Determining Income: Self Employed Spouse

When determining the amount of child or spousal support an individual is entitled to from a former spouse, we refer to Income Tax Returns and Notices of Assessment. Generally, an individual’s Line 150 is reflective of the amount of income they had earned that year. However, this may not be true for self-employed individuals, as their Line 150 is not always indicative of their true income.

Self-employed individuals deduct expenses from their gross revenue, while also receiving personal benefits from expenses that have been deducted. Further, some of these expenses are seen as accounting exercises intended to reduce income for tax purposes. So how does one determine if these expenses are reasonable or if they should be attributed to a self-employed spouse’s income?

In the case of Cunningham v. Seveny it was held that a self-employed spouse bears the evidential and persuasive onus of proving that business expenses are reasonable. In particular, a self-employed spouse has an obligation to provide an explanation and breakdown of all amounts paid to or on behalf of any non-arm’s length persons, including themselves. Also, providing personal tax returns or the general ledger of the company without more does not satisfy the disclosure requirements, rather the disclosure must be sufficient to allow a meaningful review and determination of guideline income.

The case of Elliot v. Elliot held that where a spouse fails to show expenses were reasonable in the circumstances, the Federal Child Support Guidelines allow for income to be imputed to the spouse. Further, if no breakdown of benefits has been provided, a portion of the expenses which have a personal benefit component, such as travel, auto, and telephone expenses can be added back to determine the self-employed spouse’s income for support purposes.

It is important to pay close attention to expenses of a self-employed individual as you may be getting short changed if you solely refer to their Line 150 for support purposes.