Self-employment income in the context of child support
In a recent decision, the Ontario Superior Court addressed whether a husband’s expenses from self-employment could be deducted from his gross income for the purposes of child support.
The husband and wife in question were married in 1993. They had two children, a son born in 1994 and a daughter born in 2000. They ultimately separated in 2003. Both children lived with the mother after the separation.
In 2013, the husband informed the wife that his employment with a large company had been terminated. Due to the apparent change in circumstances, the parties agreed to change their child support arrangements. They engaged in a protracted series of negotiations over financial disclosure. The husband repeatedly attempted to be deceitful about his income. For instance, he produced a letter that he claimed had been written by his former employer (the employer denied this) but eventually admitted he had created the letter himself. The husband also eventually produced bank records, which were incomplete and were also later found to have been altered. The wife eventually obtained the husband’s bank records directly from the bank.
In January 2018, the parties appeared in court, both arguing that, had it not been for the alleged uncooperativeness of the other, they would have been able to resolve their issues, with the husband even arguing that the issue distilled down to nothing more than “Grade 8 math.”
The parties eventually agreed on what the husband’s gross income had been from 2011 to 2016. An outstanding issue became whether the husband had incurred business expenses that could be deducted from his gross income for the purposes of child support.
The law on business expenses and child support
The wife questioned the husband’s business expenses, arguing that they were either poorly supported or invalid. She also pointed to his pattern of hiding income and not being forthcoming.
In addressing the husband’s alleged business expenses, the court cited relevant principles outlined in an Alberta Court of Appeal decision that is also applicable in Ontario:
- When a self-employed parent argues that his or her gross income should be reduced by business expenses for purposes of calculating income for child support, the onus of proving that the expenses are reasonable is clearly on that parent.
- A parent claiming a deduction for business-related expenses must present evidence to justify the expenses.
- If the claimed expenses also resulted in a personal benefit to the parent claiming the deduction, “an explanation is required for why those expense deductions (or a part of them) should not be attributed to the parent’s income for child support purposes.”
- Even if expenses have been approved for income tax purposes by the Canada Revenue Agency, this does not mean that the test for deducting expenses from income for child support purposes has been met.
- “Child support is the right of the child. A parent’s legal obligation to pay child support that fairly reflects the parent’s income in accordance with child support guidelines is not to be constrained or limited by income tax statutes that may confer entitlements in relation to deductibility of business expenses.”
The court noted that in this case, the father had failed to prove that any of the alleged business expenses he was claiming were reasonable and therefore properly deductible from his gross income for the purposes of calculating child support. The sole exception was certain car-related expenses for which the father had provided the court with six volumes of receipts.
The court noted:
Despite the amount of paper that was filed and the work I accept must have been devoted to compiling the hundreds of receipts and adding up the totals, the [husband] has not provided the evidence I would require to find that the receipts and totals represent expenses that were all actually incurred by [him] or that they represent business expenses exclusively and not personal expenses.
For instance, the husband had failed to demonstrate the extent to which he used his car for business purposes versus personal purposes. Similarly, the husband had not been able to satisfy the court about the business use versus personal use breakdown of his other expenses such as internet, phone, office space, etc.
The court went on to say:
In addition to finding that the [husband’s] evidence in support of his claimed expenses is insufficient, I find that, overall, the [husband’s] evidence lacks credibility. I find that he is not a party who can be given the benefit of any doubt. My conclusion in this regard is based on the steps the [husband] took to conceal income from the [wife], which included preparing a letter the [husband] informed the [wife] his employer had prepared and falsifying bank records. In both cases, the [husband] initially denied but eventually admitted what he had done.
The court did note that permitting the husband to claim certain car-related business expenses was appropriate, including certain amounts for things like repairs and gas. Those were the only expenses that were deducted from his gross income for child support purposes.