Couples who are going through a matrimonial separation often need to determine the amount of income available for child and/or spousal support purposes. This income is determined based on the applicable legislation, regulations, and guidelines. It is often referred to as “Guideline Income.” When one or both spouses own a business, the determination of Guideline Income may be more complicated than it is for non-business owners. This often requires a detailed analysis of the net income and cash flows of the business.
The determination of Guideline Income is generally required in order to initially set child and/or spousal support amounts. The calculation of Guideline Income may also need to be updated if there is a material change in circumstances. While establishing what is considered to be a material change in circumstances is a legal issue that requires the advice of legal counsel, it may include significant changes to the earnings or operation of the business.
While COVID-19, and the steps various governments and other bodies have taken to address it, have had a large impact on most businesses, the impact on specific businesses has varied greatly. Some have been forced to shut down completely, while others have continued to operate, but on a modified basis. The reality of this situation is a factor that must be considered in determining Guideline Income.
The impact of COVID-19 may be felt in two main areas:
- Net income – If the business has suffered a significant change in net income, established support amounts may need to be reconsidered. For many businesses this will likely mean a significant reduction in net income or incurring losses. However, some businesses may have experienced increased demand for their products/services and as a result have increased net income. Any significant change to net income may require a revision to the established support amounts.
- Cash flow – The cash flow requirements of the business must be considered in the determination of the amount of income from the business available to the owner for support purposes. In periods of decreased profits, or losses, cash reserves may be needed in order to allow the business to survive until operations can return to normal.
Even if the business has been able to continue to operate and maintain its profitability, the impact of COVID19 may require an adjustment to its cash requirements. For example, if the business must extend greater credit terms to its customers or alter how they operate (i.e. incur capital costs to move to a more remote workforce, alter operations to promote safe distancing for employees who cannot work remotely, adjust how services/ products are provided to customers, etc.) it may require greater cash levels in order to continue to operate. This in turn may impact the amount of income that could reasonably be considered available for support purposes.
Passive sources of income may also be impacted by COVID-19. For example, many investment portfolios may experience significant decreases to regular interest and dividend payments. Rental properties may experience a decrease in activity and/ or delays in the receipt of rental payments, creating significant cash flow difficulties. Any significant changes to net income and/or cash flows from passive sources of income should also be considered in determining Guideline Income.
Undoubtedly, COVID-19 has had a significant impact on most of our lives and will this will continue for a currently unknown period of time. The determination of Guideline Income must take into account the impact COVID-19 has on net income, cash flow and the ongoing operations of businesses and passive investments owned by one or both of the spouses.
Our Financial Services Advisory Team (FSAT) have significant experience in this regard. Please contact one of the Chartered Business Valuators in our group if you have any questions or would like any further information.
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