Determining Payors' Income in Support Claims - A Chartered Accountant's Perspective

Our friends at the Toronto accounting firm Mintz and Partners have a new newsletter, Valuation and Litigation, that is worth a regular look.

In the first issue, Stephen Rayson's article, Income determination for spousal support, addresses the challenge of accurately determining the income of a support payor in a family law proceeding.

I'm excerpting a few of his key points, as follows:

1. In family law matters, income, as defined for tax purposes, isn’t necessarily the appropriate figure....
2. When a payor is a shareholder, officer or director of a corporation, his or her income may be affected by the business’s earnings. For example, if a payor earns $100,000 in salary from a family-owned business, but the business earns $200,000 pre-tax after paying salaries and bonuses, the $200,000 may be added to the payor’s income. Also, any salaries or bonuses paid to other family members, which are higher than their market value, could be included in determining a payor’s income.
3. There are two viewpoints on the issue of retained earnings of a business owned by a payor. One holds that retained earnings are the accumulation of undistributed profits, which are best viewed as property and not income. The other view holds that retained earnings are a real asset that the payor could have taken as income. Which view prevails depends on the case’s fit with current case law.
4. If a payor deducts a high percentage of automobile expenses as business expenses for income tax purposes, but conducts most of his or her business at a single location, it’s likely that a portion should be added back to determine income. If part of a home is used as an office and these expenses are deducted for income tax purposes, it may be appropriate to include them for support purposes because they don’t represent an incremental cost to the payor.
5. If a payor does not fully use property to realize income, that income could be ascribed to him or her. For example, if a payor loans funds interest-free to a company he or she owns, the interest that could have been earned may be determined.
6. In family law, a tax gross-up occurs when a payor receives a personal benefit from a business expense. For example, if a corporation paid $10,000 for personal expenses on behalf of a payor, those expenses ($10,000) plus a gross-up factor would be added to the payor’s income. This reflects the fact that a taxpayer would require more than $10,000 in pre-tax income to spend $10,000.

Congratulations to the business valuation team at Mintz and Partners on this infomative publication. We'll very much be looking forward to subsequent newsletter editions.

- Garry J. Wise, Toronto

Visit our Website: www.wiselaw.net/family.html