My spouse is self-employed but I know they make more money than they claim: What can I do?

Financial transparency is the foundation of any fair separation or divorce process. Without it, reaching an equitable resolution becomes nearly impossible. In fact, the Supreme Court of Canada has emphasized the critical importance of disclosure in family law cases, stating:

“Failure to disclose material information is the cancer of family law litigation.”

– Michel v Graydon, 2020 SCC 24

In Ontario, full and honest financial disclosure isn’t just expected—it’s a legal obligation. Both spouses are required to provide accurate information about their income, assets, and liabilities. However, when one spouse is self-employed, the waters can become murky.

Unlike salaried employees, whose income is straightforward and well-documented, self-employed individuals often have greater flexibility in how they report their earnings. In some cases, what’s reported on paper doesn’t reflect the reality of the income available to them.

A significant indicator of hidden income is a lifestyle that doesn’t align with reported earnings. Courts take evidence of lifestyle discrepancies seriously, especially if it reveals spending far beyond what income would reasonably allow. For example, if your spouse claims to earn $40,000 per year but leases a luxury vehicle, shops for designer clothing, and takes frequent vacations, this can support your claim that they are underreporting income.

This blog explores why self-employment income can be difficult to verify and outlines the steps you can take to ensure accurate financial disclosure and protect your rights.

Why Is Self-Employment Income Harder to Verify?

Self-employment introduces opportunities for creative accounting that can make income appear lower than it actually is. Here are some common tactics:

Cash Transactions: Businesses dealing in cash, like contractors, hairstylists, or restaurant owners, may not report all payments, making income harder to trace. For instance, a contractor might report only cheque-based jobs while pocketing cash transactions off the books.

Inflated Business Expenses: Some personal expenses may be disguised as business expenses to reduce taxable income. Imagine a spouse deducting the cost of a family vacation as “business travel” or claiming personal dining bills as client meetings.

Retained Corporate Earnings: Self-employed individuals operating through a corporation can leave profits in the business rather than taking them as personal income. While this may lower their reported income, those retained earnings still represent financial resources available to them.

Multiple Revenue Streams: Your spouse may have undisclosed income sources, such as a side hustle or rental property income, that they fail to report. For example, they might run a part-time e-commerce business or rent out a property on Airbnb without declaring it.

When these tactics are at play, it’s essential to dig deeper to uncover the full financial picture.

Steps to Explore if You Suspect Hidden Income

If you suspect your spouse is underreporting their income, there are several steps you can take to protect your financial rights and ensure transparency.

1. Request Full Financial Disclosure

Ontario law requires both parties to provide complete financial disclosure, including income statements, tax returns, and corporate financial records if applicable.

Example: If your spouse owns a business, ensure you obtain their corporate tax filings, bank statements, and profit-and-loss statements in addition to their personal tax returns.

2. Examine Tax Returns for Red Flags

Review your spouse’s tax returns for the past three years. Look for:

• Income levels that don’t align with their lifestyle.

• Excessive deductions for business expenses.

Example: If their tax return claims they earn $40,000 annually but they drive a luxury car and pay for private school tuition, it’s a clear red flag that further investigation is warranted.

3. Hire a Forensic Accountant

A forensic accountant can analyze financial records to uncover hidden income or discrepancies. They can:

• Trace cash flow to identify unreported revenue.

• Evaluate whether claimed business expenses are legitimate.

• Review corporate financial records for retained earnings or undisclosed transactions.

Example: A forensic accountant might discover that your spouse has been billing clients through a separate business account that hasn’t been disclosed.

4. Request Business Records

When a self-employed spouse refuses to provide necessary financial documents, there are several legal steps you can take to compel disclosure.

A good starting point is to send a formal letter from your lawyer, clearly outlining the requested documents, such as tax returns, corporate financial records, and bank statements. If this approach is unsuccessful, you can escalate by submitting a Request for Information (RFI) using Form 20. This court-approved document obligates your spouse to disclose specific details or records relevant to your case within a set timeframe.

If these steps don’t work, filing a motion for disclosure may be necessary. This involves asking the court to order your spouse to produce the requested records. Continued refusal to comply with disclosure obligations can lead you to ask the judge to draw an adverse inference, meaning the court assumes the withheld information would harm your spouse’s case.

In situations where third parties hold key records—such as banks, accountants, or business partners—you can bring a motion for third-party disclosure directly to these entities. This bypasses your spouse’s lack of cooperation and ensures access to critical financial information.

How Courts Address Hidden Income

Ontario courts have tools to address cases where income is concealed or underreported:

• Imputing Income: If a spouse’s reported income doesn’t reflect their earning potential or lifestyle, the court can assign an income level based on evidence. For example, a court might impute an income of $100,000 if financial experts show that your spouse’s spending habits or business revenue support that figure.

• Reviewing Business Expenses: Courts will scrutinize claimed expenses to separate legitimate business costs from personal ones. For instance, a judge might disallow deductions for personal vacations or entertainment disguised as business expenses.

• Requiring Corporate Records: If your spouse operates a business, the court can demand detailed corporate financial documents to assess the true income available.

Protecting Your Rights

If you suspect your spouse is hiding income, it’s crucial to act quickly and take the following steps:

• Document Evidence: Keep detailed records of any evidence suggesting hidden income, such as receipts, bank statements, or photographs of expensive purchases.

• Work with Professionals: Collaborate with a family lawyer, forensic accountant, and other experts to build a strong case.

• Be Persistent: Financial investigations take time, but thorough disclosure is essential to achieving a fair resolution.

Conclusion

Navigating financial disputes with a self-employed spouse can be challenging, but you have options to uncover the truth. By requesting full disclosure, engaging experts, and leveraging the court’s tools, you can ensure that hidden income comes to light and that your financial interests are protected.

If you suspect your spouse is underreporting their income, consult an experienced family lawyer as soon as possible. With professional guidance and a strategic approach, you can secure a fair and equitable outcome.