Imputing Income for Support Purposes

When a married or common law couple separates, support is an issue that arises more often than not. 

There are two categories of support: child support and spousal support.[1] Both categories of support are based on the income of the parties. Often times, income for support purposes is relatively easy to figure out; the parties look at their Line 150 Income, as set out in their most recent Income Tax Return or Notice of Assessment, and support is calculated based on that income. However, there are certain circumstances where the courts will impute an income for support purposes. Imputing income is a way for the courts to determine a fair level of support if it is found that a party’s Line 150 income is not appropriate to use. Three commons circumstances that may lead to the imputation of income for support purposes are:

1. A party is self-employed or works for a company or corporation in which they control;
2. A party’s income fluctuates from year to year; and
3. A party is found to be intentionally unemployed or underemployed.
   

Self-Employment/Corporation Paying Expenses

When an individual is self-employed or works for a company or corporation in which she or he  an ownership interest, tax deductions are often applied or personal expenses are paid through the corporation, which may lower their income for tax purposes.

However, the courts have been clear that, just because the Canada Revenue Agency accepts an expense as tax deductible, this does not mean the courts will automatically exclude the deductions from the parties’ income for support purposes. If the courts view the deduction as a personal expense for family law purposes, they will add the expense back to the party’s income, and may ‘gross-up’ the income (that is, add an amount on top of that expense) to compensate for the fact that the party did not have to pay taxes for that benefit. Therefore, the party’s income for support purposes is not their Line 150 income, but instead becomes their Line 150 income with the expense and ‘gross-up’ added on top. For example, if a party deducts their vehicle expenses, the court may add on an amount of income to account for the personal use of the vehicle.

The same applies in situations where personal expenses are paid through a corporation. For example, if a party pays for his or her personal use (or mixed personal and business use) vehicle through the corporation, this will artificially lower the available income for support. The court may add on an amount of income to account for the personal use portion of the vehicle. These ‘add-ons’ can significantly increase a party’s income for support purposes, and therefore increase their support obligations.

Income Fluctuation

Income may fluctuate year to year, making it difficult to determine an appropriate income for support purposes. The Federal Child Support Guidelines suggests a method for addressing fluctuations in income: take the income over the last three years to account for “any pattern of income, fluctuation in income, or receipt of a non-recurring amount during those years.”[2] Although not obligated to follow this approach, the courts often use this method to determine an appropriate level of income.  If a party’s income has changed significantly from year to year due to fluctuations in overtime, bonuses, or for other reasons, the court may average out the party’s income for the last 3 years to determine an appropriate amount of income for support purposes.

Intentionally Unemployed/Underemployed

Another common circumstance where a court imputes incomes is when a party is intentionally unemployed or underemployed. Briefly, this means that if a court finds that an individual is intentionally unemployed or earning less than she or he is capable of earning, the court can impute an amount of income to use for support purposes, even though the party is not actually earning that money. There are plenty of cases that have examined issues of unemployment and underemployment; the courts generally look at the circumstances of the party in question to determine whether their employment situation is reasonable. The circumstances the court may consider include the party’s education, training, employment history, and health.

As shown above, there are a number of circumstances where support should be based on an income different than what is found on Line 150 of the parties’ tax returns. Other circumstances where a court may impute income include:

• A party is exempt from paying taxes,
• A party lives in a jurisdiction where tax rates are lower than in Canada; and
• A party is a beneficiary under a trust.[3]

It is important to receive advice from a lawyer regarding the appropriate amount of income on which support should be based. Please contact the McKenzie Lake family law team if you have any questions regarding your income and how this impacts support.

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[1] The basics of child support are covered in a past McKenzie Lake blog post, “Child Support 101”.

[2] Section 17(1) of the Federal Child Support Guidelines. The courts have applied this ‘3 year approach’ to spousal support as well.

[3] Section 19(1) of the Federal Child Support Guidelines sets out a non-exhaustive list of circumstances where it may be appropriate to impute income for support purposes.