Child and/or Spousal Support Payments & Self-Employment

When it comes to calculating the amount of child and/or spousal support that self-employed payors are expected to pay, there is frequently uncertainty. In order to establish payments, the payor's Guideline Income must first be determined. If the payor is an employee, the amount stated on Line 150 of the prior year's tax return is normally his or her Guideline Income. However, if a payor is self-employed (in whatever capacity), the amount on Line 150 of the previous year's tax return may not fully reflect the real income available for support payments.

For the payor, expenses typically allowed to be deducted by Revenue Canada on the income tax return may not qualify as “fair” as they relate to support payments, and a payor’s Guideline Income may be calculated as much higher than indicated on Line 150 from the previous year’s income tax return.

The law is well established. § 19(1)(g) and (h) of the Federal Child Support Guidelines as well as case law allows the use of the payor's corporate pre-tax earnings for child and spousal support payments:

19(1) The court may impute to a spouse whatever amount of income it judges reasonable in the circumstances, which conditions include:

(g) the spouse deducts expenses from income in an unreasonable manner;

(h) the spouse earns a major amount of his or her income from dividends, capital gains, or other sources that are taxed at a lower rate or are tax-free compared to work or company income...

Consequently, the onus remains on the payor to prove that only reasonable expenses are deducted from the pre-tax income. However, the court routinely cuts or disallows vehicle expenses, mobile phone bills, home office expenses, asset amortisation, and bank charges as reasonable deductions.

The above are just some of the things you should think about when you're dealing with a support payor who is self-employed or runs a business. It shouldn't be a surprise that the person who will pay support will try to keep their reported income as low as possible so that they don't have to pay taxes. However, when it comes to support payments, the same principle does not apply.

[Via: Kirk Montoute Dawson LLP and Feldstein Family Law Group P.C.]