SELF-EMPLOYED? HERE IS WHAT YOU NEED TO KNOW BEFORE SEPARATION/DIVORCE
By: Eva DiGiammarino
Going through a separation and divorce can be both emotionally and financially complicated. For business owners, much of the complication has to with determining income and the value of the business. Further, many business owners are unaware of the paperwork and steps involved in separation/divorce, leading to an unnecessarily long and expensive process. To save time, money and stress, all business owners should read up on the following points before they engage in the separation/divorce process.
1. IN A SEPARATION/DIVORCE BOTH SPOUSES NEED TO DIVIDE THEIR PROPERTY – AND YES YOUR BUSINESS INTERESTS ARE INCLUDED!
Division of Net Family Property
When a married couple separates in Ontario, they must disclose to each other the property they accumulated during the marriage. In this case, a list of each spouse’s individual and jointly owned property is detailed with values for date of marriage and date of separation. In this context, “property” refers to anything owned by a person such as a car, household items, bank-accounts, pensions, and yes, business interests. Debts are also included as “property”, so debts such as a mortgage, car loan and credit-card debt are also taken into consideration.
Business interests which must be disclosed, for the purposes of property division, can include (but are not necessarily limited to) the following:
· The value of your share of the business;
· Your shares in a business; and,
· If you own the business, the business’s property and, good-will.
The idea is that the couple is sharing the increase in value of their net-assets (assets minus liabilities), equally.
2. YOU WILL LIKELY NEED TO HAVE YOUR BUSINESS PROFESSIONALLY VALUED
There are many different ways people value their business in divorce. Certainly, the larger the business, the more difficult it can be to determine value. In these cases, one of the most common ways is to obtain a valuation from a Chartered Business Valuator (CBV). A CBV is a certified professional who can quantify a business by reviewing it’s profitability, tangible and intangible assets and future cash flows.
3. YOU WILL HAVE TO PROVE YOUR INCOME
If child-support and/or spousal support are issues in your separation/divorce, then you will have to provide proof of your income. This is relatively straightforward for individuals who work for a company where their income is reported on a T4. In this case, pay-stubs, TF slips and Notice of Assessments can be the best proof of income. Typically, for self-employed individuals the aforementioned proof is not good enough for determining support because the Income Tax Act allows self-employed individuals to reduce their income by deducting legitimate business expenses. The complication derives from the fact that the Family Law Act (“FLA”) does not allow the same deductions to income. As such, a self-employed individual has to go through all of the business expenses they have used to reduce their income to see if they can also legitimately be deducted for the purposes of paying support. If the expenses cannot be deducted, they can be added back in to the income, increasing the self-employed person’s support obligations. Given all of this it is extremely important that the self-employed individual prepare an income statement in conjunction with a lawyer and business accountant to accurately determine their income and satisfy their disclosure obligations under the FLA.