This is the fourth article in my "Imputing Income" series, which will explore the Court's authority to impute income to a support payor who has unreasonably deducted expenses from their income.
Legislative Authority
Section 19(1)(g) of the Child Support Guidelines says income may be imputed when:
The parent or spouse unreasonably deducts expenses from income.
Section 19(2) of the Child Support Guidelines states that:
For the purposes of clause (1)(g), the reasonableness of an expense deduction is not solely governed by whether the deduction is permitted under the Income Tax Act.
Overview
The issue of reasonable deduction of expenses commonly arises when there is a self-employed person who claims that their net business income, as reflected on their income tax return, should be their income for the purposes of calculating child and/or spousal support. In many cases, the Court needs to "look under the hood" to determine the true nature of a self-employed payor's income.
A self-employed person has the onus of clearly demonstrating the basis of their income including demonstrating that the deductions from gross income should be taken into account in the calculation of income for support purposes. This requires proof of deductions claimed. Deductions which may be accepted for tax purposes but have a personal component (such as cellphones and cars) are often added back into income for child support purposes (Makhmadaliev v Marasulova, 2023 ONSC 6938).
In Templeton v Nuttall, Justice Chappel explained that in order to impute expenses that have been deducted against income for tax purposes back into a parent's income under Section 19(1)(g), it is not necessary to establish that the party who claimed the deductions acted improperly or outside the norm for claiming expenses in the income tax context. The issue is whether the full deduction of the expense results in a fair representation of the actual disposable income that should be available to the party for personal expense and child support. The Court must balance the business necessity of the expense against the alternative of using those monies for the purposes of child support. The underlying principle here is that payor parents should not be permitted to manipulate their financial affairs so as to prefer their own interest over those of the their children (Templeton v Nuttall, 2018 ONSC 815).
Principles from the Case Law
In Decker v Fedorsen, Justice Sherr heard a motion regarding support in which the Applicant sought to impute income to the Respondent. The Respondent was a self-employed financial planner and the sole shareholder of his financial planning company.
The Applicant claimed that the Respondent had manipulated his financial records to declare taxable income that was far less than what he really earns, and that he was deducting unreasonable expenses from his business that should be added back to his income for calculating his support obligations.
Justice Sherr found that the Respondent was "unable to adequately explain how his personal income was calculated in his income tax returns or how his business income was calculated in the corporate financial statements".
Justice Sherr held that the principle that a self-employed person has the onus of clearly demonstrating the basis of their net income, including that the deductions from gross income should be taken into account in the calculation of income for support purposes – applies equally where the person's employment income is derived from a corporation that he or she fully controls.
In Decker, the Court held that the evidence demonstrated that the Respondent and his accountant "have aggressively deducted expenses" in his company to reduce the Respondent's income. For example, he declared meals and entertainment expenses of close to $2,000 per month and in the circumstances, the Court found "this is exorbitant". Furthermore, Justice Sherr found that many of the other expenses in the corporate financial statement were very high or could not be explained by the Respondent. Justice Sherr held, "I had no difficulty finding that the expenses claimed in the corporate financial statements were not an accurate reflection of its actual expenses".
Justice Sherr also grossed-up the Respondent's income because he was paying tax on substantially less income than he was actually earning. Justice Sherr imputed income in the amount of $137,143 including that gross-up.
Decker v Fedorsen, 2010 ONCJ 618.
In Monahan-Joudrey v Joudrey, Justice Chappel heard an uncontested trial which included an assessment of income for the purposes of support for both parties as set-off child support was an issue. The Applicant was a certified hairdresser and aesthetician. She did not submit copies of her relevant Income Tax Returns with all attachments or any documentary evidence regarding her current year-to-date income. She only provided two Tax Return Summaries and one Income Tax Return with some attachments. She claimed expenses against her total self-employment income for the past several years although she did not give specifics about what those expenses were. The Applicant did not put forward any documentary evidence to support her business expense claims.
The Court reiterated that there is an obligation on the part of both parties in a support case to adduce the evidence required for the court to make a fair and reasonable assessment of their respective incomes for the purposes of the child support calculation. If they fail to do so, they run the risk of the court imputing income to them.
Justice Chappel held that the Court had insufficient information about the business expenses which the Applicant claimed against her gross business income to determine whether those business expenses were reasonably deducted from income and no evidence about whether those expenses were similar at present. In addition, there was significant cause for concern that the Applicant's business expenses were unreasonably deducted from income for the purposes of calculating support. For example, in 2008, her business expenses represented 63% of her gross self-employment income; in 2009, they represented 64% of her gross self-employment income; and in 2010 they represented 69% of her gross self-employment income.
Justice Chappel held that a party who seeks to deduct business expenses from their income for support purposes has an obligation to explain the reasons for the expenses and how they were calculated, and must provide documentary proof of the expenses in an organized manner so that the court can make a proper determination as to the reasonableness of the expense from the standpoint of the child support calculation. The Court further stated, "It is not appropriate for a party to request a judicial determination of their income, fail to provide the information required for the judge to do so, and then simply ask the court to 'take their word for it' or to 'take a wild guess' based on minimal information and hope for the best".
If a party seeking to deduct business expenses from income fails to provide meaningful supporting documentation or other evidence in respect of those expenses, an adverse inference may be drawn by the court in making the income determination. In this case, the Applicant to provide sufficient evidence supporting the business expenses she deducted from her income, and Justice Chappel drew an adverse inference against the Applicant and imputed income to her.
Monahan-Joudrey v Joudrey, 2012 ONSC 5984.
The case examples above illustrate the importance of producing fulsome disclosure to support business expenses that are deducted from income in support cases. A self-employed payor cannot assume that their net business income will be considered their income for support purposes, and must be prepared to defend and prove their business expenses great and small alike.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
