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Self-employment and child support: It is not as easy as you think

Many people come to family law lawyers for answers regarding their child and spousal support. While we would love to give easy and simple answers, this is often not the case. This is especially the case where either one or both of the spouses are self-employed. When you work for someone else, your income is fairly easy to calculate. You will either have a salary or you will be paid hourly. More importantly, your tax return from previous years will be, for the most part, an accurate representation of what your income is, for the purposes of child and spousal support. However, this is often not the case for self-employed individuals.

It is at this point in the conversation where most people say something to the effect of "we are very careful with the business, only run through allowable expenses, and do everything in accordance with the CRA". Then it is our turn to say, "I am sure that is true, but that is not the conversation we are having". The problem is that self-employment income based on personal tax returns is not necessarily accurate for the purposes of child and spousal support. This means that while you or your spouse may be doing everything correctly according to CRA, the income reflecting on personal tax returns very well may not be the number on which you or your spouse should be paying child support and spousal support.

This is all because of the following provisions in the Federal Child Support Guidelines:

Calculation of annual income

16 Subject to sections 17 to 20, a spouse's annual income is determined using the sources of income set out under the heading "Total income" in the T1 General form issued by the Canada Revenue Agency and is adjusted in accordance with Schedule III.

Shareholder, director or officer

18 (1) Where a spouse is a shareholder, director or officer of a corporation and the court is of the opinion that the amount of the spouse's annual income as determined under section 16 does not fairly reflect all the money available to the spouse for the payment of child support, the court may consider the situations described in section 17 and determine the spouse's annual income to include

(a) all or part of the pre-tax income of the corporation, and of any corporation that is related to that corporation, for the most recent taxation year; or

(b) an amount commensurate with the services that the spouse provides to the corporation, provided that the amount does not exceed the corporation's pre-tax income.

Adjustment to corporation's pre-tax income

(2) In determining the pre-tax income of a corporation for the purposes of subsection (1), all amounts paid by the corporation as salaries, wages or management fees, or other payments or benefits, to or on behalf of persons with whom the corporation does not deal at arm's length must be added to the pre-tax income, unless the spouse establishes that the payments were reasonable in the circumstances.

While the default position is total income on personal tax returns, this is subject to looking at the entire income of a corporation where a spouse is a shareholder, director or officer and where the Court feels that their personal income does not represent all the money available to the spouse for the payment of support. While this provides some measure of guidance, please note that the Court can include "all or part of the pre-tax income of the corporation". This means that anywhere from none to all of the pre-tax income of the corporation can be seen as income for the purposes of paying child and spousal support. This once again does not mean that spouse is in trouble with CRA. It does, however, mean that often people are blindsided when they come to see us about how much a person is making and what their support obligations may be.

So what can you do to have more guidance and move more quickly through the process to get some form of reasonable outcome?

1.) Get or Give disclosure- the Court has time and time again stated that regardless of personal qualms you may have with providing your spouse all your personal and corporate financial information, which is what is going to be expected of you. The Alberta Rules of Court dictate a procedure for the provision of financial information and it is quite fulsome. You will be expected to provide tax returns, bank accounts statements and for business and corporations some estimation of your income and expenses. In addition, the Court has made it clear throughout the years and even more explicit recently, that they will likely order any disclosure that they feel is relevant to the resolution of the matter. The question then becomes, why can't you disclose that piece of information?

Generally speaking*, it is a waste of time and resources to fight disclosure. Bite the bullet, provide your disclosure and move on. The court has very little sympathy for not providing disclosure, and in addition to time and resources, you may find yourself at the receiving end of costs and further penalties for not providing your disclosure.

* A caveat to this is obviously if you are under some obligation to your company, other shareholders or employers not to disclose certain information. In those situations, you should be contacting a lawyer and having them help you craft an agreement regarding disclosure that can be everyone happy and the company protected.

If you are the one looking for disclosure, make sure you obtain it. There are mechanisms in court such as a notice to disclose to help you and the as stated above the Courts are going to try to help you obtain the information you need. If you are trying to come to a resolution on support, if your spouse is self-employed, you need this information to make an informed decision. If nothing in the disclosure changes the outcome, fine but at least you will know. The majority of the time, however, it will change the outcome.

2.) Gain knowledge on how the company works and what the expenses are because you will be expected to answer these questions.

Not two companies are the same, but for the most part, the person running the company will have information regarding how the company is run and where the money comes from and goes. The Court has also stated this. In recent Court of Appeal case law, the Court has stated that the person running the company is the person with the burden to show what their income and expenses are and provide satisfaction of questions regarding same. Below are some examples of information you may be expected to provide. If you employ an accountant, they will often has the majority of this information.

a.) What expenses have a personal benefit (Do you run your cell phone through the company? Gas for your car? Have a home office that allows you to expense part of your mortgage?)

b.) What debt are you servicing on a monthly basis to the company?

c.) Is anyone else taking wages from the company? Is this someone that is an employee or a new spouse or family member?

The understanding of the operations of the corporation are important because if you do not understand there may be assumptions offered that are not true to what is actually happening, and support based on income that is not there.

3.) Don't get Defensive

As we stated above, the dwelling into the corporation and income is not a personal affront. It does not mean that the other spouse or their lawyer thinks that you have done anything wrong or are not trying to support them or your children. It simply means that there is a different system in place. Most people have a reference point of Canada Revenue Agency being above it all, and to a tremendous degree, I agree. A good relationship and healthy fear of CRA is the best way to live. However, income in family law is simply treated differently. When the guidelines were put in place, it was to make support more uniform for people in like situations. In order to do that with self-employed persons, we have to try to look at how much income would they have if they would put in the same situation as a salaried employee. In order to do this, we have to look at the income of the company and how being self-employed is benefitting the parties.

4.) Set up a mechanism for the future-

Support should usually be adjusted according to changes in income level. This can be tough when one or both parties are self-employed. In order to do so more easily in the future, figure out a formula that you can both agree upon for calculating income in the future. That way, while you may not know what the income is going to be, you will know how to calculate it and determine what adjustments need to be made.

If there are concerns about feasibility of the company or affordability of support, these arguments can be made, but simply relying on tax return income and a non-willingness to disclose will not get anyone very far. It is only with understanding of the numbers, how the company operates, and concerns regarding finances, that these matters will resolve.

If you are the spouse who is looking for support based on self-employment income; information is crucial. This knowledge will allow you to better understand the other parties' position and be open to their concerns. A self-employed person's ability to thrive is important to the future of support and a healthy relationship on a go-forward basis.

It is also important to not attempt to go blind through the process. If you are unsure what your obligations may be or what support you may be entitled to, or just need help obtaining information and understanding it, the lawyers at Soby Boyden Lenz LLP are available for consultations and to represent you in your matter. Matters with self-employment incomes often get complicated and this only gets worse the more time passes. Come and see us today!

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