Child Support - Determination of Income

Determination of Income

The income of a party for the purposes of the CSG is frequently at issue.  Where a party simply has one employer and receives a T4 slip at the end of the year, the exercise is relatively simple.  However, where a party has several sources of income, such as self employment income, dividends, interest income, rental income and employment income, the calculation can become complicated.  The CSG provides some tools to assist in the calculation. A party’s Guidelines income is presumptively the party’s actual current income from all sources. However, where a party’s income is complicated or varies from year to year, it is common to accept the party’s income in the most recent complete tax year as his or her Guidelines income. The court may average a party’s historic income under s. 17 where the party’s income fluctuates, or impute income to a party under s. 18 where the party is self-employed or paid through a closely-held company, or s. 19 where the party is underemployed, intentionally underemployed or could be using capital assets to generate additional income but is not.

Issues involving the imputation of income and parents who are self-employed or work through their own companies arise because legitimate deductions made pursuant to the Income Tax Act are not necessarily allowed for the purpose of calculating Guidelines income. Line 150 of the party’s most recent income tax return, the presumptive starting point under CSG s. 16, may not provide an adequate description of the parent’s income. Often companies pay for many items that otherwise are personal expenditures or benefits.  If such payments are not added back to the person’s income, that person’s annual income will be unrealistically low for the purpose of applying the child support guidelines. You should always consider engaging the services of an accountant when dealing with a self-employed party in order to obtain a realistic view of that party’s income.

Deductibility of Legal Fees

The party receiving child support is entitled to claim a tax deduction for that portion of his or her legal fees incurred to obtain or enforce an agreement or order for child support. The taxpayer must have paid the fees before they can be claimed. Legal fees incurred in defending a claim for child support are not deductible. 

Where the deduction is claimed, the client will ask the lawyer to provide a letter stating the amount of legal fees that were incurred for those purposes from the lawyer’s accounts that year.  Therefore the time-keeping records of the lawyer are very important, especially if the deduction is audited by the Canada Revenue Agency.

Community Discussion

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One of the most difficult issues in the area of child support is section 18 cases.  The law is not settled that all of the pre-tax income of a payor who has a professional corporation should be included in the determination of his or her Guideline income.  What is much more challenging is determining how much should be left in the company to ensure the ongoing viability of the company.  This assessment will generally require the input of a certified business valuator.

Clients continue to struggle with the concept of what is and what is not a special and extraordinary expense in their given circumstances as well as understanding why it is in the best interests of a child to be enrolled or continue to be enrolled in an activity/program.

In my Family Law practice I constantly come across cases where the payor parent attempts to avoid paying child support/spousal support by working for "cash". Unfortunatly, one will have to prove that the payor parent is effectively "working under the table". It becomes an expensive process as credit card accounts and bank accounts will have to be reviewed, sometimes going back 3-5 years.  I have at times even retained private investigators to prove that a payor parent is working for cash.  

Whether for child or spousal support , Imputation of Income may be an important consideration and challenging in its various elements .  Consideration should be given to whether expert opinion should  be obtained in this regard . It is important to discuss  with the client before doing so, as well as to investigate precisely which elements of income need to be investigated - i.e. rental income, self- employment - including shareholder loan transfers, dividends declared,  legitimacy of payments on " expenses" alleged to be business made by and on behalf of  the payor.