Imputing Business Expenses Support lawyers deal with family law cases where business owners or professionals income and expenses need to be properly calculated. Failing to properly calculate income can lead to underpayment or overpayment of spousal and child support warns Lorne N MacLean, QC founder of our team of Imputing Business Expenses Support Lawyers.
Myth # 1 Wrongly Using A Business Owners Personal Tax Return – Imputing Business Expenses Support Lawyers
The biggest myth our Imputing Business Expenses Support Lawyers come across with clients in cases involving business owners is that the business owner spouse’s personal tax return should be used to calculate proper child and spousal support. Failing to hire a lawyer who understands how pretax profits, improper deductions, non-arm’s length salary diversion and working capital requirements impact child and spousal support can be catastrophic.
Imputing Business Expenses Support Lawyers 1-877-602-9900
Ensuring the family business, which is often called the “goose that lays the golden egg”, survives while at the same time not shortchanging spouses and children for the support they need is a key issue in self-employment support cases. But Imputing Business Expenses Support Lawyers need to ensure the goose isn’t padding its nest with improper and excessive personal deductions hidden as business expenses.
Key Takeaway
In cases where personal expenses are run improperly through a business or professional practice our top-rated* Imputing Business Expenses Support Lawyers point out that two corrections must be made to do justice:
- Add back the improper deduction for personal entertainment, travel, car expenses, cell phones, above fair market salary to a new spouse etc; and
- gross up the tax-free payment that resulted from it being paid with tax-free money!
Too often thousands of dollars of improper deductions are missed by unrepresented clients. Don’t make that mistake call the senior lawyers at Maclean Law across BC and in Calgary Alberta.
New Case Explains Law
In D.M.B. v. D.W.A.L 2018 BCSC 1254 a husband who failed to make full disclosure and had a variety of excuses for his overly aggressive business deductions had income attributed to him under section 18 and 19 of the Child Support Guidelines. Remember a business expense that is personal in nature results in having that expense paid at a preferential tax rate compared to paying for it out of your after-tax salary. Call 1 877 602 9900
Our Imputing Business Expenses Support Lawyers extract the following summary form the case to help you obtain justice in your spousal and child support case:
First off the Judge held the father’s claims for business expenses were inflated and improper:
[155] The respondent pushes (and exceeds) the boundaries of what is a legitimate business expense.
How Are Expenses Clawed Back
Secondly, the Judge summarized the law related to imputing income in cases of inappropriate business expense deductions which helps you and Imputing Business Expenses Support Lawyers to properly claw back these improper deductions.
[147] If a party unreasonably deducts expenses from their income then section 19(1)(g) of the Guidelines permits the court to add income. Section 19 applies to sole proprietorships and partnerships. What is reasonable for the purposes of income determination in the family law context is not necessarily consistent with what deductions are permitted under the Income Tax Act (Guidelines section 19(2), Dornik v. Dornik, 1999 BCCA 627).
[148] Determining what are reasonable deductions should involve a detailed analysis of the deductions claimed in order to assess the items that make up the sums deducted. In May of 2017 counsel for the claimant asked that the respondent produce copies of all receipts for the business expenses claimed and all receipts for the motor vehicle expenses claimed along with the respondent’s mileage log. He was reminded of the sought-after disclosure by letter in June of 2017. The requests were repeated by letter on February 16, 2018 to then counsel for Mr. L. noting that what had been only recently disclosed were three boxes filled with receipts with no reference to the business expenses claimed.
[149] Notwithstanding the failure of the respondent to provide the documents necessary to analyse the business expenses in detail the Court may still undertake an assessment of the claimed deductions.
[150] In Ursel v. Ursel, 2014 BCSC 1219, Dorgan J. usefully summarized the rationale for, and the approach to be taken, when determining what income is available for child support:
[22] The leading case on s. 18 of the Guidelines is Kowalewich v. Kowalewich, 2001 BCCA 450. In her analysis, Huddart J.A. explained that the Guidelines are intended to permit an impartial assessment of the funds available to a spouse to pay support; they “are not just about actual income as a parent directly or indirectly determines it to be” (para. 42). To that end, s. 18 is designed to permit the court to “lift the corporate veil” in appropriate circumstances in order to ensure that the money the payor lists as income actually reflects all of the money available for support (para. 43, quoting Baum v. Baum (1999), 182 D.L.R. (4th) 715).
[23] The court then held that, in determining whether the “total income” figure fairly reflected the money available for child support,
a court might ask what an objective well-informed parent would make available for child support in the circumstances of a particular business over which the parent exercised control, having regard to the objectives of the Guidelines, the underlying parental obligation to support children in accordance with one’s means, and any applicable situation in s. 17.
[24] The approach set out in s. 18(a) — the pre-tax income approach, as opposed to the personal services approach — applies where the nature of the spouse’s relationship with the corporation is such that they have control over the corporation and thus should receive a financial return for their “entrepreneurial capacity and investment” (para. 48). That applies to the present case as Mr. Ursel has sole control of HiQual and UCC.
[25] Under s. 18, the onus is on the payor to provide evidence that some or all of the corporation’s pre-tax income is not available to the payor for the purposes of support: Hausmann v. Klukas, 2009 BCCA 32.
Unreasonable Expenses Will Be Added To Paying Spouse’s Income
[26] As is apparent from s. 18(2), personal benefits paid by a corporation on behalf of a shareholder, officer, or director will be considered in the calculation of income, “often by adding that amount back into the pre-tax corporate income that thus becomes available as income for support purposes”: Jenkins v. Jenkins, 2012 NSSC 117 at para. 24; Stevens v. Stevens, 2012 BCSC 1698 at para. 16. As stated in K.S.F. v. S.M.F., 2011 BCSC 1563, “the owner spouse must state business income and allocate expenses honestly and transparently. Expenses must be reasonable and for legitimate business purposes, considering all the circumstances” (para. 54). Even charitable donations by the corporation must be added back in to the pool of available income: Boykiw v. Boykiw, 2013 BCSC 1107. [Emphasis added by Dorgan, J.]
[27] For example, in Hadjioannou v. Hadjioannou, 2013 BCSC 43, the court found that the tax deductions from the corporate income included expenses which provided a personal benefit to the respondent. Telephone, internet and vehicle expenses, along with food, meals and entertainment were all included in that category. The court added these expenses back in, noting that it would “not be appropriate … to deduct this type of ordinary living expense from the claimant’s employment income” and that therefore it was not appropriate to permit its deduction when income flowed through a corporation. (See also Reis v. Bucholtz, 2008 BCSC 1156, aff’d 2010 BCCA 115.)
[28] Under the Guidelines, the court also has a discretion, under s. 19(1)(g), to impute income to a spouse where the spouse “unreasonably deducts expenses from income.” Section 19(2) clarifies that “the reasonableness of an expense deduction is not solely governed by whether the deduction is permitted under the Income Tax Act.” In Stevens, supra, the court indicated that “add back” for expenses, even in a corporate situation, could take place under either s. 18 or s. 19. The respondent in that case was half-owner of a company that ran a lodge property north of Fort St. John. The court found that the company paid for the respondent’s lodging, food, utilities, vacations and other expenses, and chose as a result to impute $16,000 to the respondent’s income under s. 19(1)(g).
[29] In Mr. Ursel’s case there is some difficulty in determining exactly how ss. 18 or 19 would apply to his income. The available financial information was, unfortunately, somewhat limited. Generally speaking, where the payor spouse is the shareholder of a corporation, the payor should provide the corporation’s full financial statements as well as the evidence necessary to meet the onus in Hausmann. Although it is not required, it can be useful to call experts to testify as to the financial needs of the business and the purpose and legitimacy of any expenses. Here the court received no evidence of that sort and it is correspondingly difficult to assess the full extent of the pre-tax corporate income or the legitimacy of alleged business expenses.
[30] In Riemersma v. Riemersma, 2013 BCSC 474, Rogers J. emphasized that the court has a discretion, in assessing income, “to employ common sense when it analyzes financial information” (para. 39). That is what I intend to do here. I also follow the lead of Barrow J., in C.J.R. v. S.P.J., 2009 BCSC 264, where the defendant dentist was the sole shareholder of his professional corporation. The plaintiff argued that $42,000 in expenses — in particular, vehicle expenses, professional fees, travel, and telephone — were “essentially personal in nature.” The court assessed the expenses and determined that a portion of these expenses should be added back, emphasizing the defendant’s failure to adduce evidence on the point.
Experienced MacLean Law Imputing Business Expenses Support Lawyers deal with these business owner cases daily. Meet with us to find the path to a just resolution of your child and spousal support case. Meet with us early on to prevent a bad result.
