How Child Support Is Calculated for Self-Employed Parents in BC

If your ex runs a business or is paid through a corporation, the income on a personal tax return may not tell the whole story. Many parents in this position worry that support will be set too low, or that they cannot see the real numbers.

This article explains in plain terms how income is worked out for support in British Columbia, what can be added back, and what options exist if you think income is under-reported. Every family's facts differ, so treat this as a general guide.

This article covers the law of British Columbia.

Where the calculation starts

In British Columbia, child support orders must follow the child support guidelines, and the Federal Child Support Guidelines supply the tables and the method. The usual starting amount is the table amount for the payor's province plus any special or extraordinary expense amount.

The table amount depends on the payor's income and the number of children, not on the recipient's income. So the key question for a self-employed payor is: what is their annual income for support purposes?

Income is determined from the Total income heading of the T1 General tax form, adjusted under Schedule III of the Guidelines. Where income fluctuates, the court may look at the last three years.

What can be added to a business owner's income

For a shareholder, director or officer of a corporation, the court may include all or part of the corporation's pre-tax income, or an amount that matches the services provided, capped at the corporation's pre-tax income. Whether and how much is added depends on the facts, so it is worth confirming with a lawyer or accountant.

Schedule III also adjusts the figures on the tax return. Examples relevant to the self-employed include:

• A capital cost allowance deduction on real property is added back.
• Payments to people who do not deal at arm's length are included unless the parent shows they were necessary to earn the income and reasonable.
• Amounts properly required for capitalization of a partnership or sole proprietorship can be deducted.
• Only the actual amount of business investment losses is deducted.

Exception: where capital or business investment losses are non-recurring, the court may choose not to apply those particular Schedule III rules.

Imputing income and unreasonable expenses

The court may impute an amount of income it considers appropriate in some situations. Examples include a parent who is intentionally under-employed or unemployed, property that is not reasonably used to generate income, or a parent who unreasonably deducts expenses.

Whether an expense is reasonable is not decided only by whether the Income Tax Act allows it. A deduction that is fine for tax purposes can still be questioned in a support case.

Two other situations are worth knowing. If the payor lives outside Canada, income is generally determined as though they were a resident of Canada, but the court determines an appropriate amount if the country has significantly higher tax rates. And if the payor earns over $150,000, the court may apply the table or set the table amount for the first $150,000 plus an amount it considers appropriate for the rest.

Getting the information and challenging under-reported income

An applicant must include the other parent's personal income tax returns for the three most recent taxation years. The respondent must provide income documents within 30 days if in Canada or the U.S., or 60 days elsewhere.

If both parents agree in writing on a parent's annual income, the court may accept that amount if it is reasonable given the income information. Be careful before agreeing to a figure you cannot verify.

If you later find evidence of a lack of financial disclosure after an order was made, that can support asking the court to change the order.

• Personal tax returns for the last three years.
• Company financial statements and corporate tax returns, where the payor owns a corporation.
• Records of payments to family members or related companies.
• Records of personal expenses paid through the business.
• Notes on lifestyle changes that do not match reported income.

What to do next

Start by collecting what you already have, such as past returns and notices of assessment, and note what is missing. Check the table for your exact income row using the official lookup, since only selected rows are shown in most summaries.

Business income cases can turn on accounting detail, so it is sensible to speak with a lawyer, and sometimes an accountant, before agreeing to an income figure or filing documents.

Frequently asked questions