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Determining Support For The Self-Employed

Understanding Income for Child and Spousal Support

The first step in calculating child support and spousal support is determining income. For salaried employees, this is straightforward. For self-employed individuals, it is often far more complicated.

Why Self-Employment Creates Challenges

Self-employed individuals often reduce their taxable income by writing off business-related expenses. These deductions are legitimate from a tax perspective. They are designed to lower profit, which lowers the amount of personal income tax owed.

It makes sense financially. The more expenses you write off, the less tax you pay. But when it comes to family law, those deductions can create complications.

Support Calculations Use a Different Standard

The income used to calculate support is not always the same as the income reported on a tax return. Family law looks beyond the surface to determine true income, especially when deductions are involved.

Hard vs. Soft Expenses

Hard expenses are typically accepted as necessary business costs.
Soft expenses, on the other hand, may be viewed as personal benefits and can be added back to income.

Hard Expenses

Office rent (outside the home)
Employee salaries
Advertising
Professional services

Soft Expenses

Cell phone used for personal and business calls
Restaurant meals
Home office supplies
Car used for both personal and business reasons

How Expenses Are Challenged

Both parties have a role in reviewing expenses:

The self-employed person must prove that the expense is necessary for generating business income.
The support recipient can challenge the deduction, arguing that it provides a personal benefit rather than being a true business expense.
These disagreements are resolved through a review of the business’s financial statements, often with the help of a lawyer or accountant.

Example: Cell Phone Deduction

Let’s say a business owner deducts $2,000 per year for their cell phone. However, 50 percent of the phone use is personal. In this case:

$1,000 could be added back into their income

But that’s not the full picture

To account for income taxes, the law uses a concept called imputed income. Since an employee would need to earn more than $1,000 to take home $1,000 after taxes, a grossed-up value is used.

Example Calculation:

$1,000 in disallowed expenses
40% tax bracket
$1,667 is the gross income required to net $1,000
$1,667 is added to support income, not just $1,000

This Does Not Affect Taxes

It’s important to understand that this income adjustment is for support purposes only. It does not change your actual taxes. Family court is separate from the Canada Revenue Agency, and tax officials do not enforce private separation agreements.

Once Income Is Determined...

Once the adjusted income is calculated:

Child support and spousal support amounts can be set
Any child-related expenses that are shared in proportion to income (like daycare, medical, or extracurricular costs) will also use this updated income amount

Collaborative Process: A Private Path Forward

If you are self-employed and going through a separation, the Collaborative Process may be a better option than family court. It offers:

Privacy
Flexibility
Cost-effective problem solving
Control over how your financial information is handled

Unlike court, the Collaborative Process keeps your financial records out of the public eye and allows for creative solutions that reflect your business reality.

Our Experience Can Help You

Determining income for self-employed individuals is rarely simple. Every case is different. In some situations, a chartered accountant may be brought in to help with the analysis.