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…I’m self employed and paying child support?
Since their inception in 1997, no single piece of legislation has done more to simplify the family law landscape than the child support guidelines (or “CSG”). Now adopted at both the federal and provincial levels, the CSG allow anyone to determine what basic rate of child support they should be paying, or receiving, by simply finding the support payor’s gross income on the chart, and matching that up with the monthly support figure based on the number of eligible children. The support tables themselves are available at most courthouses or online at http://canada.justice.gc.ca/en/ps/sup/grl/Pdftab.htm.
The guidelines were written on the assumption that the support payor is a salaried employee whose income can be easily determined by looking at that person’s income tax return and using the figure shown as employment income. But, what if the support payor is self-employed, and shows either business or commission income from which expenses are deducted? What figure is used to determine that person’s gross income for child support? The answer is not always easy to come by.
Imputing Income for Child Support
Any self-employed person being asked for child support has certain disclosure requirements. This means that he or she is required, by law, to produce to their spouse any and all documentation necessary to prove the income and expenses set out in the tax return. If asked, the payor needs to be prepared to back up every deduction from income made in a given year, by producing receipts if necessary. Most of these expenses will be legitimate monies spent to earn income, and therefore should be deducted before any child support calculation is completed. However, simply because a deduction is permissible for Canada Customs and Revenue Agency (“CCRA”) purposes, does NOT mean it will necessarily be taken away from gross income for the purposes of determining child support.
Section 19(1) of the CSG states:
The court may impute such amount of income to a spouse as it considers appropriate in the circumstances, which circumstances include the following:
…….
(g) the spouse unreasonably deducts expenses from income:
(2) For the purposes of paragraph 1(g), the reasonableness of an expense deduction is not solely governed by whether the deduction is permitted under the Income Tax Act.
There are some deductions which are automatically disallowed for the purposes of child support. These include:
Payments or salaries paid to non-arms length parties (such as relatives) by the payor which cannot be shown by the payor to be reasonable and necessary to earn income (CSG Schedule III, 9);
Capital cost allowance claimed by a payor spouse who owns real property (CSG Schedule III, 11);
The difference between any dividend claimed by a payor spouse from a taxable Canadian corporation on the tax return and the actual amount of the dividend received by the spouse (CSG Schedule III, 5).
All of these are added back to the support payor’s net income before child support is tabulated.
There are, however, other expenses that may be added back after an analysis by the court.
Is the Expense Reasonable?
This is the question that a court will ask itself when presented with evidence of deductions for “business” purposes, which may have a personal component added in.
While the CCRA requires the taxpayer to break down how much of their automobile use was for business versus personal use, don’t rely on a court to stop there if the percentages are not within the scope of reasonableness for your profession or if you are including fringe items such as weekly carwashes.
Another questionable expense is the home office, especially where the payor has an office for which he or she is paying rent elsewhere. These expenses may be added back in to the payor’s income.
Travel expenses, gifts, meals, club memberships and bartered services are also popular areas for courts to impute income, if warranted by the evidence presented. Even depreciation of office or farm equipment is not immune from imputation in the right circumstances.
Once the amount of “add backs” has been tallied, there is the taxation question. Since the guidelines assume that the salaried employee on which they are based will pay the usual taxes on their gross incomes, an adjustment needs to be made to the “add back” figure to account for its non-taxed status. This figure can be significant.
Determining Child Support
Now that you have made all the adjustments to a self employed payor’s income, child support can be determined by applying the table amounts as described above. Remember, as well, that additional amounts can be payable if a child meets any of the criteria in section 7 of the CSG, which allows for a division between the parents of such items as work related daycare, certain extracurricular activities and health related expenses not covered by existing insurance. Consult your family law lawyer for a detailed analysis of whether any of these apply to your situation.