Understanding Self-Employed Income for Child Support Calculations
By Mat Wirove, Senior Calgary Family Lawyer, Mediator, and Arbitrator
The objectives of the Federal Child Support Guidelines (the “FCSGs”) are not to maximize or minimize child support, but rather to ensure children receive the financial support they are entitled to after their parents separate. The starting point to meet this objective is the calculation of each party’s guideline income. This calculation can be much more complex when dealing with a self-employed party, whether through a corporation or sole proprietorship.
Typically, income is determined by line 15000 of the party’s income tax return. However, in the case of self-employment, relying solely on line 15000 may not accurately reflect the actual funds available for child support.
In this blog, we delve into the intricacies of calculating self-employed income for child support purposes and explore the principles that guide courts in determining income in these situations.
Cunningham v Seveny, 2017 ABCA 4
Generally, calculating a parent’s annual income for child support is governed by sections 16 to 21 of the FCSGs. When income is derived from a sole proprietorship, or in instances where the party is the owner of a company, income is calculated pursuant to section 18. Fortunately, the Alberta Court of Appeal has provided the framework for this analysis in Cunningham v. Seveny (“Cunningham”), at paragraph 18, which reads:
[18] Consistent with the federal guidelines, sections 18-21 of the provincial Guidelines recognize that the taxable income declared in a tax return completed by a self-employed parent or a parent who is a shareholder, director or officer of a corporation whose income derives from a corporation or business undertaking, may not fairly reflect the amount of the parent’s annual income for child support purposes. If a court is of the opinion that the amount of the parent’s annual income is not fairly reflected, it may consider some or all of the pre-tax income of the parent’s corporation or an amount commensurate with the services that parent provides to the corporation, as long as that amount does not exceed the pre-tax income of the corporation. It is manifest that a determination of the reasonableness of expenses claimed in reduction of annual income is a core, and critical, aspect of the court’s decision-making function.
Further, at paragraph 24, the court also discussed the duty to disclose and the requirements of self-employed people in disclosing their financial statements:
[24] This separate and additional requirement to disclosing financial statements under section 21(1)(d)(i) is reinforced by section 18(2) of the Guidelines, which provides that where a Court is of the opinion that a parent’s annual income does not fairly reflect the money available for child support, “all amounts paid by the corporation as . . . payments or benefits . . . must be added to the pre-tax income, unless the parent establishes that the payments were reasonable in the circumstances” (emphasis added). A court cannot make an informed decision under the income sections of the Guidelines (sections 15-20), unless and until full and complete disclosure is made under section 21(1) or (2) of the Guidelines.
Financial Disclosure
In all cases where a party’s income is necessary to calculate child support, financial disclosure is required. This becomes even more important when a party is self-employed, as there are additional documents that must be provided to ensure there is a clear picture of their available financial resources.
The Notice to Disclose Application’s Schedule A includes a complete list of the financial documents that must be exchanged in child support matters. If you’re self-employed, some of the documents you are required to provide include:
- Financial Statements
- General ledgers
- T2’s
- T4’s for all employees
- T5’s for role shareholders
- Corporate bank account and credit card statements
- Personal percentage breakdown of expenses.
Disclosure is a fundamental aspect of family law proceedings. This is particularly true when a party is self-employed, as provided in the Cunningham case.
If a party chooses not to disclose, they are not off the hook. The court can make ‘negative inferences’ against them. For example, it is not uncommon for a judge to set the income of a non-disclosing party even higher than what the other parent claims. This is based on the assumption that the non-disclosing party would have likely provided complete financial disclosure if their income lower than the claim, so their income must be higher than what the payee calculated.
Section 9(d) of the FCSGs allows the court to impute income to a party if they determine that the party did not properly disclose their income. Generally, it is better for a payor to ‘over’ disclose and argue against the income calculation than to attempt to hide their income.
Calculating Income
Generally, there are two considerations in determining a self-employed party’s guideline income:
- Line 15000 from any payroll or dividends paid by the company.
- Any available corporate income earned by the company.
When calculating self-employment income, courts typically examine the corporate revenue and subtract business-related expenses. This leaves the pre-tax income, or profit, of the company, which the party can access for the purposes of paying child support.
When reviewing financial statements and expenses, the courts will scrutinize the nature of those expenses, questioning:
- Are they business related?
- Are they of a personal nature or benefit to the owner?
- Are they reasonable?
The self-employed party bears the onus of proving what percentage of the expenses are business-related and what percentage are more personal in nature. Certain expenses, such as meals and entertainment, cell phone costs, vehicle expenses, or rent for a home office, are often considered to have a personal benefit. These would then be “added back” to the pre-tax income of the company, proportionate to the personal benefit derived from these expenses. Only reasonable, business-related expenses are not added back. The resulting amount serves as the party’s guideline income for calculating the amount of child support payable.
Given the complexity of this analysis, it is generally advisable to retain an expert to complete a guideline income analysis. While lawyers can provide a preliminary calculation, experts can usually offer further insights and evidence to support a more accurate calculation of the party’s income. These reports not only aid in reaching a resolution, but also help a judge understand the calculations behind the self-employed party’s income. Any assistance a party in litigation can provide to help a judge understand their position is a worthwhile investment.
At Crossroads Law, we understand the complexities of calculating self-employed income for child support purposes. Our experienced team of family lawyers are well-versed in these types of calculations and can provide the necessary guidance and support. Whether you’re dealing with a complex corporate structure or high income, we strongly advise seeking legal advice, and possibly even a guideline income expert. We are committed to ensuring your rights and interests are protected. Don’t navigate this complex process alone—book a free 20-minute consultation today to explore your options and ensure your financial and legal rights are upheld.
