I have a client who is in the process of divorcing his wife. He is employed full time as a chef at a Retreat and Community Centre. He is also the sole owner of an Incorporated company.
A bit of back story…since the separation, he has been having a hard time financially and has been using funds from the corporation. I have explained that he can’t be taking money whenever he needs to purchase groceries, dinners, etc.
What is the proper way for these funds to be dealt with on the financial statement for the courts? Does he need to declare this as current income as it started in January 2020? Also, will it be best to issue a T3 for Dividends for this money for tax purposes or does he need to repay the funds to the corporation?
@sandra.tone, see a lengthy discussion of this topic by searching “Shareholder Draws”. I would say just record it as Shareholder Loan, to be dealt with at year end. This is a very common occurrence with this type of corporation. However, the CPAs on this forum don’t necessarily agree with me, which is fine.
This is likely a more common problem in 2020 due to COVID. I imagine this is especially true in the hospitality industry. Without knowing too much about your client’s situation, I’ll make a few comments. A dividend is reported on a T5, not a T3. Most provincial corporation laws require that the company have net assets of equal or more value than the dividend being issued so you may want to double-check that. Otherwise, it is quite common, as already mentioned, for a dividend to be issued by the corporation to the shareholder(s) to clear up a shareholder loan balance. If the company is going to issue a dividend in this manner, you want to make sure it is properly documented in terms of any director resolutions.
"has been using funds from the corporation. I have explained that he can’t be taking money whenever he needs to purchase groceries, dinners, etc.
What is the proper way for these funds to be dealt with on the financial statement for the courts? "
Unfortunately this clients’s divorce is going to go a lot worse for him than he thinks unless he fixes it up properly. The judge will come down on him like a ton of bricks for anything that carries a hint of sloppy finances.
In addition, income for the purposes of support etc is separately defined in family law legislation.
The “proper way” to deal with these funds is:
He immediately repays every single cent to the corporation of his previous undocumented and unauthorized money-grabbing.
IF the corporation is financially sound enough to pay a wage, declare a dividend, or make a loan (on specified written terms), then the DIRECTOR can have a meeting (with himself), and have such documents prepared and executed (he may want a lawyer and the accountant to ensure that the wording is correct).
Everything he does is going to be very enthusiastically examined by the Opposing Counsel and brought to the attention of the Judge…
@sandra.tone; this is what I was referring to - Joe uses the right words to accomplish the same thing. And the client could probably type up a document that says something like this (but I am no lawyer)
> On this date, at a meeting duly called in accordance with the bylaws of the Corporation, I hereby authorize a dividend of (amount to be determined at year end) to be paid to the Authorized Shareholder(s) of the Corporation. Signed by (shareholder/officer/director)