Nelligan O'Brien Payne gratefully acknowledges the contribution of Natasha Chettiar, Student-at-Law in writing this blog post.
The amount of child and/or spousal support a payor is responsible for depends on what they can afford, and what they can afford depends on their income. That sounds simple, but for payors who are self-employed, figuring out income for the purposes of support can be a pretty complex task.
In any support case, a support payor should speak to a lawyer to make sure that the agreed upon amount accurately reflects the needs and abilities of both parties. In cases involving self-employed payors, the advice of a lawyer will be especially valuable. Here’s why:
- The court may adjust your income to reflect your tax savings.
One advantage of being self-employed is that you can structure your finances to pay significantly less tax than your employee counterparts. So, as a self-employed person, your tax return may say one thing about how much support you can afford, while the money in your pocket may say another. The Child Support Guidelines and the Spousal Support Advisory Guidelines were implemented to ensure that people of the same financial means pay the same amount of support. As such, a court may scrutinize the validity of a self-employed person’s expense deductions when looking at the amount of support they should pay, even if those expense deductions were appropriate for tax purposes. In family law, it doesn’t matter that Revenue Canada has accepted the deductions you’ve claimed, so be prepared to defend their legitimacy.
If a court decides that you have unreasonably deducted expenses, the Federal Child Support Guidelines allows that court to add those deducted expenses back into your income for your support calculation. After all, it wouldn’t be fair for you to pay less support than you would if you were an employee making the same amount per year. So, in the end, your income for support purposes may be much higher than what your tax return says.
- In proving that those expense deductions are legitimate, you’ll need show that you do not derive a personal benefit from them.
If you gain a personal benefit from any of your deductions, those deductions may be either entirely or partially put back into your income for calculating support. Think about your work cell phone or your work computer. Those are likely required for business purposes, which make them legitimate deductions for tax purposes. But, as a business owner, you might avoid having to buy a personal cell phone or computer, which means you gain a personal benefit from those business expenses as well. Because your employee counterparts have to pay for things like cell phones and computers, a court may level that imbalance by placing the personal component of your business expenses back into your income for support purposes. So, for example, if you have deducted 100% of the cost of your work cell phone on your tax return, but a Family Court concludes that you actually use that work cell phone for personal calls and texts 50% of the time, then the court may place that 50% personal use back into your income before your support obligation is calculated.
To prove that your business expenses are only used for business, keep your bills, records, and a log of your use of those items. Although it may be time-consuming to keep a log, it could be very helpful down the road. With those kinds of details documented, you can help limit the guesswork of a court measuring how often you make, say, personal calls on your cell phone or how often your work vehicle gets used for personal trips.
- If you have a paid employee, that employee needs to be at “arm’s length”.
Courts are also empowered to challenge salaries, wages, benefits, management fees or other payments paid by a self-employed person to a person who is not at arm’s length. Someone who is not at arm’s length is typically a family member, relative, or current spouse. Courts are skeptical of wages paid to relatives, unless the payor can prove that the payments were reasonable and legitimately connected to their business. For example, if a self-employed person pays a current spouse as a way of splitting income to reduce the amount of tax paid, a court will likely find those payments unreasonable and put the amount of the payments back into the self-employed payor’s income.
The point of putting that income back is to ensure fairness across the board between all support payors, and to ensure support payments reflect each payors’ real income. So, unless the payments you make to employees who are also your family members are reasonable and necessary to your earned income, those payments may be added back to your income before your support obligation is calculated.