Source: http://thepascoedifference.com/child-support-for-self-employed/
Timestamp: 2019-04-19 18:45:35+00:00

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The purpose of this paper is to provide an overview of how income is determined for a self-employed person for the purposes of establishing child support under the Child Support Guidelines.
Like the pre guideline law on child support, the ability to pay is the guiding principle in determining child support. For a self-employed person the ability to pay may not be accurately reflected by using the total income line 150 on an income tax return. Therefore, the Child Support Guidelines in many ways either mandate the court specifically or give it discretion to adjust the self-employed person’s income so that child support is determined based upon on the real ability to pay. As the Guidelines need to have an exact income figure for determining the table amount, as well as for the portion of extra ordinary expenses, precise calculations and findings of fact must be made both for the payor and in many cases, the payee.
If the case is one with only spousal support I would suggest that the same principles found in the Guidelines apply and can be argued to determine the ability to pay for spousal support determination. The Guidelines have therefore nicely pointed out ways to argue in spousal support cases as to what the real income is and therefore the ability to pay.
Because of the extensive subject matter and the limited amount of my retainer for writing this article, I am only able to provide an overview and limited discussion of the many issues. I will point out all of the sections I believe are relevant for the self-employed but I will only concentrate the discussion on some of the case law on the more common occurring adjustments.
The annual income for the table amount of child support is determined by first taking the Total Income amount as shown on line 150 of a personal income tax return. Adjustments to income can, and in some cases must be made, based on three main areas of the Guidelines.
(a) The definition section 2(3) of the Guidelines which requires that current information be used.
(c) Schedule III of the Guidelines entitled “Adjustments to Income”.
2(3) Most Current Information – Where for the purposes of these Guidelines , any amount is determined on the basis of specified information, the most current information must be used.
Courts have also interrupted section 19 very broadly to include sources of money – whether income or capital which give an ability to pay child support.
Except for the sections on net self – employment income and partnership income there is no discretion in the court not to make the adjustments found in these sections.
Where both spouses agree in writing on the annual income of a spouse, the court may consider that amount to be the spouse’s income for the purposes of these Guidelines if the court thinks that the amount is reasonable having regarding to the income information provided under section 21.
As it is not possible to obtain a divorce without satisfying the court that one is paying child support as set out in the Guidelines, perhaps an agreement which considers a host of other issues is needed to convince the court when a self-employed person is involved that proper child support is being paid.
(c) where the spouse has received a non-recurring amount in any of the three most recent taxation years, to be such portion of the amount as the court considers appropriate, if any.
(2) Where a spouse has incurred a non-recurring capital or business investment loss, the court may, if it is of the opinion that the determination of the spouse’s annual income under section 16 would not provide the fairest determination of the annual income, choose not to apply sections 6 and 7 of Schedule III, and adjust the amount of the loss, including related expenses and carrying charges and interest expenses, to arrive at such amount as the court considers appropriate.
A self-employed person’s income is bound to fluctuate from year to year. Unless he or she pays oneself a salary, the income is not going to be exactly the same. With all due respect to the drafters of the Guidelines this section, because of section 2 (3) and its own wording, is basically useless unless I am missing something. A court simply has a lot of discretion to come up with an income figure that it feels appropriate. It does not have to be an average.
With respect to business losses, this section gives the court discretion not to allow the payor to argue his income is a lot less because a business loss was incurred, when that business loss is not an ongoing loss. In the case of Omah – Maharajh v.Maharajh  7 W.W.R 342 (Alta. Q.B.) where the loss was incurred with borrowed money, the court did not allow the full loss to be used in the calculation but used the $24,000 a year for five years, which was the blended interest and principal payments.
(b) an amount commensurate with the services that the spouse provides to the corporation, provided that the amount does not exceed the corporation’s pre-tax income.
Section 18 therefore allows the court the discretion to add to income the retained earnings for that year. In the case of Stamoulos v. Pavlakis (1997) 32 R.F.L. (4th) 75 (B.C.S.C) the Judge made the following interesting comment about automatically adding the retained earnings.
Also see Goldberg v. Goldberg (1998),132 Man. R. (2nd) 101 (Q.B.) There the court did not attribute all of the corporate income because there needs to be a cushion in the company for working capital.
(2) In determining the pre-tax income of a corporation for the purposes of subsection (1), all amounts paid by the corporation as salaries, wages or management fees, or other payments or benefits, to or on behalf of persons with whom the corporation does not deal at arm’s length must be added to the pre-tax income, unless the spouse establishes that the payments were reasonable in the circumstances.
The purpose of this clause is to deal with the common situation where a self-employed person income splits with a person not at arm’s length – probably the new spouse. If the amount paid to the new spouse is not reasonable then the payor is deemed part of that spouse’s salary. It is quite common to income split not to avoid paying child support but to reduce taxes. There are cases that have held that salaries paid to a spouse or even children will be added back in for guideline purposes.
In the case of Needham v. Needham  B.C.J. No. 202 the court added on income to the husband because it believed the amount of money paid to the common law spouse was “in excess of that which is strictly necessary for the services that she no doubt provides to the company”.
The way this section reads the onus rests on the payor to justify these non arms length payments however in the case of Stamoulos v. Pavlakis the court held that this onus is triggered only when there is some evidence of unreasonableness. I do not think this is what was intended. It is very difficult for the payee spouse to be able to establish unreasonableness. The onus justifiably should be with the payor to the pre-tax income, unless the spouse establishes that the payments were reasonable in the circumstances.
The way the beginning of this section has been drafted has allowed courts not to be restricted by the set out circumstances. Courts have taken a broad approach to income to go back to the old “ability to pay” theory and therefore included obvious capital amounts as income. In the case of Razavi v. Aavani  B.C.J. No. 1885 (S.C.) the court took into account student bursaries and student loans though that was not the finding in Vierling v. Boudreau (1997) 160 Sak.R.81 (Q.B). The case of Jackson v. Jackson (1997) 35 R.F.L. (4th) 194 (Ont.Gen. Div) included capital payments from a trust as income. One should therefore be able to argue that draws which may exceed income should be taken into account. Or a corporation that is controlled by a payor of support has a lot of cash in it, but perhaps not income for whatever reason, should pay higher support because of an ability to pay. The court in Risen v. Risen  O.J. No. 3184 made the comment that though the list in section 29 is not exhaustive, the source should bear some resemblance to the list.
Subsections (d) and (f) have been used to impute income when the lifestyle of the payor does not fit the declared income. Such was the case in Biamonte v. Biamonte (1997) 36 R.F.L. (4th) 349. So when the payee testifies that a lot of business was conducted under the table when he or she was living with their spouse which resulted in a higher life style than the income would dictate, a court using this section can set the amount of support it wants.
A major section of section 19 is (g) which is modified by 19 (2). There are a lot of deductions that a self-employed person is allowed for tax purposes that are really personal expenses and not business expenses. The person would have had these expenses anyway but is allowed a tax deduction. In Da Costa v. Da Costa (1997), 74 A.C.W.S. 88 (B.C.S.C.), the court added back to income, expenses related to telephone and utility expenses as well as automobile expenses. In Omah – Maharajh v. Howard  7 W.W.R.342 (Alta Q.B.), the court also added back in automobile expenses, but also expenses related to a computer, travel and convention expenses. Not the total amount of these expenses was always added back into income but a substantial portion was. In the case of Cornelius v. Andres (1998),36 R.F.L.(4th) 436 (Man.Q.B.) expenses for meals and parking tickets were added back in as an adjustment to income.
Attached as Schedule “A” to this paper is a list of types of expenses assembled by Ron Sullivan a C.A. that are often personal in nature but deducted as business expenses. It is a good checklist when dealing with a self-employed payor.
Another area of unreasonable expenses occurs in cases of business losses, especially farming losses, that set off against the main source of income. When there is no reasonable prospect of earning income from these sideline businesses but they are really a hobby, the courts will not allow the loss to be taken against income. See Adams v. Loov (1998), 40 R.F.L. ( 4th) 222 and Clark v. Kubek (1998), 37 R.F.L. (4th) 244 ( Alta. Q.B.).
The other area of unreasonable expenses relates to capital cost allowances on personal property. The Guidelines are very specific that one adds back into income capital cost on real property but is silent on capital costs on other types of assets. Courts however have used the unreasonable expense section to add back into income some capital costs taken on automobiles [Paynter v. Sackville (1998), 162 Sask R.319 (Q.B.)] and skidoos [Addison v. Dornian (1998), 36 R.F.L. (4th) 355 (Man Q.B.)].
Replace the taxable amount of dividends from taxable Canadian corporations received by the spouse by the actual amount of those dividends received by the spouse.
As these dividends are grossed up the actual amount of the dividends (80% of what is on the income tax return) is actually used. The fact that a tax credit is given has not been properly taken into account. In my opinion, this adjustment is a mistake because the dividend tax credit already gives the payor a greater ability to pay so by having the payor only include the actual amount received, an extra amount is available to the payor.
Replace the taxable capital gains realized in a year by the spouse by the actual amount of capital gains realized by the spouse in excess of the spouse’s actual capital losses in that year.
As capital gains are not taxed like regular income, the actual amount of the gain is added back in but no accounting for the fact that tax is not paid on it is taken into account. The gross up is 133% as only 75% of the capital gain is included. Again this is not an accurate reflection of ability to pay as it is not taken into account that no tax is paid on that other 25%. If the capital gain was not reoccurring every year, the definition section of current information would be used to argue against including the capital gain.
Of course as previously stated, a payor can argue that the previous capital gain will not be reoccurring so should not be included.
Deduct the actual amount of business investment losses suffered by the spouse during the year.
Because only 75% of the business loss can be claimed for income tax purposes, the full amount may be deducted for guideline purposes. This is unfair to the payor (as opposed to the case of dividends and capital gains) because income tax is determined on only 75% of the loss.
Carrying Chargenter v. Sackville (1998), 162 Sask R.319 (Q.B.)] and skidoos [Addison v. Dornian (1998), 36 R.F.L. (4th) 355 (Man Q.B.)].
As capital gains are not taxed like regular income, the actual amount of the gain is added back in but no accounting for the fact that tax is not paid on it is taken into account.
Deduct the spouse’s carrying charges and interest expenses that are paid by the spouse and that would be deductible under the Income Tax Act.
Where the spouse’s net self-employment income is determined by deducting an amount for salaries, benefits, wages or management fees, or other payments, paid to or on behalf of persons with whom the spouse does not deal at arm’s length, include that amount, unless the spouse establishes that the payments were necessary to earn the self-employment income and were reasonable under the circumstances.
A similar provision to this section is found in section 18 of the Guidelines.
As capital gains are not taxed like regular income, the actual amount of the gain is added back in but no accounting for the fact that tax is not paid on it is taken into account. The net of reserves.
This provision is necessary for many lawyers and other self-employed persons who now, thanks to a change in the law in 1995, must include in their income 10% of their stub year income. Again though it is a break for the payor, it does not accurately reflect ability to pay because tax is being paid on income one does not have.
Include the spouse’s deduction for an allowable capital cost allowance with respect to real property.
As there is no actual outflow of cash the depreciation on real property is added back in, though again the payor is still better off because no tax is paid on this amount.
Where the spouse earns income through a partnership, deduct any amount included in income that is properly required by the partnership for purposes of capitalization.
As capital gains are not taxed like regular income, the actual amount of the gain is added back in but no accounting for the fact that tax is not paid on it is taken into account. The not also help the incorporated self-employed person who has to use income to finance perhaps the buying of the business though this section only deals with partnerships.
(1) Where the spouse has received, as an employee benefit, options to purchase shares of a Canadian-controlled private corporation and has exercised those options during the year, add the difference between the value of the shares at the time the options are exercised and the amount paid by the spouse for the shares and any amount paid to acquire the options to purchase the shares, to the income for the year in which the options are exercised.
(2) If the spouse has disposed of the shares during the year referred to in subsection (1), deduct from the income for that year the difference determined pursuant to that subsection.
Like every other area of family law, it is hard to appeal a court’ s determination of the finding of a self-employed person’s income. Unless it is unreasonable or the evidence is clearly misconstrued.
As capital gains are not taxed like regular income, the actual amount of the gain is added back in but no accounting for the fact that tax is not paid on it is taken into account. The d, the appeal court will not overturn a trial court’s determination of income Benvie v. Mills (1997) 34 R.F.L. (4th)313 ( N.S.C.A.).
The Child Support Guidelines recognize that the total income on one’s income tax return is not a fair indication of a person’s ability to pay. The Guidelines provide that many adjustments have to automatically be made. There are also many adjustments that though not mandatory, will be made with the court’s discretion so to come to a true figure of income to determine child support under the Guidelines.
Because the scheme of the Guidelines needs an exact figure for income for table and extraordinary calculations, the Guidelines dictate exactly how to add and subtract from income certain specific situations. Sometimes those adjustments are not completely fair because they do not adequately deal with the tax consequences of the adjustment.
The Guidelines still leave an enormous amount of discretion to Judges in many ways to determine income when it comes to the self-employed. Judges have interpreted the Guidelines to give them more discretion than was probably intended.
As capital gains are not taxed like regular income, the actual amount of the gain is added back in but no accounting for the fact that tax is not paid on it is taken into account. The rly reflect one’s ability to pay for support purposes. Those principles can be used as well to determine a fair ability to pay spousal support.
An expert could be used in many cases to help determine a self-employed person’s income for the issues of unreasonable expenses and hiding income.
One must be careful to arrange his or her corporate affairs properly for guideline purposes. As it presently stands though capital to fund a partnership can be taken into account capital to fund a corporation cannot.
As capital gains are not taxed like regular income, the actual amount of the gain is added back in but no accounting for the fact that tax is not paid on it is taken into account. The ld be a reduction of discretion which was a clear and necessary aspect of the Guidelines.
(b) The many discretionary aspects of the determination of self-employed persons should be reduced. State clearly what expenses will be found to be unreasonable and how they are added back into income. The income tax laws over the years have done that with respect to personal expenses such as automobile, food and business losses.
(c) Be a little more sophisticated with the adjustments that have tax consequences. Yes, the Guidelines state to use the actual amount of the capital gain and the actual dividends received but the ability to pay is greater because of the tax consequences.
(d) Allow some discretion or make fairer rules like those present for funding partnerships for funding a company.
Income under the Guidelines is not a simple issue. A lawyer who does his or her work can effect a court’s determination of income by making all the arguments for adjusting the income which the Guidelines allow for.
The above represents a partial list of some of the more common approaches to altering expenses and revenue.

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