Self-Reporting Your Income: How to Go Wrong
If you are a separated or divorced parent and also self-employed, then you likely know of your legal obligation to report your income so that any child support obligations (or entitlements) can be determined under the federal Child Support Guidelines (the “Guidelines”).
This can be more complicated than you may think. Because unlike those who receive a straight salary, if you earn your living through self-employment, or if you are paid through a corporation, then the calculation of your income can fluctuate greatly from year to year. It may also require some crystal ball-gazing, and be driven by numerous esoteric variables and discretionary business-decisions.
Not surprisingly, when family disputes involving one or more self-employed parents end up in court, the judge is authorized to closely scrutinize your self-reported income to fix the true amount. As part of this exercise, the Guidelines allow the judge to “add back” or impute income to your declared income in certain cases. These include situations where you:
• Are intentionally unemployed or under-employed;
• Divert income;
• Unreasonably under-use property that could be used to generate income;
• Fail to produce income information when legally required to do so;
• Deduct an unreasonably high amount of expenses from income (and this is not solely governed by whether the deduction is permitted under the Income Tax Act); and
• The beneficiary under a trust.
(The Guidelines also allow the court to impute income to you in certain defined tax scenarios).
Needless to say, there is a lot of gray-area in that list; for example, in a small corporation or single-person business you may have a lot of leeway in determining the amount of expenses that you deduct from income. Essentially, it is an “executive decision” in the colloquial sense, highly dependent on factors unique to your specific self-employment arrangement, and may vary from year to year as business needs and economic factors dictate.
In fact, the over-generous deduction of business expenses is the area where most self-employed parents trip up in reporting their total income for child support purposes. Here are just a few of the ways that you can go wrong in reporting income:
• By trying to deduct business expenses for what are actually recreational purposes. For example, in a case called Dunham v. Dunham the court added back 100 percent of the amount that the self-employed spouse had tried to claim for gasoline and oil expenses relating to a snowmobile and an airplane.
• By being over-generous in deducting expenses for items that have a dual purpose. For example, in A. (A.) v. A. (C.) the court disallowed certain capital cost allowance deduction in relation to a $60,000 truck and a computer, because they were used by the father (who was a private investigator) for both personal and business-related purposes).
• By hiding behind your accounting professional in justification of various decisions made in coming up with an income amount;
Note the following:
• Just because the deduction is allowed by the Canada Revenue Agency (CRA) does not mean it will be allowed for Guideline support and income-determination purposes.
• On the flip-side, if the deduction clearly disallowed by the CRA, then it will also be disallowed under the Guidelines when calculating income.
• The fact that a deduction may have survived a CRA audit does not mean that for child support purposes the deductions will not be added back by the court if warranted. Family courts have a great deal of discretion in this area.
For the full text of the decisions, see:
Dunham v. Dunham, 1998 CarswellOnt 4571 (Ont. Gen. Div.)
A. (A.) v. A. (C.), 2012 CarswellBC 3001 (B.C. S.C.)