim mileage for the car as per CRA's max guidelines and parking as well. Cell phone too. The mileage, parking, and cell are not declared as income. Will they be considered some kind of income?

[arabian]

Some would argue that those are normal operating costs occurred regularly by you so you can perform your work.


Opposing counsel may argue that these are fully taxable items and therefore should be considered as income.

You can always try....

[billm]

Some would argue that those are normal operating costs occurred regularly by you so you can perform your work.


Opposing counsel may argue that these are fully taxable items and therefore should be considered as income.

You can always try....

Your post does not make sense to me.

They are not fully taxable items - they are expenses and are not taxable.

[OrleansLawyer]

Your post does not make sense to me.

They are not fully taxable items - they are expenses and are not taxable.

I believe she is indicating that opposing counsel may pursue the argument that, while they are deductions for CRA, they may not be deducted when calculating CS or SS.

[randomjohndoe]

Your post does not make sense to me.

They are not fully taxable items - they are expenses and are not taxable.

A lot of stuff does not make any sense under FLA, get used to it See NOL answer. Make sure you don't do abuse "meals and entertainment" expense. If your ex is nasty, they'll nail you with support on the entire amount of that line

[SomeGuy]

Thanks again everyone for your replies. It looks like we'll be doing the settlement conference route (man this stuff is a drag ).

So judging on what I've read, is it basically up to me to present a fair way to consider my income ?? Then she/her lawyer can accept it, modify it, or tear it to shreads ? Then the judge will make a decision ? Is that how this works ?

Thanks...

[Berner_Faith]

You basically have to make sure all your expenses are legit business expenses...in my bf's case, his new job (where he is basically self employed), has him traveling daily. The amount he has spent in gas to travel is outrageous and he would have never spent that amount if it was not for this job, therefore any fuel costs related to his work are legit write offs (he is careful not to write off personal gas, such as if we go away for the weekend).

Some expenses, such as entertainment can be added back to your income.