Disclaimer: This article aims to provide educational information surrounding child support. It is not intended to serve as legal advice. Consult with a lawyer and exercise your discretion before taking action based on the information provided in the blog.
We have discussed before how to calculate child support payments using the Child Support Guidelines and how corporate income might impact that calculation.
Another group whose income is less straightforward are self-employed parents. Calculating their income for support purposes can be challenging and nuanced. Unlike salaried employees, self-employed individuals have fluctuating incomes and more flexibility in reporting earnings. Courts in Ontario must carefully examine financial records to ensure a fair assessment.
In this article, we will discuss three common challenges when determining income for self-employed people and how the courts treat these cases. However, each case is unique, and if you pay child support, we advise you to speak to our team for more tailored advice that considers the facts of your case.
Challenge #1: The paying parent has a fluctuating annual income
For self-employed people, you know that your income can be unpredictable. Some years may be more profitable than others, and relying on income from a single year could create an inaccurate picture.
Let’s consider a self-employed consultant. In 2023, he landed a couple of large projects that generated $250,000 in income, a substantial amount compared to his usual earnings. However, in 2024, his income dropped to $120,000. If child support were based solely on the amount in his 2023 income tax return, the resulting amount would be significantly higher than what he can reasonably afford in 2024.
How Courts Address This:
Courts may examine a parent’s income over multiple years to establish an average that accounts for peaks and valleys. This approach helps smooth out inconsistencies and ensures that the child support payments owed are fair and reflect the parent’s financial reality over time. The courts will typically review the self-employed person’s income information for three years to determine a reasonable child support amount.
Challenge #2: Self-employed income can be lowered by business expenses
If you are self-employed, you know that you can deduct reasonable business expenses from your gross income to reduce the amount of income tax owed. However, not all deductions are allowed when calculating income for the purpose of determining child support payments. By challenging the validity of certain deductions, support recipients can ensure a more accurate reflection of the payor’s actual income.
How Courts Address This:
Section 19(1)(g) of the Federal Child Support Guidelines allows a court to add income back to the payor if expenses were unreasonably deducted from their income. Additionally, section 19(2) clarifies that the reasonableness of an expense deduction is not solely governed by what Revenue Canada would accept. This means that even if the Canada Revenue Agency (CRA) accepts the payor’s tax return and deductions, the court may still reject those same deductions if they appear to provide a personal benefit to the payor while depriving the children of needed support.
For example, the court disallowed a deduction for “work-space-in-home” expenses that the payor, a traveling salesman, claimed against household costs. The court reasoned that the payor’s household expenses would remain the same regardless of their status as a traveling salesperson. While the court had no objection to the payor claiming this deduction for tax purposes, it found no justification for making the same deduction when calculating child support.
Challenge #3: The self-employed parent can reduce their income by paying a salary to another party
Another way self-employed individuals may lower their reported income is by paying salaries, wages, or management fees to others. While these payments can be legitimate business expenses, issues arise when the payments are made to individuals with whom the payor has a close personal relationship, such as family members or friends.
How Courts Address This:
Section 9 of Schedule III of the Federal Child Support Guidelines provides a mechanism to scrutinize such payments. It challenges salaries, wages, benefits, management fees, or other payments made by a self-employed spouse to, or on behalf of, persons with whom they do not deal at arm’s length. Under this provision, the court may add these amounts back to the payor’s income unless the payments were both necessary to earn self-employment income and reasonable in the circumstances.
For example, suppose a self-employed parent claims to pay their spouse a salary for administrative support, but no evidence of work performed is provided. In that case, the court might find that this payment was not necessary or reasonable. Similarly, if a parent hires a family member and pays them above-market wages for minimal work, the court could view this as an attempt to reduce the parent’s reported income to lower child support obligations.
How the courts determine a self-employed parent’s income and calculate child support
Self-employed income can be tricky to pin down, but the courts take a balanced approach. They don’t just rely on what’s reported on a tax return; instead, they look at the bigger picture. By examining factors like income fluctuations, business expenses, and payments to family members, the courts aim to understand what the payor can reasonably afford.
The Federal Child Support Guidelines provide clear rules to ensure deductions are applied reasonably and that personal benefits aren’t disguised as business expenses. Ultimately, the goal is fairness—for the paying parent and, most importantly, for the child. Courts work to ensure that support payments are based on an accurate and realistic picture of the parent’s financial situation so the child gets the support they deserve.
Plat Simionati LLP: Family law is what we do, and we do it well.
At Plat Simionati LLP, we understand that family law can be complicated, especially regarding things like child and spousal support, parenting arrangements and property division. Our experienced team is here to help you navigate these complexities and find a fair resolution that works for your unique situation.
Whether you’re working through the challenges of self-employment income or need help with any other family law matter, we’ve got your back with personalized advice and the support you deserve. Get in touch with us at Plat Simionati LLP today and take the next step with confidence.