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Ontario - and separated in 2014 and have 3 children under…

Second opinion] Ontario - John...
Second opinion] Ontario - John and Mary separated in 2014 and have 3 children under the age of 16 years old who reside with Mary and see John at their discretion. An interim order was issued to John to pay Mary $3,500 per month in Spousal/Child support based on John's salary of $100,000/year. In 2016 John lost his job of 10 years and became an incorporated independent consultant. In the first year as a consultant John's company earned $200,000 in income before paying himself for his time. John is wondering what are his options on how much to pay himself in the interest of growing his company while at the same time fairly attending to his support obligations. John draws 3 scenarios:A) He pays himself $150,000 and leaves $50,000 in his company for future growth through investments.B) He pays himself $100,000 and leaves $100,000 in his company for future growth through investments.C) He pays himself $50,000 and leaves $150,000 in his company for future growth through investments.John understand that regardless of his choices above, he will likely have to keep the same or increase his support payments given his company's success.What type of Support Law rules or Case Law material can John refer to in order to better understand what I judge would expect he does with respects to his support payments for these 3 scenarios?
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3/9/2018
ulysses101
ulysses101, Lawyer
Category: Canada Family Law
Satisfied Customers: 3,748
Experience: Over 10 years litigation experience in family, criminal, and civil law
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Hello, thank you for the question.

Has John's company (incorporated, right?) paid all its expenses and now has $200,000 left for John to decide how to take as income/profit/expand company? What would the company do with the money left into it? It's not a holding company so I don't know if it could simply "invest", unless it was buying into some real estate that it might have an office in or something like that. Taking a company's profits and just "leaving it in the company" isn't as easy as checking a box on a tax return.

What does an accountant say about how much can reasonably be left in the company, and what will that money be doing? That's probably the best starting point, since if this winds up in court for any reason those details are going to have to be explained to a judge.

So how much can legitimately be left in the company and for what purpose?

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Customer reply replied 4 months ago
Incorporated. All expenses paid.
After thinking through it further, John thinks that he would like to pay himself $100,000 (same as his previous salary) and leave the rest of the funds in his company as retained earnings. These would be split into three buckets:
a) Reserves for future salary continuity during non-consulting periods (i.e. while conducting business development and training.) $50,000
b) Reserves for untaken carry over vacation days $20,000
c) Reserves for future ventures (company expansion through hiring of additional consultant, business purchase, etc., $30,000)Would a judge find this unreasonable and impute John's income to $150,000, $170,000, or $200,000?

If John is paying himself the same $100,000 as before then he should be fine.

A judge could certainly impute higher income, or lower income. The question is "would a judge do this" and that depends on the evidence. If an accountant can say that the retaining of these funds is typical for the industry, necessary to build some equity in the company so that it can borrow money, and that it's the smart thing to do in order to better position the company's ongoing viability so that you John can continue to expect an annual salary of $100,000 or even more, then I don't think a judge would tamper with it.

If however the company had profits of a billion dollars and John only took a $100,000 draw I think the judge would obviously say something about it.

Also, look at the Statement of Business Activites, the corporation's tax return, and John's tax return, as if you were a forensic accountant working for the support recipient. Yes, John is still earning $100,000. Yes, it's reasonable for the company to retain earnings of $100,000. But if as part of its expenses the company is paying for half of John's apartment, his car and gas and insurance, his cellphone, and for an annual vacation all as "business expenses", a judge could easily order some extra imputed income on that basis too.

Does that make sense?

ulysses101
ulysses101, Lawyer
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Customer reply replied 4 months ago
Makes perfect sense. John is not abusing his position as a corporate owner and he loves his children so paying support is ok with him. But the need to build some equity and have reserve funds is critical to withstand future challenges and opportunities as you noted.
Thank you for allowing John to think through his options. This is all advance planning for next year not the past year.

I'm glad to have helped. I appreciate the rating too, that's great.

Good luck

Ulysses

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