Child support guidelines

The Child Support Guidelines (“the Guidelines”) provides a roadmap to determining income in the family law context. This roadmap is used when calculating income for both child support and spousal support purposes. The definition of income found in the Guidelines differs dramatically from the one found in the Income Tax Act.

Self-Employed Payors

Self-employment allows for flexibility and control over one’s declared income for tax purposes. A person’s reported income to the CRA is just the starting point; adjustments to a self-employed person’s reported income are almost always necessary to comply with the broader definition of income in the Guidelines.

Whether a payor is self-employed through a proprietorship or corporation, the bulk of the analysis often surrounds the expenses deducted from their gross income, and whether any of those expenses are personal in nature. For example, business owners commonly deduct expenses related to a company vehicle that is simultaneously used as a family vehicle. In this case, at least a portion of those vehicle expenses will be attributed as personal income for the business owner.

Any business expense that is attributed as personal income will then be subject to an income tax gross up. This is done because the Guidelines is based on a concept of employment income equivalency. A tax gross up is intended to reflect the amount of income a T4 employee would need to earn (net of taxes) to pay for the expense in question.

Different considerations come into play for self-employed spouses operating through a corporation. In addition to personal expenses being deducted as business expenses, shareholders of a corporation generally extract only the amount of funds from the corporation needed to fund their living expenses, so as to defer tax on unneeded income.

This pool of money that remains in the corporation, either in the form of retained earnings or pre-tax income, can become significant. Some businesses are capital-intensive and legitimately require large sums of cash to operate the business. Many corporations simply hold onto their earnings as a tax planning mechanism. In this case, all or part of the corporation’s pre-tax income could be attributed as personal income and grossed up for tax in a family law matter, to comply with the Guidelines.