Imputing Income for Child or Spousal Support
For as long as there have been taxes, there have been those seeking to hide income. And in family law, hiding income can be an issue when calculating child support or spousal support payable after separation.
Fortunately, determining income in most family law cases is straightforward. If the person who pays child support or spousal support is an employee, a look at their total income – line 150 of their tax return – is generally all that is needed. However, when a payor’s financial statements do not accurately reflect their income for spousal support or child support purposes, the Court can ‘impute’, meaning to make up additional income. The Federal Child Support Guidelines outline various factors to consider when imputing income in a family law case:
- a spouse is intentionally under-employed or unemployed, other than where the under-employment or unemployment is required by the needs of a child of the marriage, or any child under the age of majority, or by the reasonable educational or health needs of the spouse;
- the spouse is exempt from paying federal or provincial income tax;
- the spouse lives in a country that has effective rates of income tax that are significantly lower than those in Canada;
- it appears that income has been diverted, which would affect the level of child support to be determined under these Guidelines;
- the spouse’s property is not reasonably utilized to generate income;
- the spouse has failed to provide income information when under a legal obligation to do so;
- the spouse unreasonably deducts expenses from income;
- the spouse derives a significant portion of income from dividends, capital gains, or other sources that are taxed at a lower rate than employment or business income, or that are exempt from tax; and
- the spouse is a beneficiary under a trust and is, or will be, in receipt of income or other benefits from the trust.
What if the payor of child or spousal support owns a business? The Child Support Guidelines specifically state that the reasonableness of a business expense deduction is not governed by whether it is allowed by the Income Tax Act. Just because your accountant says you can expense something for your taxes, it doesn’t mean you get the same deduction for the purposes of calculating child support or spousal support income.
In every own-business case, all expenses are examined and, if any provide a personal benefit, they are eligible to increase income for child or spousal support. Some expenses may be a blend of personal and business; in these circumstances the percentage of each is determined and the personal portion is added to the income eligible for support.
What if the payor is intentionally under-employed or unemployed? In Alberta family law cases, the courts apply a difficult test to prove this type of case. The Court of Appeal has outlined the following principles in the decision to impute the income of a payor using these manipulative tactics:
- there must be a deliberate course of conduct for the purpose of evading child support obligations;
- imputing income requires either proof of a specific intention to undermine or avoid support obligations, or circumstances which permit the court to infer that intention;
- there is no obligation to earn the maximum that a payor is capable of earning;
- without more, unreasonable unemployment or under-employment is insufficient to impute income;
- the intention of a spouse to evade support obligations may be found if the unemployment, underemployment or other acts indicate a deliberate refusal to fulfill the obligation to support one's children.
Courts in Alberta have found that people are allowed to make their own employment decisions – as long as these decisions are not made to defeat support, they will not result in an imputation of income.
Got questions about imputing income? The team at Coach My Case can lead you in the right direction on how to address these hidden figures.