Income determination for support purposes will depend largely on whether the payor is a salaried employee, a sole proprietor, or a self-employed person with their own private corporation. Below are practical tips and suggestions for each of these scenarios:
When dealing with salaried employees, a common mistake is to simply assume that Line 150 of the payor’s tax return is sufficient to determine income. There are, however, several deductions and adjustments set out in Schedule III of the Federal Child Support Guidelines which may be appropriate to use. If acting for the payor , you should definitely be aware of these so that the payor is not paying an inflated amount. Counsel for the recipient will want to be aware of these deductions to ensure that deductions/adjustments claimed by the payor are accurate.
When dealing with sole proprietors, two primary considerations are business expense deductions and the performance of “under the table cash jobs”. To deal with the former, look first to Line 150 income and compare it with gross business income. The larger the margin between the two, the more inquisitive you should be. Then examine the business deductions made under the Statement of Business Activities on the personal tax return and add back any business expenses which can be added to the payor’s personal income. Examples include telephone expenses (when using their own personal cellphone), meals and entertainment, and automobile expenses (if they use the same vehicle for work and personal uses).
There are a number of options available to determine unreported income generated from “cash jobs”. You can perform an “income/lifestyle analysis” based on bank account statements and credit card statements compared to the general knowledge of the recipient. You can also cross-examine the payor on their basic monthly budget and spending patterns.
Lastly, when dealing with self-employed people with a private corporation the process for income determination is similar to that of sole proprietors. You should look first to the Line 150 income and then compare it with the gross revenue reported under the Financial Statements of the Corporation. You can then look to the Financial Statements section to determine which expenses can be added to the payor’s income. Because of the complexity of the Financial Statements, it may be wise to retain an accountant to make sense of the reported items. Additionally, a source of income that may be worth investigating is whether the corporation has any retained earnings that are increasing year to year. Depending on the specific factual circumstances, the recipient may be able to argue that these retained earnings are not needed by the corporation and should be added to the payor’s income.
(Based on an article presented by Aaron D. Martens at the Family Law Boot Camp seminar in October 2010. To access the full article, click here.)
