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.