Family Law Blog

Why is my income for support purposes so much higher than my total self-employment income?

Writing a Child Support Check

The process of calculating the support obligations for someone who is self-employed is much more complicated than it is to calculate support obligations for someone who is a salaried employee.  Self-employed individuals have some ability to manipulate their income, or at least how it appears on their tax return.  They can structure their affairs to pay significantly less tax than their employee counterparts.  That reality led the courts to consider the fairest way to calculate income for support purposes.


One of the reasons the Child Support Guidelines, and subsequently the Spousal Support Advisory Guidelines, were implemented was to create uniformity in the way that support is calculated for separated parents and spouses.  Ideally, people of the same financial means should be paying the same amount of support.  However, people who are self-employed have a wide range of tools available to them so that they pay less tax, and thereby have more money in their pocket, than their salaried colleagues being paid the same amount.  The courts decided that the fairest approach to determining support was to figure out a way to ensure that people with the same amount of money in their pockets every month paid the same amount of support, regardless of how they earned that money.


There are a few ways that the court may adjust the self-employed person’s income to adjust for  tax savings and other advantages of being self-employed:

1.              Some self-employed individuals create a corporation and are paid through that corporation.  This allows them to pay themselves by way of dividends, which are taxed at a much lower rate than a salary.  The Child Support Guidelines provide for a specific mechanism by which the person’s income is adjusted to take into account the tax benefits of dividends.  That adjustment results in a higher income appearing in the support calculations than appears on that person’s tax return.

2.              Self-employed individuals, who have a corporation, can leave some of the money they earn in the corporation, which means that income never shows up on the business owner’s tax return.  Business owners can thereby keep savings in the corporation and invest the entire amount, where a salaried employee has to create savings from his or her after-tax income.  The Guidelines make things fairer by requiring that any money that the business earns, which is not required for the ongoing operation of the business, be added into the owner’s income for child support purposes.

3.              Some business owners reduce their amount of tax for the family by dividing the income between several family members, such as a spouse, children, or the owner’s parents.  The amount that these family members receive may not reflect the work that they do for the business.  These payments may be designed to divide the income due to the owner across several tax returns so that it is taxed at a lower rate.  The Guidelines take into consideration payments that the business makes to non-arm’s length individuals when calculating the business owner’s income for support purposes.

4.              Business owners can also write-off many expenses in the business, some of which may also have a personal benefit to the business owner.  An obvious example is a cellular phone.  The business owner likely requires a cellular phone for business purposes, which makes it a legitimate deduction for tax purposes, but as a result, the business owner does not need a personal cell phone and avoids that expense.  Some expenses can have quite a large personal components and the business owner can receive significant benefits without reporting additional income on his or her tax return.  The Guidelines require that the personal component to business expenses be added back to the business owner’s income for support purposes.


As it is evident from above, many of these strategies have significant tax advantages for the business owner that allows him or her to pay less tax than a salaried employee.  The law requires that an additional adjustment be made to take into account the tax savings that business owners can enjoy but salaried employees cannot.  To accomplish this, the law does not just add back the amount of personal expenses or other amounts that do not appear on the business owner’s tax return, but also adds back the tax savings as well.  This is called “grossing up” the support payers income for tax.  For higher income individuals, this additional amount can be significant.  The highest tax bracket is around 43%.  This means that the law requires that for every dollar of income that the business owner is able to take off his or her tax return, $1.43 is added back to that reported income for support purposes.  This is fair because the adjustments looks at how much money the business owner gets to put in his or her pocket and then bases support on how much a salaried employee would have to earn to have that same amount of money in his or her pocket.


The above are just some of the examples of adjustments to reported income that the law makes when determining income for support purposes.  Income for support can be much higher than the “total income” as reported on a tax return.  In any support case, it is important for both the support payor and the support recipient to speak to a lawyer to make sure that the level of support is appropriate.

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If you would like more information about child support and spousal support and how self-employed person’s support obligation is calculated, then pick up a copy of this easy-to-understand book on Ontario Family Law.  Not only does it explain those issues, but it explains most family law and divorce issues, the court process for support and the options to having support determined in court. 


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A lot of money can be at stake in support cases.   Child support or spousal support can be far to high or far to low if the income calculations are not done properly.  To ensure your support amount is right, you really should discuss the specifics of your situation with a good family lawyer.  To contact Certified Specialist in Family Law, John Schuman, either fill out the form below, or call the phone number at the top of this page.  You can also use the form below to comment on this page.   If you are one of the many people who has found this page helpful, please share it on your social network using the buttons at the bottom of the page.

 


Child Support Does Not End At Age 18

University Student

Unlike several jurisdictions of the United States, child support in Canada does not automatically end for a child when he or she turns 18 years old.  In Canada, child support continues for children after their 18th birthday in one of two circumstances:

  1. If the child is disabled, such that he or she remains dependent and cannot obtain employment that is adequate to meet his or her needs; or,
  2. When a child is enrolled full-time in a program of education.  In theory, that program of education must be career-oriented and not just an excuse for the child to remain dependant.  There is a debate over whether avictory lap in high school, where a child who spends an extra year in high school, qualifies the child to continue receiving child support.  Some factors to be considered are if the child is spending that extra year to hang out with friends, or to avoid entering the workforce or postsecondary education, rather than continuing their studies to meet the educational requirements of a particular program.  Some judges suggest that a child is only entitled to child support for a “victory lap” if the extra year is related to career or education advancement.


An important difference in child support for children over 18 years of age is that the child support tables no longer presumptively apply (although most judges use the tables as a starting point) and other arrangements can be made for their support to suit their particular circumstances.


For children over 18 years old, who are enrolled in a full-time program of education, their educational expenses may be special or extraordinaryexpenses.  This means that the child’s parents must contribute to postsecondary education, tuition, books, residence, and other related expenses in proportion to their incomes. 



This does not mean that children of separated parents are automatically entitled to have their entire postsecondary education paid for by their parents while their peers that have intact families have to pay for school.  Judges are supposed to consider

  1. what arrangements would have been made for the children’s education if the family was still intact
  2. what contribution the child should make to his or her own education.  The longer a child spends in school, the more that the courts expect the child to contribute to the cost of that education.   The courts expect children to apply for grants and scholarships and to incur a reasonable amount of student debt in light of their parents’ financial situation.  The courts also expect children to work, unless their parents are exceptionally wealthy and can afford to send the child on other “enrichment programs”, such as trips to Europe for the summer.  University and college students should get summer jobs, assuming that is possible, and use some of their earnings toward school.  The longer children are in post-secondary education, generally, the more judges expect them to contribute to their education.


However, where it is not clear how these factors should impact on the amount of child support, judges err on providing support to the child.

May paying for child's expenses

It is common for the child support payer to pay full table amount of support while the child is at home from school and a reduced amount while away at school.  The logic behind this is that a portion of the base child support is to pay for food and accommodation, but the parents are already sharing the cost of food and accommodation as special or extraordinary expenses.  However, the recipient parent is also maintaining a home for the child to come back to, so some amount of support is appropriate to cover that expense.


Since the tables no longer presumptively apply, parents of adult dependent children are free to agree to other arrangements than the above to share the child’s expenses.  Sometimes one parent pays all of the post-secondary costs and stops paying base child support.  Sometimes the parents each agree to be responsible for specific expenses. 


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11 - Child Support's Special and Extraordinary Expenses

Another situation that sometimes comes up is when a child takes a year, or more off school and then returns to school full-time.  In that situation, the child may once again become a dependent, and that may entitle him or her to child support.  However, the longer a child has been in the workforce, the more a judge will expect that child to have the money to put towards education before looking to parents.  Also, child support is likely not appropriate if a child’s employer is sending him or her to school.  For example, it is harder to hit up parents for child support when an employer gives a child leave to do an MBA with a promise of a better position and higher salary on return.  Without separated parents, that child would have taken out a loan because that would be the smart financial decision. After a child turns 18, child support may not end, but the parents have more freedom over how they will share the child’s expenses.  


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Since so much about the particulars of the circumstances can affect child support for a child over 18, and since there are many options for how child support can be paid, the best thing to do to figure out child support for your situation is to set up a consultation with a good child support lawyer.  Contact Certified Specialist in Family Law, John Schuman, by calling 416-446-5847, emailing him, or using the form below.  We respond promptly to all inquiries. 


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To learn even more about child support, for kids over and under 18, and for kids with special expenses, you may want to get a copy of this easy-to-understand book on the basics of Ontario Family Law as a paperback, or as a $9.99 eBook for Kindle or Kobo or as an iBook for iPad, iPhone or Mac.  You may also want to listen to this podcast or watch this video. You can also use the search on the right to find lots more articles on child support.


If you would like to comment on this article, please use the contact section at the very bottom of the page.  If you have found this article useful, please feel free to share it on your social network, using the buttons below, so that your friends and colleagues can also learn a little bit more about child support.

Comments:

Thank you.  

I have a child turning 19 who is special needs and know that the absent father will think he will not be required to continue.  My daughter functions at the age of about a three year old, so needless to say, life will never be independent for her.

Again, thank you for posting.

Pam


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What Does the Term "Custody of a Child" Mean

Baby boy and baby girl with a custody order

When there are children of the marriage, one of the things that family lawyers hear most frequently at initial consultations is that the client wants either “custody” or “joint custody” of those children.  However, it is rare for those same clients to understand what the term “custody” means.  Custody no longer refers to where a child lives.  In Ontario Family Law, the term “custody” refers to who makes certain decisions with respect to that child.  In many cases, if not most cases, those decisions regarding the child are not controversial and so who has custody makes little difference.


When parents separate there are two important groups of issues that they, or if they cannot agree, a court or arbitrator, must decide with respect to the children.  Those groups of issues are as follows:

(a)            How much time the children will spend with each parent and when they will spend that time with each parent;

(b)           Who will make the big decisions in relation to the child.  Those big decisions are decisions related to education, major medical treatment, religious upbringing and extracurricular activities in which both parents will have to be involved.


It is the decision making, as described in Paragraph (b), that relates to who has custody.  If a parent has “sole custody”, without any other limitations, then that parent can make those decisions in relation to education, medical treatment, religion and extracurricular activities by him or herself.  If the parents have “joint custody”, then they must make those decisions together.  Ironically, it is fairly rare for parents to have a disagreement over what school a child should attend, whether the child should have medical treatment, or what religion the child should be raised in.  So for most separated families who has custody really makes little difference.  In “high conflict separations”, the parents fight with each other over almost everything.  They will fight over issues that they might not have fought over while they were together.  Sometimes they will fight over simple things like what school the child should go to just for the point of having the fight.  In those cases, joint custody does not work well.


Sole custody does not work well where one parent wants the other parent out of the lives of the children.  If that parent has sole custody he or she may use it to make decisions to deprive the children of a relationship with the other parent.  For example the parent may choose to have the children go to a school that is far away from the other parent or that in some way makes it difficult for the parent to visit with the children.  Judges try quite hard to keep parents who are not supportive of the children’s relationship with the other parent from having sole custody.  They either try to order joint custody or give sole custody to the parent who will facilitate a relationship with both parents.


Unfortunately, custody is usually more of a status symbol than a legal necessity.  After separation, parents like to say that they have “custody” of their children.  Parents will fight to have that “status symbol” when they would not have thought over the decisions that are made by the person who has custody.  For that reason, it is becoming increasingly popular for separation agreements and court orders to not mention the word custody at all.  Instead, the agreements, or court orders, state where the child will be living and when and which parent gets to make which decisions.  When deciding those issues, the courts usually look at what went on during the marriage in terms of what time the children spend with each parent and who made the decisions during the marriage.  If possible, courts try to leave things the way they were.


The only time that the term “custody” can become important is with regard to international disputes in relation to a child.  If one parent wants to abduct a child to another country it can make a difference which parent has “custody” when there are legal proceedings to have that child returned.  However, when one parent acts unilaterally to remove a child from the other parent’s care, judges in Ontario often do not have concerns about making an emergency custody order in favour of the parent who is left behind.  In deciding whether a child should be returned to another jurisdiction, judges in Ontario are also more interested in what the parenting situation looked like before the removal than who had the label of custody.  Put another way, when Ontario Family Court judges are considering what parenting orders to make, how the parents parented the child in the past is usually more important than whether one of them had a label of “custody”. 


There are also different types of custody.  Parents can have sole custody, joint custody, shared custody or split custody and they can also have one of those types of custody combined with parallel parenting.  For more information about the different types of custody, what they mean, and how family court judges decide between them, watch this video.


If you would like to know more about what “child custody” means, or how judges decide which parent gets custody, listen to this podcast or read this page.  For much more about child custody, child support, and the family court process, pick up a copy of this $20 easy-to-understand book on the basics of Ontario Family Law.

Guide to the Basics of Ontario Family Law Available on Kindle


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If you would like to comment on this page, or if you would like to contact John Schuman, please use the form below.   This is one of the most popular pages on this site and it has been shared many, many times.  If you would like to share it with people in your social network, so your friends and colleagues will understand what it means to have have custody of a child, please fee free to use the buttons at the bottom of this page.



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