DETERMINING THE PAYOR’S INCOME - A CHILD SUPPORT …

DETERMINING THE PAYOR'S INCOME A CHILD SUPPORT PERSPECTIVE

BRENT D. BARILLA Scharfstein Gibbings Walen Fisher LLP

500, 111 ? 2nd Avenue South Saskatoon SK S7K 1K6

TABLE OF CONTENTS

Introduction................................................................................................ 3 Starting Point.............................................................................................. 3 Inclusions in Income...................................................................................... 3 Exclusions in Income..................................................................................... 4 Determination of Income ? a prospective exercise.................................................... 4 Mid-year calculations (year-to-date pay information)................................................ 6 Pattern of Income.......................................................................................... 6 Adjustments ? Schedule III............................................................................... 7 Employees................................................................................................... 10 Self-Employed Persons....................................................................................12 Imputing Income.......................................................................................... 15

WHERE'S THE PROOF?

April 2009

DETERMINING THE PAYOR'S INCOME A CHILD SUPPORT PERSPECTIVE

Introduction

This paper focuses on how to properly assess a payor's child support obligation once it has been conclusively determined that there is an obligation to support children (ie. a mother is seeking child support from her former spouse for the two children of the former relationship that reside primarily with her.)

Probably one of the areas that creates the greatest litigation concerns determination of the payor's income. As will be illustrated below, if a payor is a wage earner, determination of his income may be relatively easy. If the payor is self-employed, what is typically shown on his/her income tax return and financial documents does not always reveal the true financial picture and the payor's actual earning capacity.

Starting Point

The relevant section of the Guidelines for determining income is Sections 16 through 20. Section 16 tells us the spouse's annual income shall be determined using the sources of income set out under the heading "Total Income" in the T-1 General Income Tax Form filed with Canada Customs and Revenue Agency (formerly, Revenue Canada). This is "Line 150" on a tax return.

Inclusions in Income

The typical sources of income that would be included in total income are employment income,

pension income, employment insurance benefits, taxable amount of dividends from Canadian corporations, interest and investment income, net partnership income, rental income, taxable capital gains, Registered Retirement Savings Plan income, and self-employed income (including

farm, professional and business income). Taxable benefits or allowances received by employees are also included.

WHERE'S THE PROOF?

April 2009

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The T1 General Form requires the tax payor to include only net income if the income is derived from property or business sources. Under The Income Tax Act, a tax payor is permitted to deduct the expenses necessarily incurred to gain or produce the business or property income when arriving at net reportable business income.

Exclusions from Income

Since a payor's income for Guidelines purposes is determined from his income tax return, income or benefits that are not included in an income tax return for taxation purposes are usually also disregarded for child support purposes. A number of common examples are as follows:

(i) Loan repayments are a transfer of capital and therefore not income. A repayment of a shareholder loan is therefore not income for Guidelines purposes. See Rudachyko v. Rudachyk (1999), 47 R.F.L. (4th) 363 (Sask C.A.)

(ii) Certain forms of non-taxable living allowances. See Bryant v. Bryant (2005), 266 Sask.R. 98 (Sask. Q.B.)

(iii) Certain forms of government payments are not to be included. This includes GST, Child Tax Benefits, Universal Child Care Benefit, and provincial allowances paid to a parent on account of a child's disability. See: Krislock v. Krislock (1997), 34 R.F.L. (4th) 420 (Sask Q.B.) Hussein v. Ibrahim (2007), 163 A.C.W.S. (3d) 274 (B.C.S.C.) Dunham v. Dunham (1998), 84 A.C.W.S. (3d) 294 (Ont. Court General Division)

(iv) Reimbursement of expenses actually incurred (ie. a salesperson's reimbursement for travel, meals, and accommodation while away from home and for work purposes).

Determination of Income ? a prospective exercise Many counsel are still under the misconception that section 16 of the Guidelines directs the court to determine income based on the payor's preceding year's income tax return. This is not the case. Although a person's income tax return from the preceding year often provides a valuable

WHERE'S THE PROOF?

April 2009

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source, it may not necessarily be the best source in which to predict the payor's income for child support purposes on a go forward basis. It must be remembered that the determination of a payor's annual income is a prospective exercise. In other words, it is the spouse's projected annual income, not his or her historical income, which is to be used in the calculation of the Table amount. Support must be paid out of the future income of the payor and not from what he or she has earned in the past. Having said that, the courts often refer to past income to predict future income, and historical financial data will usually provide a good forecast for future income. This is reinforced by section 2(3) of the Guidelines which directs that the court must use the most current information available. See MacDonald v. Rasmussen (1997), 34 R.F.L. (4th) 451 (Sask Q.B.)

The necessity of a prospective exercise can be illustrated by example. You have a wage earner who is working for a certain employer for all of 2007 and he, accordingly, files his income tax return revealing all income earned from that employer for the 2007 taxation year. The payor loses his job in February of 2008 and is facing a child support application in March. Under such a scenario, it is fair to say that his 2007 income tax return is no longer a good predictor of what the payor is likely to now earn in 2008.

This type of focus also becomes important when there is a non-recurring income from a previous taxation year. For instance, there may be severance pay, accrued vacation pay, or a bonus received in a previous year that cannot be expected in the current year in which the child support application is being heard. If one can persuasively establish that the source of the past income is non-recurring, then it should not be considered when projecting the payor's annual income on a go forward basis.

In a number of cases, the courts have disregarded previous isolated RRSP collapses (see Hart v. Hart (1997) 75 A.C.W.S. 3(d) 1086 (Sask. Q.B.) Further, courts have ignored one-time gains from prior taxation years (ie. a one-time asset dispositions).

WHERE'S THE PROOF?

April 2009

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