The Potential Child Support Pitfalls When Dealing with a Parent or Spouse who is Self-Employed o
Hello, I am Jeffrey Hart, one of the lawyers here at the Feldstein Family Law Group.
As has been explained very well by my colleagues in other parts of our website, the amount of child support paid by a parent is set out in the tables of the Federal Child Support Guidelines, which is calculated according to the number of children and the income of the payor. So, that means to figure out child support, we need to know both the number of children and the income of the payor. Figuring out the number of children sounds pretty simple, but even that issue can sometimes be complicated. I’ll leave that topic for another time. Figuring out income though, is not so simple, as there are many different ways a payor can earn income. I would like to discuss with you some points you should keep in mind when dealing with a child support payor who earns self-employment income, and a child support payor who operates as a corporation.
One of the financial benefits of being self-employed is that you can deduct legitimate business expenses to reduce your net taxable income. What affect can this have on child support payments? Well, in a never-ending battle with the tax man, self-employed persons will often re-package personal expenses and declare them as business expenses so that she or he will pay less income tax. In some cases, a self-employed person may also claim to pay an employee, such as a current partner, as a way of splitting income to also reduce the amount of tax paid. The effect all of this has on child support is that a self-employed person can potentially manipulate their reported income, and thus end up paying less child support.
Luckily for support recipients we have section 19(1) (g) of the Federal Child Support Guidelines, which allows for a court to add income back to a payor if expenses were unreasonably deducted from the payor’s income. As well, section 19(2) provides that the reasonableness of an expense deduction is not solely governed by what Revenue Canada would accept. That means that just because Revenue Canada accepted the payor’s income tax return and all the deductions claimed, does not mean a court, or you, should accept those same deductions if they appear to be personal in nature. So challenging whether those expenses are valid, may mean you will be rewarded with more in child support.
As well, Section 9 of Schedule III of the Guidelines challenges salaries, wages, benefits, management fees or other payments paid by a self-employed spouse to or on behalf of persons with whom the spouse does not deal at arm’s length. This section suggests that such payments be added back to the income of the self-employed spouse, unless such payments were necessary for the spouse to earn the self-employment income and were reasonable. So it may pay off to ask the right questions about salaries paid.
Operating as a Corporation
There are several financial benefits to operating as a corporation especially when as the sole director an individual can pick and choose how the corporate revenue is allocated. What effect can this have on child support payments? Well, if only one person is responsible for allocating all of the corporation’s earnings, then that one person can decide how much income she or he will declare as her or his salary. As well, as mentioned earlier with respect to self-employment income, this same person can manipulate the expenses deducted from the corporate revenue, including salaries paid to persons who are not at arm’s length with the corporation. The effect is that the child support payor is able to declare any level of income they desire, when in actuality all or most of the entire corporate revenue flows through their hands. Shouldn’t they pay support on all of the money the corporation earns if they are the sole employee, the sole shareholder and the sole director and they are in control of all the corporate revenue? The answer is…maybe.
According to Section 18(1) of the Guidelines the court has the ability to determine the proper level of income for support purposes by including all or part of the pre-tax income of the corporation and of any corporation that is related to the corporation, or by calculating an amount that is commensurate with the services that the payor provides to the corporation. As well, under Section 18(2), the court can add back any 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. What does this all mean? It means that in situations where a support payor is able to manipulate her or his income in their role as shareholder, director or officer of a corporation, the court does not have to accept the reported income figure. Instead, the court can re-adjust the income of the payor to a number that better reflects the amount of available money, or that better reflects the compensation that should have been declared for the type of services the payor provided to the corporation.
The above are just some of the issues you should be considering when dealing with a support payor who is self-employed or operates as a corporation. Remember the support payor will try to keep their reported income as low as possible to avoid paying tax, and while this may be to your advantage while you are still in a relationship, it will mean receiving less support dollars when the relationship is over, unless you ask the right questions.
Thanks for watching. Should you require more information about child support and wish to schedule a consultation, please contact our office at 905-581-7222.