If you are self-employed and separating from a common-law partner in Ontario, the financial issues can be more complicated than they are for someone who earns a regular salary. Business income, expenses and financial records may need to be reviewed to determine support, while property rights depend significantly on who owns the property and how each partner contributed during the relationship.
It is also important to understand that common-law partners do not have the same property rights as married spouses in Ontario.
Common-law partners in Ontario do not divide their property through equalization when they separate. However, property claims may still arise, and a self-employed partner may have to provide detailed business records so that their true income can be determined for child or spousal support.
Common-Law Partners Do Not Divide Property Pursuant to the Equalization Scheme
Ontario’s equalization rules generally apply to married spouses, not common-law partners. This means that separating common-law partners do not calculate and divide the increase in their net worth accumulated during the relationship.
Generally, each common-law partner keeps the property they own. Property purchased jointly may have to be divided according to the parties’ respective ownership interests.
This distinction can be particularly important if one partner owns a business. The fact that the business increased in value during the relationship does not, by itself, give the other common-law partner an automatic right to half of that increase.
For more information about division of property for common-law couples, click here.
Sources: Family Law Act, R.S.O. 1990, c. F.3, Part I.
A Former Partner May Still Have a Claim Against the Business or Other Property
Although common-law partners do not have a right to equalization, a former partner may be able to make a claim based on unjust enrichment.
An unjust enrichment claim generally requires the person making the claim to establish that their former partner received a benefit, that they suffered a corresponding deprivation, and that there is no legal reason why the former partner should be permitted to retain that benefit.
For a self-employed person, this may become relevant where a common-law partner contributed money, labour or other services that helped build or maintain the business without receiving appropriate compensation. Similar issues can arise where one partner contributed to a home or other property legally owned by the other.
If unjust enrichment is established, the remedy may be a monetary award. In some circumstances, a court may also recognize an interest in particular property through a constructive trust.
For more information about property and support rights following a common-law breakup in Ontario, click here.
Sources: Kerr v. Baranow, 2011 SCC 10; Becker v. Pettkus, [1980] 2 S.C.R. 834.
Self-Employed Partners May Have Greater Financial Disclosure Obligations
Self-employed individuals may have to provide considerably more information than someone who receives a regular paycheque. Personal income tax returns alone may not provide a complete picture of the income generated by a business.
Depending on the circumstances, a self-employed person may be required to disclose business or professional financial statements for the three most recent taxation years. They may also have to provide information about salaries, management fees or other payments or benefits paid to people or corporations with whom they do not deal at arm’s length.
Supporting records may also be necessary to explain business expenses and deductions. This information should be organized so that the other party and the court can reasonably understand how the business operates, and how the self-employed person’s income is calculated.
For more information about financial disclosure from a self-employed spouse in Ontario, click here.
Sources: Family Law Rules, O. Reg. 114/99, r. 13.
A Tax Return May Not Tell the Whole Story About Income
A self-employed person’s reported taxable income does not necessarily determine the income that will be used for family law purposes.
Business owners and self-employed individuals may deduct legitimate expenses when calculating taxable income. However, if income is disputed for support purposes, the nature and reasonableness of those expenses may have to be examined.
A self-employed person should therefore be prepared to explain their income and business expenses and provide supporting documentation. Where the financial information does not adequately establish the person’s true income, additional disclosure or an income analysis report may be required.
Common-Law Partners May Still Have Spousal Support Obligations
The property rules may differ for common-law partners, but common-law partners can still have rights and obligations relating to spousal support.
Under Ontario’s Family Law Act, a person may qualify as a spouse for support purposes where the partners have cohabited continuously for at least three years. A person may also qualify where the partners are in a relationship of some permanence and are the parents of a child.
Where spousal support is at issue, determining the self-employed partner’s income can therefore become particularly important. The analysis may extend beyond the income appearing on a personal tax return to obtain an accurate picture of the person’s financial circumstances.
For more information about common-law separation agreements and support in Ontario, click here.
Sources: Family Law Act, R.S.O. 1990, c. F.3, ss. 29–30.
Self-Employed Partners Should Organize Their Financial Records Early
A self-employed person preparing for separation should begin organizing their financial records as early as possible. Clear and complete records can reduce disputes about income and make the financial disclosure process more efficient.
Depending on the circumstances, useful records may include:
- Personal income tax returns and Notices of Assessment;
- Business or corporate tax returns;
- Business financial statements;
- Income statements and balance sheets;
- Records supporting business expenses and deductions;
- Records of payments or benefits to family members or related corporations; and
- Banking and other records that help explain the income generated by the business.
A self-employed person should also avoid making unusual financial or business changes simply because a separation has begun. Significant changes to compensation, expenses or business arrangements may require explanation if income later becomes disputed.
Sources: Family Law Rules, O. Reg. 114/99, r. 13.
A Separation Agreement Can Resolve the Outstanding Issues
Common-law partners do not need to obtain a divorce when their relationship ends. However, they may enter into a separation agreement to establish their respective rights and obligations following separation.
A separation agreement can address issues such as ownership or division of property, spousal support and, where children are involved, parenting arrangements and child support.
For a self-employed partner, reaching an agreement may first require sufficient financial disclosure to allow both parties to understand the income and business interests involved. Obtaining independent legal advice from a family lawyer can also help ensure that the agreement properly addresses the parties’ circumstances.
Source: Family Law Act, R.S.O. 1990, c. F.3, s. 54.
Common-Law Separation Can Be More Complex When You Are Self-Employed
For a self-employed person, separating from a common-law partner can involve two distinct financial questions: what rights each partner has to property, and what income should be used to determine support.
Unlike married spouses, common-law partners do not equalize their property in Ontario. However, claims involving unjust enrichment may arise depending on how the parties contributed to property or a business during their relationship. At the same time, self-employment can require more extensive financial disclosure to determine income accurately.
Organizing business records and obtaining legal advice early can help identify the financial issues that need to be resolved and reduce uncertainty as the separation proceeds.
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Categories: Common-Law Relationships, Separation, Self-Employment, Financial Disclosure