Why Income Analysis is Important in a Divorce

In a divorce, it is necessary to understand the income levels of the spouses for purposes of determining the amount of child and spousal support. Business ownership can often complicate this assessment because a business owner has an opportunity to pay personal expenses and also may leave funds in a business that could otherwise be available for support.

The purpose of an income analysis is to assess the income of a spouse taking into consideration the income reported on the spouse’s tax return as well as other necessary adjustments based on accepted guidelines.

What is Available Income?

If a spouse owns a corporation, their personal income tax return will only reflect the income that they have paid themselves as salary and dividends. Available income represents the amount of funds available as income for support purposes, rather than only that which the owner chooses to distribute.

Available income will also take into consideration personal expenses paid by the business, which could include meals, trips, and vehicle expenses.

Available Income and Discretionary and Personal Expenses

Often a business owner will have some of their personal expenses expensed by their company, such as a vehicle, travel expenses, meals, and so forth.

These discretionary expenses are notionally added to the spouse’s income in an income analysis. In addition, since taxes were saved by not issuing further salary or dividends to pay for these expenses, discretionary expenses are grossed-up to reflect the pre-tax equivalent.

An Example:

Let’s say husband owns a company called XYZ Corp, and is getting divorced from his wife. XYZ Corp earned $500,000 in net income, after paying himself a salary of $50,000 per year. Assuming the $500,000 is not needed for business purposes this amount may be available for support purposes. As a result, even though the husband’s income tax return only reflects $50,000 of employment income, his available income for support purposes will be $550,000 ($500,000 + $50,000). A business valuator will assess the extent to which the $500,000 is or is not needed for ongoing business operations and the extent to which additional amounts may be considered by the Court for income inclusion.

Contact Fuller Landau LLP For Your Business Valuation

If you or your spouse owns a corporation and require an income analysis, contact our Toronto business valuation experts for a consultation.