Self-employed financial disclosure – Part One

By Luke's Place | July 19, 2022

Please take a look at our new resource, a two-part series on supporting women who are dealing with a self-employed ex-partner.

Part one will provide an overview of the T1 income tax return and some general tips on supporting women who are reviewing a self-employed party’s financial statement, tax returns and supporting documentation. Part two will cover the types of common expenses a self-employed party will often deduct from their income and how you can support a women who is dealing with a self-employed ex-partner.

When the Federal Child Support Guidelines (the “Guidelines”) were put in place, one of the main goals was to create certainty for both payors and recipients. Payors who earned a specific income and had the same number of children would pay the same amount of child support.

In situations where a woman is dealing with an ex-partner who is self-employed, she may face a unique set of challenges. Her ex-partner may intentionally show significant business losses as a way of avoiding support obligations or provide little to no financial disclosure in order for her to rack up her own legal fees in making multiple requests for disclosure.

Legal Onus of Self-Employed Income & Expenses[1]

A self-employed person has to demonstrate the basis of their net income. This includes being able to prove that the deductions from gross income should be taken into account in the calculation of income for support purposes.

This principle also applies where the person’s employment income comes from a corporation that they fully control.

A self-employed person has an obligation to put forward adequate and comprehensive records of income and expenses. The recipient should be able to determine the amount of child support based on the disclosure the payor has provided.  

Imputing Income

Section 19 of the Guidelines provides the Court with broad powers to impute income to individuals as “appropriate in the circumstances”. The ability to impute income is found in cases where:

  • One person is intentionally under-employed or unemployed
  • The payor has failed to provide income information when they were under a legal obligation to do so (i.e. court order)
  • They unreasonably deduct expenses from income (i.e. significant motor vehicle expenses when they work from home regularly)
  • Their property is not being reasonably used to generate income (i.e. if there are rental properties that are not being used)

Even if the expense is incurred legitimately, it may be “added back” if it is not in proportion to the level of income earned. Judges will often consider the lifestyle of the parties and each person’s spending patterns.

While the T1 is the primary source of information about a self-employed individual’s income, it is important to also understand the types of transactions that it does not include.

Some businesses are more likely to have unreported (cash) income than others. For example, a mechanic is more likely to be paid in cash than an individual who works for a major company who most often is paid by cheque or automatic deposit.

T1 Income tax return[2]

The T1 income tax return is the starting point for gathering information about a self-employed person’s income for the purpose of calculating support. Depending on the nature of the business, the relevant information (i.e. the net income earned by the self-employed individual) should be captured in lines 135 to 143 on the T1. Where the income is from rental of a business or property, this will be reflected in line 126.

Each of these individual lines are generally supported by a form attached to the income tax return. There are different forms depending on the nature of the income. For example:

  • T2124: Statement of Business Income
  • T2032: Statement of Professional Activities
  • T2042: Statement of Farming Activities
  • T2121: Statement of Fishing Activities
  • T776: Statement of Real Estate Rentals

Expenses listed on the T1 forms

The most common categories of expenses that are important when imputing income to a self-employed person can be found in the following lines:

  • Line 8521: Advertising
  • Line 8760: Business tax, fees, licenses, dues, memberships and subscriptions
  • Line 8710: Interest
  • Line 9690: Insurance
  • Line 8871: Management and administrative fees
  • Line 8523: Meals and entertainment
  • Line 9281: Motor vehicle expenses
  • Line 8810: Office expenses
  • Line 8810: Supplies
  • Line 9060: Salaries, wages and benefits
  • Line 9200: Travel
  • Line 9220: Telephone and utilities
  • Line 9926: Capital cost allowance
  • Line 9924: Business use of home expenses

Tips for reviewing the tax return and supporting documentation

If you are supporting a woman who has a self-employed ex-partner, consider the following when looking through the payor’s tax returns:

Tip 1: The nature of the business

  • What product or service does the business provide?
  • Where does the business operate from? What is its mailing address and does it differ from its location?
  • Where are the customers located?
  • How do the customers pay for the product or service (i.e. cash, credit card?)
  • Do the types of expenses incurred by the business actually make sense?
  • Does the business pay for its expenses with cash?
  • Are there separate bank accounts for personal vs business use or is only one account used for both purposes?
  • Are there business loans or lines of credit in place? Are there corresponding loan applications?
  • Is there an accountant or bookkeeper involved to cross-check the records prepared by the individual?

Tip 2: Areas that require further explanation

  • Are there continuous business losses? If continued loss is experienced, it may be reasonable to expect the individual to either stop operating the business or make changes to the business to make it profitable.
  • Is there a decline in revenues or increased expenses post-separation in comparison to when the parties were together?
  • Is the payor’s personal credit card being paid for by the business?

Tip 3: Take a look at the general ledger or detailed listing of expenses[3]

  • A review of the expenses can provide useful information and easily highlight expenses that do not appear to be business related such as clothing purchases, personal grooming, vacations, etc.

Tip 4: Use of industry and statistical information[4]

  • The Statistics Canada Survey of Household Spending can be a useful source as a basis to estimate the approximate income level required to support average household spending in the absence of other information

Footnotes

[1] Gordon v. Wilkins 2020 ONCJ 115 at para 31-33

[2] Stacie Glazman and Sharon Griffin, The Art of Section 19 Add Backs

[3] Steven Ranot, Income Determination for Matrimonial Purposes (2017)

[4] Steven Ranot, Income Determination for Matrimonial Purposes (2017)

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