Self-employed payors and common deductions in family law cases – Part Two

Please take a look at our new resource, the second in a two-part series on supporting women who are dealing with a self-employed ex-partner.

In cases involving a self-employed payor, it is common to see the following expenses deducted from their income:

1. Vehicle

Typically, where there is no evidence that the car was used for a long business trip, 50% of the expenses were added back^[1]. Some considerations to think through when confronted with what might seem to be excess vehicle expenses:

• Is the vehicle necessary for the specific type of business? For example, if the payor is working from home it makes sense that their vehicle expenses would be minimal. However, if they work as a truck driver, it makes sense that they would be incurring significant expenses in order to repair and maintain their vehicle.  

• Expenses in the vehicle category generally include licence and registration fees, fuel, insurance, interest on money borrowed to buy the vehicle, maintenance and repairs, leasing costs. Does the amount of expenses claimed make sense based on the vehicle?

• In terms of supporting documentation to ask for: credit card statements and or receipts for payment of fuel, repairs, insurance, car lease or loan financing agreements and insurance policies.

2. Travel

In cases dealing with spouses who take trips to Las Vegas, Mexico and Florida and are claiming them as business expenses, the Court added back 50% of the expenses^[2]. If the support payor has trips such as these, consider:

• How and where is the business conducted? Short business trips to the US and Canada during the week are common, whereas travel to the Caribbean over the holidays is likely personal.

• Does the travel relate to income generating activities such as meeting clients or, if they are there to attend a conference, does it directly relate to the business?

• Were travel expenses actually incurred or were loyalty program credits such as Aeroplan used?

• Was the amount of expenses incurred reasonable in relation to the length of the business trip? For example, it would be unreasonable for the support payor to deduct all meal and accommodations for a two-week period when the trip was only two days.

• Supporting documentation to look at includes: credit card statements for dates, airfare, travel, meals, etc.; Aeroplan or other loyalty program statements that record travel dates, destinations, etc., and conference registrations.

3. Home office

In cases where no documentation was provided, the Court added back the entire “home office” expense. Where the payor could not justify the requirements of a home office deduction, such as the principal place of business or regularly meeting with clients at home, such amounts were added back^[3]. Some considerations to think through if the support payor is claiming a home office deduction or expenses:

• Is a home office necessary? Would an office in an off-site location be rented if the home office was not available?

• Expenses deducted within this category typically include an allocation of home operating costs such as utilities (electricity, heat, water), maintenance, insurance, and property taxes. Does the amount of these expenses make sense relative to the apparent business requirements?

• Does the home insurance policy include a clause for a home office / business?

• Are there related expenses such as phone, fax or software expenses?

• Supporting documentation to consider: monthly utility bills and statements, property tax assessment and bills, insurance policies, business cards / letterhead showing address location

4. Meals & entertainment/advertising/promotion

Where the support payor claimed significant meal and entertainment expenses, 50% of the expenses were added back^[4]. Some considerations to think through:

• This category of expense frequently contains items that are personal in nature such as meals, hockey/basketball tickets, golf memberships, etc.

• How does each expense relate to the nature of the business?

• Is the expense level for this category disproportionately high as compared to revenues?

• Who benefited from the expense? For example, hockey or basketball tickets to potential clients may be considered a reasonable promotion expense

• Supporting documentation to consider: Detailed listing of expense in this category, copies of promotional materials or advertisements, credit card statements, receipts, etc.

5. Other common expenses

If the support payor also claims legal and accounting fees relating to the family law litigation as well as telephone or cellphone expenses, consider asking for supporting documentation in order to verify that the expenses were legitimate.

Documentation relating to expenses

Even in simple cases, it is reasonable to expect that the following records exist and can be produced to demonstrate purchases and operating expenses:

• Tax returns
• Notice of assessments
• Statement of business activities or similar form or financial statement
• Explanations regarding significant expenses

Where the business is more sophisticated or there are allegations about various expenses that cannot be explained with the above documents, the payor should be able to produce:

• Monthly credit card statements
• Monthly bank statements and/ or cancelled cheques
• Where rental income is earned, copies of leases

Documentation relating to underemployment

If the payor has historically earned a certain level of income and is no longer working or their income is significantly reduced because it appears that they are trying to reduce the amount of support to be paid, it is important to request or look for supporting information about:

• Explanation of reasons for job change (i.e. were they laid off? Did the company shut down?)
• Description of employment, including nature of business, clients or customers and hours worked
• Details regarding employment sought (i.e. were they applying to similar positions, how often?)
• Summary of employment qualifications

If the business is more sophisticated or the woman is aware that the payor is receiving a cash income and there is no explanation about this provided in the documentation they have provided, it is important to ask them to produce:

• Monthly credit card statements
• Monthly bank statements or cancelled cheques
• Copies of CV and other work history
• Copies of applications, e-mails or other efforts to find employment and responses received

Supporting a woman who is dealing with a self-employed ex-partner can be challenging. While the Guidelines provide some predictability, unfortunately it is not a one size fits all approach when dealing with a self-employed support payor. It is important to understand the nature of the business and the expenses claimed within the context of the specific business.

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Footnotes

[1] Stacie Glazman and Sharon Griffin, The Art of Section 19 Add Backs (2008), p.8

[2] Stacie Glazman and Sharon Griffin, The Art of Section 19 Add Backs (2008), p.11

[3] Stacie Glazman and Sharon Griffin, The Art of Section 19 Add Backs (2008), p.11

[4] Stacie Glazman and Sharon Griffin, The Art of Section 19 Add Backs (2008), p.13