How is a self-employed parent's income worked out for support in Ontario?

For a self-employed parent in Ontario, income for support starts with the "Total income" on the tax return, which already reflects business expenses, and is then adjusted: some deductions are added back, such as salaries paid to relatives that were not reasonable or necessary and capital cost allowance on real property (Child Support Guidelines, Schedule III). A court can also look at three years of income, and can impute more income where expenses are unreasonable or income has been diverted (ss. 17 and 19). The same income figure is the starting point for spousal support.

How a self-employed parent's income is worked out, step by step

Support depends on income, as our child and spousal support page explains. For employees, the pay stub tells most of the story. For a sole proprietor, contractor, consultant or partner, the tax return reports what is left after business expenses, and the guidelines ask whether that number fairly shows what is available to support the children.

1. Start with the T1. A parent's annual income is determined using the sources under "Total income" in the T1 General return, adjusted under Schedule III (Federal Child Support Guidelines, s. 16; Ontario's O. Reg. 391/97 has the same rule). For a sole proprietor, business income on the return is net of expenses claimed.
2. Apply the Schedule III adjustments. Add back amounts deducted for salaries, wages, management fees or other payments to people the parent does not deal with at arm's length, unless the parent shows they were necessary to earn the income and reasonable (Schedule III, s. 9). Add back capital cost allowance claimed on real property (s. 11). Deduct an amount properly required by the partnership or sole proprietorship for capitalization (s. 12), and an "additional amount" earned in a prior period that is included under ss. 34.1 and 34.2 of the Income Tax Act (s. 10).
3. Test the expenses. A court can impute income where a parent "unreasonably deducts expenses from income" (s. 19(1)(g)). The fact that the Canada Revenue Agency allowed a deduction does not settle whether it is reasonable for support (s. 19(2)).
4. Look at the pattern. If the latest year is not the fairest measure, the court can consider the last three years and set an amount that is fair and reasonable in light of any pattern, fluctuation or one-time receipt (s. 17(1)).
5. Exchange the documents. A self-employed parent applying for, or served with, a child support claim must provide three years of personal returns and notices of assessment, three years of the business's financial statements, and a breakdown of payments to non-arm's-length people (s. 21(1)(a), (b) and (d)). The respondent has 30 days if living in Canada or the United States (s. 21(2)).
6. Use the figure for spousal support too. The Spousal Support Advisory Guidelines start from the same definition of income under the Federal Child Support Guidelines (SSAG, chapter 6.1). Our page on how the amount of spousal support is worked out continues from there.

Common adjustments to self-employment income

What changes the answer

• Incorporated or not. This page deals with sole proprietors and partners, whose business income flows onto the personal return. If the business is a corporation, the question becomes how much of the company's pre-tax income to count, which s. 18 governs. Our page on corporate income and support covers that.
• Partnership income. A partner must confirm income, draw and capital in the partnership for its three most recent taxation years (s. 21(1)(e)). The capitalization deduction in Schedule III, s. 12 is often argued in partnerships that require partners to leave money in the firm.
• Cash. Unreported cash income is the clearest case for imputation, but a court needs evidence: bank deposits, lifestyle spending, past statements, invoices. Without evidence, the argument is weak.
• Deliberately earning less. If a parent is intentionally under-employed, a court may impute income, except where that is required by a child's needs or the parent's reasonable educational or health needs (s. 19(1)(a)).
• The online Child Support Service is not available. Ontario's Child Support Service cannot be used if the paying parent is self-employed, earns income in cash, or is a partner or majority shareholder of a business (ontario.ca). These cases go by agreement, arbitration or court.
• Property overlap. The same business may also be valued for equalization, which our page on a business owned by one spouse explains. Raise the property and income questions together so the same money is not counted inconsistently.

A worked example

For example, take Nadia, a self-employed renovation contractor in Toronto. This is a hypothetical. Her T1 shows net business income of $96,000 for last year, after these deductions: $30,000 in wages to her new partner, who answers the phone a few hours a week; $14,000 of vehicle costs for a truck also used for family driving; and $6,000 of capital cost allowance on a small workshop building she owns.

• Capital cost allowance on real property: added back under Schedule III, s. 11: +$6,000.
• Partner's wages: if the evidence shows a fair wage for the work is about $10,000, the other $20,000 may be added back under Schedule III, s. 9: +$20,000.
• Truck: if half the use is personal, $7,000 might be treated as an unreasonable deduction under s. 19(1)(g): +$7,000.

Adjusted income could then be about $129,000 rather than $96,000. If her income over the last three years was $70,000, $96,000 and $90,000 before adjustments, a court might also consider whether one year is out of line (s. 17). The numbers are invented; how much is added back depends on proof, and a business valuator or accountant's report is often used.

Common mistakes with self-employment income

• Using the "Total income" figure as the final answer. It is the starting point. Schedule III and s. 19 adjustments routinely change it.
• Assuming a CRA-approved deduction is safe. Section 19(2) says tax deductibility does not decide reasonableness for support.
• Paying family members without records. The parent must show non-arm's-length payments were necessary and reasonable, so job descriptions, hours and market rates matter.
• Late or partial disclosure. Failing to provide income documents opens the door to imputed income, an adverse inference and costs up to full recovery (ss. 22 to 24).
• Cutting work after separation. A sudden drop in billings invites the question of intentional under-employment under s. 19(1)(a). A genuine drop is better raised openly, through a request to change support; our page on changing spousal support explains that process for the spousal side.
• Arguing only about the latest year. If income swings, prepare a three-year picture under s. 17 rather than defending a single number.

What to do this week

1. Collect three years of personal tax returns with every schedule, plus notices of assessment and reassessment; our page on financial disclosure lists what a property claim adds.
2. Get the business's financial statements, general ledger and bank statements for the same three years.
3. List every payment to a relative or partner, with what they actually do and how many hours.
4. Separate personal and business use of vehicles, phones and home space, with a short explanation for each.
5. Ask your accountant for a note on any amount the business must keep as working capital.
6. Book a free consultation before you exchange financial statements, so your income is presented accurately the first time.

Frequently asked questions

Can personal expenses run through my business be added to my income?

Yes, if they are unreasonable deductions. Section 19(1)(g) allows income to be imputed where expenses are unreasonably deducted, and s. 19(2) makes clear tax rules do not decide the point.

Which year's income is used if my business income goes up and down?

Usually the most current information, but where that is not the fairest measure, the court can look at three years and choose a fair and reasonable amount (s. 17(1)). Our page on income for support covers the general rules.

What documents does a self-employed parent have to give?

Three years of personal returns and notices of assessment, three years of business financial statements, and a breakdown of payments to non-arm's-length people (s. 21(1)). Ongoing, the same documents can be requested once a year after an order (s. 25), as our page on yearly income disclosure explains.

Can I use the Ontario online child support service?

Not if the paying parent is self-employed or earns cash income. Ontario lists both as reasons the service cannot be used.

Does the same income apply to spousal support?

The Spousal Support Advisory Guidelines start from the Federal Child Support Guidelines definition of income, including Schedule III and s. 19 (SSAG, chapter 6.1). Some differences exist, for example the SSAG do not treat social assistance as income (chapter 6.2).

What if the other parent hides cash income?

Collect what evidence you can: deposits, spending, invoices, prior statements. The court can impute income for diverted income or missing information (s. 19(1)(d) and (f)). Our page on a spouse hiding assets explains the disclosure tools.

Sources

• Federal Child Support Guidelines, SOR/97-175, ss. 16, 17, 19, 21 to 25 and Schedule III
• Child Support Guidelines, O. Reg. 391/97, ss. 16 to 19 and Schedule III
• Spousal Support Advisory Guidelines (2008), chapter 6
• Government of Ontario, Set up or update child support online