Financial Disclosure to the Ex: Do I Have to Report All Self-Employment Income?
When your employment income comes from an employer in the traditional way – and when those amounts are recorded and provided by the employer for Income Tax purposes – there is little room for you as an employee to “fudge the numbers.”
But human nature being what it is, if you are self-employed you may feel some temptation, particularly when those income amounts are being used to calculate the support to be (begrudgingly) paid to an Ex in a separation or divorce proceeding. This is because when you run your own business, it is far easier to “forget” to include income amounts or do some “creative bookkeeping”, and generally low-ball your income when providing financial disclosure.
But tempting as it may be, my (free) professional advice is this: Don’t do it.
For one thing, there is a well-established general legal obligation on all parties to a family law proceeding to provide full, frank disclosure of their financial information; otherwise, the court is entitled to draw assumptions and make inferences that can (and probably will) work against you. This applies equally to those who are self-employed, as has been emphasized by the court in a case called Meade v. Meade:
It is inherent in the circumstances of those who are self-employed or have irregular income and expenses, that they have a positive obligation to put forward not only adequate but comprehensive records of income and expenses. That does not mean audited statements. But it does mean a package from which the recipient spouse can draw conclusions and the amount of child support can be established. Where disclosure is inadequate and inferences are to be drawn, they should be favourable to the spouse who is confronted with the challenge of making sense out of financial disclosure and against the spouse whose records are so inadequate or whose response to the obligation to produce is so unhelpful that cumbersome calculations and intensive or costly investigations or examinations are necessary.
The precise application of these principles, and the question of whether the self-employed spouse has fulfilled his or her obligations, will depend on the circumstances. In Squirrell v. Squirrell, for example, the court found it insufficient for the husband to merely refer the court to his and his company’s accountant, and expect the accountant to allocate income for the court’s calculations. The court said it “hardly sounds plausible and certainly is not sufficient to discharge the onus” on the husband to provide proof of the accuracy of his reported net income and expenses.
If you are self-employed and need to provide income figures for support-calculation purposes, the bottom line is this:
• You have the onus to clearly demonstrate the basis of your net income.
• This includes an inherent obligation to put forward adequate and comprehensive records of your income and expenses.
• The records must form a “package” from which your former spouse can draw conclusions, and from which the amount of child or spousal support you owe can be established.
• You must also prove that your claimed deductions from gross income should be taken into account in calculating your income for support purposes.
And most importantly: If a court finds that your disclosure is inadequate or that you are not being forthright, it is entitled to make assumptions and draw inferences that may actually work against you in setting the eventual support amounts.
For some illustrative cases, see:
Meade v. Meade, 2002 CanLII 2806 (S.C.J.)
Whelan v. O’Connor, 2006 CanLII 13554 (ON SC), [2006] O.J. No. 1660 (Ont. Fam. Ct.)
Carty-Pusey v. Pusey, 2015 ONCJ 382 (CanLII)
Wilson v. Wilson, 2011 ONCJ 103 (CanLII)
Squirrell v. Squirrell, 2012 ONCJ 284 (CanLII)
