The Federal Child Support Guidelines for Self-Employed Individuals

Introduction

The Federal Child Support Guidelines (SOR/97-175) were established in 1997 to provide certainty in determining child support based on a payor's income and the number of children. However, income determination becomes more complex for self-employed individuals or those earning income through a corporation. This blog post aims to provide an overview of this complex process.

Self-Employed Income Determination

For self-employed individuals, the determination of income and resulting child support varies based on specific employment situations. The Guidelines provide a 10-step inquiry under Section 19 to help determine a self-employed spouse's income. This process includes reviewing specific places on the individual's tax return, understanding what information to ask for, and analyzing the supporting documentation.

Consideration of Pre-Tax Corporate Income

While the 10-step inquiry also applies to individuals earning income through a corporation, the Guidelines do not detail the availability of pre-tax corporate income under Section 18. Despite this, it is essential to be aware of its availability and impact on income calculations. The pre-tax corporate income can significantly affect the final child support amount.

The Role of Income Tax and Benefit Return

The payor’s Income Tax and Benefit Return (T1 General) is the most crucial source of information in determining income for child support calculations. The starting point is always to look at line 150, labeled “Total Income,” on page 2 of the tax return. Sections 16 to 20 of the Guidelines provide further instructions on the calculation of income based on this document.

Reasonableness of the Expense in Relation to the Business

The next consideration is whether the expense was reasonable in the context of the business. Even if an expense was indeed incurred, it needs to be reasonably related to the business operations. For instance, a computer technician's van repair cost of $200 would likely be considered reasonable. However, if the repair cost is $1,000 because the technician drives a high-end Ferrari, the expense may be deemed unreasonable.

In assessing the reasonableness of the expense in relation to the business, the nature, and scale of the business, as well as industry norms, should be taken into account. Expenses that are common and necessary in a specific line of business may be deemed reasonable, while those that are unusual or extravagant may be deemed unreasonable.

Permissibility of the Deduction Under the Income Tax Act

The final aspect to consider is whether the Income Tax Act permits such a deduction. The statute states that an expense deduction's reasonableness is not solely determined by whether the Income Tax Act allows the deduction. Even if an expense is legitimately deducted for tax purposes, it may not be deducted for support purposes if it provides a personal benefit to the payor.

This highlights the fact that tax law and family law have different objectives and criteria. While tax law aims to accurately reflect the profits and losses of a business for taxation purposes, family law aims to ensure a fair division of resources and financial support for children. Therefore, an expense that is permissible under tax law may not be permissible under family law if it is deemed to provide a personal benefit to the payor at the expense of their child support obligations.

Understanding the Nature of the Business

Understanding the nature of the business is crucial when reviewing expense documentation. If the payor runs a certain type of business and you are not familiar with it, you will want to do some research online or speak to others to understand how the business owner earns income in this area. Knowing the ins and outs of the business can help you make a more informed judgment on the reasonableness of the expenses claimed.

Onus of Proof

The first step in determining the reasonableness of an expense deduction is establishing the onus of proof. The party requesting the court to impute income must present sufficient grounds for their request. If you are the recipient spouse, a solid basis to challenge the expense is necessary. This could be evidence or documentation that suggests the expense may not be reasonable or necessary for the business.

The self-employed spouse seeking to deduct the expenses then needs to provide robust documentation proving the expenses were reasonable. This could include receipts, invoices, contracts, or other forms of proof that clearly show the expense was incurred and was necessary for the business operation.

Areas that Require Further Explanation

Certain areas may need additional scrutiny, such as yearly fluctuations in expense categories, changes in the relationship between revenues and expenses without explanation, and continual business losses which may indicate that personal expenses are being deducted from an otherwise profitable business.

For instance, if there is a sudden increase in expenses in a certain year without a corresponding increase in revenue, this may warrant a closer look. Similarly, if a business is continually making losses, it could be that personal expenses are being deducted from the business, reducing its profitability. In such cases, these expenses may be added back to the payor's income for child support purposes.

Conclusion

Understanding the Federal Child Support Guidelines is crucial for self-employed individuals or those earning income through a corporation. The process may seem overwhelming, but with a careful review of the tax return and understanding the role of pre-tax corporate income, a fair and accurate income determination is achievable. Always consult with a legal professional when navigating these complex matters.

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