When a child or spousal support payor or recipient has a job as a regular employee, determining their income for support purposes is usually quite simple. Most regular employees earn a standard annual salary which is represented on their annual T4 Statement of Remuneration Paid. Per section 16 of the Child Support Guidelines (“CSGs”), income for child support (and spousal support) purposes is presumptively determined by using an individual’s total net income as indicated in their T1 General Tax Return, issued by the Canada Revenue Agency.
However, if you are self-employed, receive cash income or even own your own company- it may be more complex to determine your income for support purposes.
It is important to understand that the CSGs (which are also applicable for determining income for spousal support), are designed to assess a payor or recipient’s income based on what they could reasonably earn. For example, if you own a company which earns multi-millions of dollars in profit every year, but you take a salary of only $60,000, a court may impute you a higher income. This is because the law takes into account the fact that company owners often control how much personal income they receive every year. The law seeks to assess how much money is reasonably available to a payor. If there is a large discrepancy between what they receive as an annual salary and the amount of funds they actually have access to in reality, a court may look to section 19 of the CSGs to impute an income.
Per section 19 of the CSGs a court may impute income in the following circumstances:
- The individual is intentionally under-employed or unemployed which is not required by the needs of the child or the reasonable health/educational needs of the individual
- The individual is exempt from paying federal or provincial income tax
- The individual lives in a country with much lower rates of income tax
- It appears that there is income which is being diverted and which would affect the determination of the quantum of support to be paid
- The individual’s property is not reasonably used to generate income
- The individual has failed to provide income information when they have the legal obligation to do so
- The individual derives a significant amount of their income from dividends, capital gains or other sources taxed at lower rates than business or employment income
- The individual is a beneficiary under a trust or will be in receipt of income/benefits from a trust
Broadly speaking, section 19 gives a court the discretion to impute income in a range of scenarios, but especially where an individual is able to generate more income and they are choosing not to do so, where they are not providing financial disclosure, or where their income should be adjusted due to having an atypical tax treatment.
For example, if an individual makes a large portion of their income from capital gains every year, a court may gross-up their income for the purposes of support. This is because capital gains receive a more beneficial tax treatment than other forms of income and using the after-tax value would not appropriately reflect an individual’s economic ability to pay support (or if they are a support recipient, their financial need for same).
Moreover, if a court does decide to impute income to an individual, they must ground their determination in evidence. Per Michaud v. Kasali 2016 ONSC 443, a court should not use imputation of income as an exercise to simply “fill in the blanks” with whatever income they would like. This is the case even where an individual has not provided financial disclosure or they appear to be hiding the amount of income they actually receive. In those cases, a court may look to the lifestyle the individual is living as well as their expenses. If their lifestyle would cost far more than their reported income would permit, a court may impute an amount of income that they reasonably believe would be required in order to afford that lifestyle. This is assuming they do not have corresponding debts showing they are just living beyond their means.
But what about individuals whose income fluctuates every year through no fault of their own? This is a common pattern in some industries like banking where a large portion of an individual’s income may be the result of performance-based bonuses. If that is the case, section 17 of the CSGs allows a determination of income using an average of the individual’s income, from the previous three years.
Overall, determining income for individuals who are self-employed or are underreporting their income can be challenging. As such, we recommend that you seek out the counsel of a licensed Family Law Practitioner for more information.