Working For Your Family Can Raise Suspicion of Under Reporting Income

">

In family law cases, determining a payor’s income can simply involve looking at their total income listed on their tax return. But that is not always the best reflection of a person’s true income, and parties may try to manipulate their income, which impacts the amount of child support or spousal support they pay. Courts may impute additional income to a party to arrive at a more accurate level of income. This may arise if a payor seems to receive benefits or payment from a family business. These cases can attract scrutiny if the party financially benefits from the business, which may indicate an under-reporting of income.

Disclosure Clarifies a Party’s Involvement in Family Companies

When a party’s financial affairs are intertwined with family businesses it is important to be able to explain the movement of funds. In Stergiou v. Stergiou the wife challenged the income claimed in the husband’s financial statements. In particular, the wife alleged that the husband stopped selling real estate after his father’s death, after which he managed the family business. The wife pointed out that the husband had previously deposited $230,250 into their joint account, largely from cheques that were written by the husband to himself from an account that he did not list on his financial statement. She understood the amounts were income. However, the husband denied that he was employed by the family business or that he had any interest in it. He claimed to be self-employed and that he sacrificed his real estate license when he became the primary caregiver to their children. He claimed no income in his financial statements.

The husband’s family members filed affidavits in support of the husband’s claims. His brother stated that none of the funds that were advanced to the husband were for work on behalf of the family companies. Instead, all the funds were purported to be documented by promissory notes. And while none were signed by the wife, after the parties’ separation, the husband’s family brought a lawsuit against the husband and wife, including a claim against the wife for half of the balance in their joint account that she withdrew after separation. The husband explained that funds in their joint account were loans from the corporate account of his brother. Because of these circumstances, in the judge’s view, the husband’s financial affairs were “clearly intermingled with the family companies”. The husband received money from corporate accounts and had signing authority over them. The judge found that the case would only be delayed by not addressing whether the husband’s brother had an obligation to make disclosure concerning the family companies. Due to the allegations, since the brother claimed to be the sole owner of the business, he had to include in an affidavit of documents full disclosure of the companies. Although the husband claimed that his personal computer did not contain business documents, there was email evidence from the husband’s home computer that related to the family business. The judge accepted the husband had not been truthful and decided the hard drive should be reviewed by an independent counsel.

Income Can be Imputed if Benefitting From a Family Business

In Amid v. Jones, the main issue concerned the amount of child support that the applicant should be paying. This required determining his income and his relationship with his family’s real estate business. The applicant argued he was a T4 employee and that his income could simply be determined from his income tax returns. However, the respondent suggested income should be imputed due to benefits that he received from his family’s business, including benefits such as luxury accommodation. She asked the court to impute income from mortgage payments made as a gift by the family. The judge noted that the starting point in calculating a party’s income is their income tax return, but agreed that under section 19(1) of the Child Support Guidelines a court can impute income to a payor that it considers appropriate. While gifts are generally not included when imputing income, in Bak v. Dobell, the Court of Appeal found that in certain circumstances gifts count towards income, by looking at the regularity of the gifts, their proportion to the payor’s income, and the impact on the parties’ lifestyle during their cohabitation.

In this case, the applicant held title to millions of dollars of property but argued he had no interest in the family properties and was merely a trustee of the assets that were financed and beneficially owned by his brother. He also claimed he had no involvement in the family business. According to the respondent, the applicant was working for his brother’s companies early in their relationship. Also, the applicant’s social media and LinkedIn account continued to list him as a structural engineer for the brother’s company. The applicant explained that he only worked part-time for the company when he was completing his Ph.D. and that he only worked there between ten to fifteen hours over several months. The judge did not find this to be credible given that the brothers had an interest in minimizing the applicant’s role in the business and their evidence was inconsistent. He clearly worked on projects for the business when needed and received benefits for his services.

Personal Financial Ties to Business Raise Suspicion

There was a series of financial dealings between the applicant and the family business. The applicant held title to two company properties from their construction until they were sold. The brothers testified that the applicant did not contribute financially to the properties and that they were only in the applicant’s name to guard against an economic downturn. The disclosure statement showed that when one of the properties was sold the proceeds were paid to the applicant. He was also listed as the borrower as his name was on the title. The applicant also held title to a second property and the funds to pay that mortgage came from the applicant’s account. The applicant indicated he had nothing to do with the financing of the properties and that his brother paid him an amount every month for the mortgage. Justice Brownstone found that the financial affairs of the family were “enmeshed and comingled” and that “funds flow freely between accounts”. Yet, there was no detailed explanations for the flow of funds. There was also a failure to fulfill the disclosure that had been ordered by the court. The brothers also had significant problems with credibility. Their explanations on the financial issues were not believable, and the pair were unclear on issues that were important to the case.

Due to the extensive financial dealings, the respondent claimed that the applicant was being rewarded by the family for his role in the business. She argued that even if some of the benefits the applicant received were gifts, it formed a significant part of his income, was regular and likely to continue, and therefore should be counted as income. The judge agreed with this and fixed the value of the ongoing gift at $6500 per month. Because of the applicant’s non-disclosure, Justice Brownstone remarked that a more precise figure could have been used if the necessary disclosure had been made. But an adverse inference could be drawn from his failure to provide financial documentation, and the gift analysis indicated it was appropriate to impute additional income.

Gifts for Work Performed Can be Income

When a payor appears to have a role within a family business any gifts or financial benefits they receive can be added to their income. This will be particularly likely when a party’s personal finances are tied to and enmeshed within the business. Accurate financial disclosure will be essential to clarify any financial links and the party’s role within the company.

Contact Our Windsor Family Lawyers For Questions Related To Separation and Family Owned Businesses

The family lawyers at Johnson Miller Family Lawyers in Windsor focus exclusively on family law matters for clients in South Western Ontario and the Windsor area, helping clients navigate family conflict and presenting customized financial solutions that are tailored to your situation. To discuss your matter further or arrange a consultation contact the firm at 519-973-1500 or visit us online and complete our contact form.

 

If You Win the Lottery While Separated, Can Your Spouse Claim Some Winnings?

lottery tickets

Court Finds No Binding Separation Agreement Reached Between Ex-Spouses

pink broken heart on black background

Court Varies Parenting Plan After Mother Unilaterally Withdraws Child From School

boy at desk in school