Kim Kieller, Partner

In the mid-1990s there were serious concerns in regard to child support.  Firstly, child support was still taxable in the recipient’s hands and deductible by the payor.  This lead to a  great deal of controversy and a hearing at the Supreme Court of Canada in regard to the constitutionality of the Income Tax Act.  Secondly, child support was determined in both  negotiated agreements  and by the Courts  on a very ad hoc basis, using the “Paras” calculation.  The name/adjective, “Paras”, resulted from an early child support court decision.  The calculation for support was determined  by a party (usually the recipient) drafting a budget for the children and then the parties respective  incomes were ascertained.  The mother and father’s full incomes were added together and a percentage calculated  which was the amount the payor was  to pay of the budgeted amount.  In those days there really was not a lot of argument in regard to how a party’s income was calculated – it really was the budget that was usually the contentious issue.  Lawyers, academics and government officials were aware that the Paras calculation lead to disproportionate amounts being paid to children in different cases – even with the same family income.  After much consideration and debate, the Federal Child Support Guidelines (CSG) were legislated into law in 1997.  Child support was no longer taxable and the income of the paying party was the amount to consider in arriving with the charted guideline income.  The only issue on basic (“base” “section 3” or “table”) support was the payor’s income.

As a result of the Guidelines income became a focus in the determination of support.  It is a common misunderstanding that only one’s Line 150 (from a tax return, known as a T-1) is how support is to be paid.  In some cases this is true (i.e. for a person who only receives a T-4 and interest  (T-5), but not in all cases.  Some examples follow.

If there is a situation where there is an individual who earns commission, they will claim expenses from their commission income such as promotion, vehicle costs, gifts, association fees etc.  The Guidelines do speak to this and between the application of the CSG and the case law, reasonable – meaning usually not all – expenses are deductible.  Therefore, when one reviews the first page of the tax return, there will be a place where deductions are taken away from gross commission income.  One has to review the actual expense and add back  to the income expenses that are not reasonable.  The usual subjects are “home office”, “cell phone”, “vehicle”, “miscellaneous”, meals and entertainment, etc.  anything that is deemed  personal is added back to the income for support purposes.

In the event of a self-employed individual, there will be an income and expense statement filed with the return or as a part of the return.  Again, one starts with the net income in Line 150 of the tax return and then reviews the expenses deducted from the revenue of the business or professional practice.  The same items as above are added back and one also has to check if children are paid, spouses are paid, is there a rational explanation for soft expenses such as depreciation?  Of course, even before the expenses are checked the revenue is also reviewed and considered – is there bartering, cash sales that are not reported, etc.?

Corporations are also complicated.  The same calculations are done as in the previous two paragraphs, but in addition, one checks the retained earnings (profits kept in the corporation and not withdrawn by the shareholder).  The query then becomes what are the reasonable expenses and then if there is a profit, how much of the profit should be added back to the payor’s line 150 income. There is no clear direction.  Corporate savings are essentially deferred income as the profit is taxed on a lower basis then personal income.  There is an argument that some retained earnings stay in the corporation for retirement purposes especially if the payor does not have an employment pension or significant RRSPs.  Each case is decided on its own facts and, as in any of the above situations it is important to have legal (and usually accounting) advice.

The last point is that the addition to the Line 150 income is the tax consequences.  If an individual has deducted an expense from his or her income and the amount deducted is added back to his or her income, one must equate the increased income to a taxable income. The courts call this process a “gross up”.  For example if one is a teacher, the cost of running a car is paid in after tax income.  If one has the ability through a business or corporation to deduct the vehicle expense from the business income then the resulting business income has taken into account a deduction that the above fictional teacher does not have.  Therefore in order to ensure that everyone pays support in the same amount on the same income, the court will add a notional tax to the self- employed person for the deduction when it is added back to his or her income for child support.  For example, for tax purposes a business owner may be able to deduct all of his vehicle expenses which are $10,000.  However for child support purposes if the court finds that there is a personal use of the vehicle for fifty percent of the time.  $5000 will be added to the payor’s income.  In addition as the payor never paid tax on the $5,000 (as he or she deducted the full amount from the revenue to determine his or her taxable income), the court will gross up the $5,000 by the notional tax rate – for example if that tax rate is 30% – $5,000 X 30% = $1,500 so $6,500 will be added to the line 150 income for that person.

The calculation of income is never an easy task.  Accountants and lawyers may be necessary to review income before the child support agreement is finalized


Kim Kieller is a partner at Barriston and has practised family law for over 26 years.  She has been nominated by her peers as a “Best Lawyer in Canada” for the past four years.  Kim restricts her practice to family law matters involving complex property and income calculation cases and the division of business assets on a separation.