Imputing Income: Self-Employed Payors

My spouse is self-employed. What if I think they are hiding money, or writing off too many expenses?

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As mentioned in our previous post on imputing income, the family courts may assume you or your spouse's income is higher than it may actually be. While this power is found under the Federal Child Support Guidelines, similar principles apply when calculating spousal support.  Our last post covered one of the more common situations in which this could occur: intentional unemployment or under-employment.

In this post we will cover situations in which income has been imputed to spouses who are self-employed.

What Financial Documents Can I Ask For?

Section 21 of the Federal Child Support Guidelines outlines the financial obligations of both parents in applications for a child support order. Subsection 21 (1)(d) specifically addresses what self-employed spouses must provide in addition to their personal disclosure obligations.

A spouse who is self-employed must provide the financial statements of their business or professional practice, and a statement showing a breakdown of all salaries, wages, and management fees. They must also account for any payments or benefits paid to individuals or corporations who are not dealt with at arm's length. A useful guide to dealing "at arm's length" can be found here.

Common Situations Where Income is Imputed

Tax Deductions

One of the most common situations in which courts will impute income to self-employed spouses is if the spouse unreasonably deducts expenses from their income. Even situations where the deductions are reasonable under the Income Tax Act, they may not be for the purposes of determining support. As such, the court may add those deductions back to your income, and calculate support based on the higher amount. When examining a self-employed spouse's business expenses, the court will adopt a perspective of balancing the business necessity of the expense against the alternative of using the funds for child support.  

Whenever a court "adds back" money to someone's income, they will also usually "gross up" the amount to reflect the fact that no income taxes was paid on it.

Income Diversion

Another situation in which courts will impute income is when it appears that a spouse has diverted income which would affect the level of child support payable. This might happen where a spouse has diverted part of their income through a professional corporation for tax purposes, or where a self-employed spouse maintains most of their income within the business, and is only paying themselves a nominal salary. If it appears to the court that, by doing so, the spouse's income is lower when calculating child support, they may impute some of that income back to that spouse.

Failure to Provide Adequate Disclosure

Courts may impute income where it is found that a spouse has failed to provide income information when under a legal obligation to do so. As we discussed earlier, self-employed spouses are under an additional disclosure obligation to provide financial documents related to their business. If the self-employed spouse fails to do so, or provides information that is insufficient to discharge their obligation, the court may impute income to that spouse.

Cases where Income has been Imputed for Self-Employment

In the case of MacNamara v. MacNamara, the court imputed income to the self-employed payor father for the following reasons: there were unreasonable deductions from one of the businesses he owned; and he failed to provide any complete income tax returns or proper financial documents. When calculating child support, the court looked at the payor father's line 150 income of roughly $44,900, and imputed his share of his company's profits ($64,100) to arrive at a total income of $109,000, and ordered child support be paid accordingly. It is interesting to note, that in this case the court imputed his share of his company to be 50% rather than the claimed 10% after the payor father submitted two conflicting financial statements.

An interesting case is Kerr v. Erland, a self-employed payor doctor left their private practice to work at a clinic.  The payor had her income imputed at $169,148 due to unreasonable business expenses, and her intentional under-employment. This case also involved a dispute as to whether income should be imputed due to the payor receiving dividends from her corporation; the court found that the income had already been accounted for and did not deem it necessary to impute any income in this instance.

In the case Wilson v. Desrochers, the payor father had income imputed to him due to unreasonable expenses deducted from his bait and tackle business. He was permitted to claim 50% of the value of a number of vehicles because the court found that there was no evidence showing that the expenses were unreasonable for the type of business he was running. However, he was found to have understated his business income due to his claiming capital cost allowance. In addition, there were expenses added back to the payor father's income due to his inability to explain the nature of the expense or whether it was reasonable.