Sections 16 to 20 of the Federal Child Support Guidelines deal with how a spouse’s annual income should be determined for the purposes of child support. Under Section 19, the Guidelines specifically identify 9 situations under which the court may impute income. Of particular interest to the self-employed, are Sections 19(1)(g) and 19(2) which deal with “unreasonable expenses”. When unreasonable expenses are deducted from income a court may impute an income to that spouse that includes a portion of, all of, or a grossed-up amount of, that expense. Just because the Income Tax Act allows the deduction, does not mean that it is appropriate for the purposes of determining income for child support. Furthermore, if expenses are in dispute in determining a guideline income, the onus is on the party claiming the expense to prove that it is a legitimate business expense and to provide appropriate documentation.
A review of the case law indicates that determining income has become more of an art than a science, particularly where disclosure is insufficient. Common expense deductions that have been dealt with by the courts include: vehicles; capital cost allowance and depreciation; travel; home office; meals, entertainment and promotion; and interest. A court may go through the process of adding back individual expenses, or they may make an overall determination, limiting legitimate business expenses to a % of business income. Additionally, to take into consideration the tax benefits obtained from deducting these expenses, they may be grossed-up prior to adding them back to income. Grossing-up an expense is not specifically mandated by statute, but is a well-accepted principle in a number of Canadian jurisdictions including Alberta.
Therefore, if you are self-employed, just because your accountant says you can deduct it, does not mean that your income for the purposes of child support will reflect those deductions. Understanding each deduction and keeping good records of all expenses will go a long way in ensuring that a fair guideline income is used for determining child support.