Self-Employed Professional Expenses

I’m a self-employed professional, deducting my business expenses for years without any problems with CRA. Now that I am going through a separation, I feel like I’m get the ‘full audit’. If it’s good enough for CRA, it should be good enough for my ex, right?

(1) The Legal Test

A general misconception is that family law provides answers to questions. It usually doesn’t. The law provides legal tests – frameworks – to assess the merit of an argument. The test is either detailed in the legislated law, or created by a judge facing the same argument. Then, the test may be adopted by other judges in subsequent similar disputes. 

For this issue the legal test is:

1. A self-employed person has the onus of clearly demonstrating the basis of his or her net income.  This includes demonstrating that the deductions from gross income should be taken into account in the calculation of income for support purposes.

2. The party needs to prove that the expense deducted was necessary to conduct business.

3. Where significant amounts of untaxed business income are used for payment of personal expenses, the law provides for “grossing up” business income to place a spouse’s real income on a par with what it would be in a salary context.

4. For example, common expenses that may legitimately be deduced for income tax purposes, but personally benefit the party include expenses for car, home office, travel and entertainment. 

(2) Full Disclosure

Now that you see the test, you can start to compile documents to support your claim:

  • Although the Financial Statement does not ask this information, to provide basic information about the nature of your business, how you generate gross income, including how you invoice for services provided, methods of collection and bookkeeping. 
  • You should expect to be able to explain, for each line item on your deductions including costs of goods sold, what expenses are included in the line item and how those expenses relate to your work.
  • You should expect to be able to provide, for each line item on your deductions, the total amount of the expense(s) relative to the deducted amount of the expense(s). That is, if there is any personal use component to an expense, whether you have or have not already accounted for that to CRA.
  • You should expect to be able to explain any large year-over-year discrepancies within specific line items. 
  • Your accounting software output, including Statement of Income and Expenses, Balance Sheets and general ledger.

(3) Source

Disclaimer:

Just as you ought to speak to a doctor before relying or applying medical information you find on the internet, you should speak to a legal professional before relying or applying legal information you read on the internet. If you are looking quick, competent and affordable family law advice, learn more or book your appointment.

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