As a self-employed business owner we all know that there is grey area around putting personal expenses through the business. In addition, business owners are often encouraged to add their spouse as an employee to gain tax advantage on lower taxed income to the family. While these approaches are common practice, it is fair to acknowledge these tax planning approaches for what they are and to account for it in the income equalization process calculations.
It is important that accurate income is determined as this is used to properly calculate both child support and spousal support. In addition, accurate income figures are important when calculating the proportionate sharing of your children’s extraordinary costs, such as daycare, extracurricular activities, uninsured health care costs and post-secondary education costs.
In an effort to acknowledge and account for these personal expenses you will want to go through your business return and identify what items are for personal use, or may also be used for personal benefit. Taking this approach is fair and expected in the separation process.
For example:
You may have a vehicle that you use for business, but unless you always leave it at the business and do not use if for personal trips, you more than likely also use it for personal trips. You will want to look at what proportion of the week’s travel that you use the vehicle for personal use. You would then look at vehicle expenses and take that proportion of personal use and add it back into your net income.
Here are some common items that I look for when evaluating these expenses:
- Cell Phone
- Vehicle
- Family vacations and trips taken though the business
- Personal property owned within the business
- Family meals put through the business
The other advantage business owners have is that you can often Income Split with your spouse, even if they are contributing very little to the business. In this case you would acknowledge that and add that income back into your income for family income calculations.
It may be important that you understand that the professionals you work with do not report any of this information to Revenue Canada and it is kept private. Privacy is yet another advantage of the Collaborative approach to separation/divorce where you agree to not go to court to settle the issues of your family’s separation.
Please note that there is no obligation to equalize your and your spouse’s incomes. Only in longer term marriages is income equalized- and this does not necessarily mean equal. The spousal support advisory guidelines provide for taking into account taxes paid and benefits received. Even if spousal support is paid, the person paying the funds out usually ends up with more income due to tax savings.
Taking a fair approach to the finances and all family issues is a cornerstone to the Collaborative divorce process.
Jackie Ramler, DFS, CDFA, CFP, FMA, MBA
Divorce Financial Specialist
Divorce Choices Inc.
