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Business vs Personal Expenses for Income Determination

Business vs Personal Expenses for Income Determination

Setting a spouse’s income in a divorce or separation is one of the most common and important exercises needed to properly address child and/or spousal support.  Income for support purposes is not always their total income, before taxes, listed in their tax return.  

In family law cases where a spouse earns business income, they almost always deduct certain business expenses incurred in the course of earning the income.  Their income is effectively their profit – the revenue generated less the expenses incurred to generate that revenue.  Expenses incurred to earn employment income, on the other hand, are very specific, and limited.  Business expense calculations when one is self-employed are more discretionary and open to interpretation.

A court decision in the 1990s by our Supreme Court addressed which expenses can be deducted from business income, and which cannot – see  Symes v Canada [1993] 4 S.C.R. 695. It was a case about a lawyer who earned business income and considered their childcare expenses to be a reasonable and necessary business expense which they should be entitled to deduct from their income. This led to a long discussion by the SCC about business vs personal expenses – personal expenses being non-deductible. It is beyond the scope of this blog to analyze this or other cases in detail, but in this decision the Court held that the childcare expenses were not properly deductible – the primary purpose of the expense was not to generate income. 

Many business expenses are a hybrid, partly business, partly personal – cell phones, travel, motor, meals, entertainment, home office, and vehicles are frequent examples. Courts often attribute a percentage of the expenses to business and another to personal benefit.  Only the percentage of expense that is business is properly deductible for support purposes, even if the CRA has allowed the full expense on your personal tax return.  One’s line 15000 – a product of revenue and expenses, among other things – is not necessarily the income a court or arbitrator will use in a divorce to set income for support purposes.

Calculating income for child or spousal support purposes is complex. Recently the complexity was increased when the Alberta Court of appeal allowed the idea of “imputing” income to a person who is considered under-employed, or under-earning. Other issues that arise include whether an expense is “capital” (and should be amortized over time) or “current” and eligible for 100% deducting in the year the current expenses is incurred. For an opinion that takes all factors into account in setting income for support purposes, you should seriously consider a case assessment with a Moe Hannah family law expert.  Failure to be educated about the law regarding income for support purposes can cost a person tens or even hundreds of thousands of dollars in over or underpaid support.