In Canada, income tax laws are are governed by the Income Tax Act. The law allows individuals (and corporations) to deduct expenses from the income that they earned before calculating their Net Income. Net Income is the figure which income tax is calculated from.

However, there is another term called Net Income For Support, which is based on Federal Child Support Guidelines. The courts have held that expenses which are allowed to be deducted under the Income Tax Act, must be added back in when calculating the Net Income For Support.

Use Jim and Pam as an example. Jim is a manager at an office who is paid twice per month, and is not able to deduct any expenses before paying taxes. Pam owns her own small business, and is allowed to deduct various expenses, resulting in a lower taxable income. While Pam pays less taxes, the law adjusts her taxable income (often called Line 15000 income) upwards for support purposes to reflect that her declared income includes expenses that the rest of the population would have to pay with after-tax income.

Some common examples of expenses added back into Line 15000 income include:

• Rent / Utilities for a home office
• Cell Phone
• Personal Meals
• Car Expenses

The standard that courts have held is that the person claiming the expense must show that it was purely business-related in order to have it deducted from their Line 15000 income. What that means is that a business owner cannot just submit a financial document which lists annual expenses (often called an Income Statement) and expect the other party to be satisfied with their claims.

This is a very complicated topic – if your spouse owns a small business, you need Divorce Finances to be on your side to efficiently show how much income they are REALLY earning, and how much support you are entitled to. Reach out through a free 30 minute consultation to see how we can help.