How to Calculate Self-Employed Income to Determine Child Support Payments
The amount of child support depends on several factors, including the paying parent’s income. If that parent is self-employed, determining their true income can be very complicated. Here is what you need to know about how child support is calculated when a parent is self-employed.
Child support is based on paying parent’s annual income
Under Canada’s Child Support Guidelines, child support is calculated based on:
- the number of children;
- the province or territory where the paying parent lives; and
- the paying parent's before tax annual income.
The BC Child Support Tables factor in those three pieces of information to determine the monthly child support payment. There is a helpful tool called the Child Support Table Look-up which is essentially a calculator that determines the basic child support amount. Of course, the results of a Table Look-up are only as accurate as the information inputted. If the paying parent’s income is understated, the monthly child support payment will be too low.
Determining a self-employed parent’s annual income
How do you determine the paying parent’s annual gross income so you can calculate child support? The Child Support Guidelines say that the starting point is income reported on line 150 of the paying parent’s personal income tax return (T1 General). But, if the paying parent is self-employed, it is very likely that line 150 will not capture their actual income for child support purposes.
A self-employed person’s income can fluctuate considerably from year to year. Self-employed people can also deduct business expenses or manipulate their reported income. These deductions can be for legitimate business or tax reasons but it can also be done in an attempt to reduce income so support obligations are reduced. If the payor operates their business as a partnership or a corporation, determinations of income for child support purposes can be more challenging.
Self-employed child support rules
The Child Support Guidelines contain rules for ensuring that the income figure used to calculate child support fairly reflects all the money available to the paying parent. For example:
- Income can be imputed if a self-employed person unreasonably deducts expenses from their income. For example, a self-employed person might deduct thousands of dollars per year for meals and entertainment or a lease on a luxury vehicle. In this regard, the Guidelines specifically state that the reasonableness of an expense deduction is not solely governed by whether the deduction is permitted under the Income Tax Act.
- A paying parent’s lifestyle can be relevant to imputing income for child support. For example, where a self-employed paying parent has a lavish lifestyle but reports a relatively low income, this suggests that there may be undisclosed income. It is open to argue that reasonable inferences about actual income should be drawn from their lifestyle as opposed to relying on their disclosed income. When such a discrepancy exists, the paying parent has to onus to provide a reasonable explanation for the difference.
- If self-employment income fluctuates from year-to-year, it may be necessary to look at the paying parent’s income over the most recent three years and determine an amount that is fair and reasonable in light of any pattern of income, fluctuation in income, or receipt of a non-recurring amount during those years (for example, by calculating average income over those three years).
- Where the paying parent’s net self-employment income is determined by deducting an amount for salaries, benefits, wages or management fees, or other payments, paid to or on behalf of persons with whom the paying parent does not deal at arm’s length (e.g., the paying parent’s current spouse or partner as a way of income-splitting to reduce tax), that amount should be added back in to annual income, unless the paying parent can establish that the payments were necessary to earn the self-employment income and were reasonable in the circumstances.
- The same is true if the paying parent is a shareholder, director or officer of a corporation and deducts non-arm’s length payments. In such situations it is also important to scrutinize non-recurring capital or business investment losses, and income of any related corporations.
Getting the right information to calculate self-employed income
When it comes to calculating child support, BC family law and the federal Child Support Guidelines impose obligations to provide complete and up-to-date information, including income tax returns and notices of assessment from the CRA for each of the three most recent tax years. Where the paying parent is self-employed, additional information may be necessary, such as documents to substantiate business expenses and financial statements. It is a good idea to get help from a family lawyer to ensure that you get (and give) the right information. Once documents have be exchanged, it is so important to ask the right questions about things like expenses deducted and salaries paid to others. Again, an experienced family lawyer will know the questions to ask and the issues to focus on.
Need advice on child support from an experienced BC family lawyer?
Self-employed child support calculations can be tricky. Line 150 may not be an accurate indication of available income for child support purposes. Whether you pay child support or receive child support, clear legal advice is essential to ensuring the amount paid is fair. If you need advice with respect to the calculation of income for the purposes of child support given your specific circumstances, contact Valerie M. Little Law Corporation.
Ms. Little has been practising family law in BC for over 30 years. Our law firm is exclusively devoted to issues of family law in Burnaby, Coquitlam, New Westminster and throughout the Lower Mainland. No matter what family law questions or issues you might be facing, you will receive attentive care and understanding at the office of Valerie M. Little. For more information about our family law office or to schedule a consultation with our family lawyer, please call us today.