What is “income for support purposes”?

When it comes to child support and spousal support after separation, determining each spouse’s income for support purposes is the first step.

Although this may sound straightforward at first (I mean, we all file our annual taxes, right?), it can involve quite a detailed examination of each spouse’s sources of income.

In a nutshell, “income for support purposes” refers to the income that a spouse has available to him or her to financially support any children of the marriage and, if appropriate, the other spouse following the breakdown of a marriage or a common law relationship.

Where to start?

The total income reported at line 150 of a spouse’s income tax return and confirmed in his or her notice of assessment is the starting point. Where this income consists entirely of employment income – for a salaried employee, for example – the spouse’s income for support purposes will likely be the same amount, provided his or her most recent pay statement confirms his or her income has not materially changed since the end of the previous tax year. As salaried employees have little to no control over how much they earn in a given year, the income they receive and report for tax purposes accurately reflects the total income available to them.

Different story for those who are self-employed

Self-employed individuals, on the other hand, often have some degree of control over how much income they receive and report in a given year. For self-employed spouses operating through a sole proprietorship, this control may result from their ability to deduct business expenses from their gross business or professional incomes to arrive at their net self-employment incomes, which in turn fall into their total incomes on line 150 of their tax returns. For such individuals, determining their income for support purposes involves examining the expenses that they have claimed for business purposes and adding back (and “grossing up”) any expenses that were, in reality, of a personal nature.

For self-employed individuals operating through one or more corporations, not only are personal tax documents relevant to determining their income for support purposes but also, the corporate income tax returns, corporate notices of assessment and corporate financial statements for each company through which they operate their businesses. Although there are several legitimate tax planning strategies that involve leaving money within a corporation rather than withdrawing it as personal income in a given year, this does not mean that such retained funds are unavailable to a business owner. Rather, the business owner is choosing to delay receipt of this money and, in doing so, voluntarily decreasing his or her personal income for tax purposes. In such situations, determining a business owner’s income for support purposes not only involves examining the expenses that have been deducted from the company’s gross revenue to ensure their legitimacy as business expenses but also requires a determination of how much money the business owner voluntarily left in the company at the end of the year, after taking into account any need to reinvest funds to ensure the company’s continued operations. If it is determined that the business owner could have withdrawn funds from the company, this amount will likely be attributed to him or her as income available to pay support (in addition to the total income reported on his or her personal tax return for the previous year).

Not just about the numbers

A spouse’s earning ability is also relevant in considering his or her available income. Where a spouse voluntarily decides to either earn less than he or she can or remains unemployed despite an ability to work, income may be imputed to him or her because it is deemed to be available for support purposes but for the individual’s decision not to earn it.

Ultimately, the law expects that both spouses will earn incomes to the best of their respective abilities after separation, taking into account their education and professional backgrounds, experience, ages, health and ongoing parental responsibilities, among other factors. Where a spouse voluntarily earns or receives less income in a given year than he or she is capable of earning or receiving, or reports less income for tax purposes than that which was actually available to him or her throughout the year, the first step towards determining child support and/or spousal support can become complicated quite quickly. It is therefore important that former spouses understand the basics of what “income for support purposes” means in the family law context to ensure that they are not taken by surprise in addressing their rights and obligations in this regard following a separation.

If you have any questions about support or spousal support after separation, contact one of our experienced Family Law lawyers.