In family law matters such as child support and spousal support, the first critical step is determining a party’s income available for support. For salaried employees, this is often straightforward: the amount reported on Line 15000 of the personal income tax return is used as the baseline. But when a person is self-employed – whether operating as a sole proprietor or through a corporation – the Courts and Guidelines recognize that reported income on tax returns may not reflect the real income available to support dependents.
1. Support Income: The Starting Point – Line 15000
Under the Federal Child Support Guidelines and related family law provisions, income for support purposes begins with a person’s annual taxable income – typically the amount shown on Line 15000 of their T1 income tax return. For employees, this figure usually reflects gross income before deductions for taxes.
However, for business owners, this reported income often doesn’t reflect the full picture of available income, because tax rules allow deductions that may legitimately lower income for tax purposes but are not appropriate in the context of a family law support obligation.
2. Sole Proprietors (Self-Employed Individuals)
A sole proprietor (unincorporated self-employed person) reports business income directly on their personal tax return (e.g., via Form T2125). This means that all business revenues and expenses flow through their personal return.
How courts look at sole proprietor income
- Reported income may understate real capacity: Deductions that are acceptable for tax purposes – like home office, vehicle, or cellphone expenses – might be limited or adjusted when determining income for support. If an expense includes a personal component, a Court may add it back to arrive at an income figure that better reflects what the person could reasonably earn or pay.
- Multi-year averaging: Because self-employed income can fluctuate, Courts often consider multiple years (e.g., last three years) to smooth out anomalies and arrive at a fair measure of income.
In practice, this means a sole proprietor’s Line 15000 figure may be adjusted upward when certain business expenses are not strictly business-related or when recurrent income patterns suggest a higher earning capacity.
3. Corporations and Business Owners
When a spouse owns and controls a corporation, things become more complex – because the corporation is a separate legal entity. In such cases, income may not automatically appear on the individual’s personal return.
Corporate income: Key issues
- Separate legal entity: A corporation’s profits belong to the corporation unless they are paid out to the shareholder as salary, bonuses, dividends, or benefits. Without distribution, profits remain inside the corporation and do not appear on the owner’s Line 15000.
- Reasonable business needs: Courts distinguish between profits that are legitimately retained for business growth or working capital, and profits or benefits that effectively serve as income for the owner. If profits are retained without clear business justification, a judge might treat those amounts as available for support.
Examples from case law show judges may average corporate earnings over multiple years and combine personal income with attributable corporate income to arrive at a guideline income figure that better reflects a party’s financial capacity to pay support.
4. Expense Adjustments and Add-Backs
Both sole proprietors and corporate business owners can claim legitimate business expenses for income tax purposes. However, not all tax deductions make sense for support calculations. For family law support analysis:
- Personal benefits expensed by a business (e.g., personal vehicle use, high telephone bills) may be added back to income. Identifying and quantifying these adjustments often requires a detailed forensic accounting review of business records and financial statements.
- “Gross-up” adjustments may be applied: the amount added back is increased to reflect what pre-tax income would have been needed to pay that expense personally (e.g., if a business pays a personal cost, the guideline may gross that amount up to a pre-tax equivalent).
These adjustments aim to neutralize tax planning strategies that reduce taxable income but do not change the payor’s actual ability to pay support.
5. Imputed Income vs. Reported Income
If a person’s reported income (sole proprietor or corporate shareholder) is unreasonably low, a Court may impute income – assign an income figure based on earning capacity rather than reported figures. Imputation generally applies where:
- The party is underemployed or voluntarily unemployed without valid reasons.
- The party is manipulating income by taking minimal salary from a corporation while enjoying the benefits of profits retained inside the business.
This helps prevent individuals from reducing support obligations through artificial income suppression.
6. Practical Steps and Documentation
For both sole proprietors and corporate business owners, Courts or support analysts — often assisted by independent experts providing litigation support services — will typically look at:
- Multiple years of personal tax returns and corporate tax returns (if applicable).
- Financial statements showing gross revenue, net income, retained earnings, and distributions.
- Expense details to identify personal elements that should be added back.
- Evidence of lifestyle or spending inconsistent with reported income (which can support imputation arguments).
Conclusion
Income for support purposes in Canadian family law is not simply what appears on a tax return for self-employed individuals or corporate business owners. Courts strive to capture true earning capacity and real income available, adjusting for business deductions and corporate structures where necessary. Sole proprietors are analysed based on personal tax reporting with add-backs for inappropriate deductions, while corporate business owners may see corporate profits and retained earnings attributed to their income where those profits are accessible or indicative of capacity to pay support.