Inputing Income
The Family Law Act
Section 19 of the Family Law Act, R.S.O. 1990, c. F-3, as amended, is the statutory provision that relates to the issue of the Court’s discretion on imputing income:
19. Imputing income. — (1) The court may impute such amount of income to a parent or spouse as it considers appropriate in the circumstances, which circumstances include,
(a) the parent or spouse is intentionally under-employed or unemployed, other than where the under-employment or unemployment is required by the needs of any child or by the reasonable educational or health needs of the parent or spouse;
(b) the parent or spouse is exempt from paying federal or provincial income tax;
(c) the parent or spouse lives in a country that has effective rates of income tax that are significantly lower than those in Canada;
(d) it appears that income has been diverted which would affect the level of child support to be determined under these Guidelines;
(e) the parent's or spouse's property is not reasonably utilized to generate income;
(f) the parent or spouse has failed to provide income information when under a legal obligation to do so;
(g) the parent or spouse unreasonably deducts expenses from income;
(h) the parent or 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
(i) the parent or spouse is a beneficiary under a trust and is or will be in receipt of income or other benefits from the trust.
The Federal Child Support Guidelines
Prior to the Spousal Support Advisory Guidelines, O. Reg. 391/97, child support was very much a matter of judicial discretion, a discretion that was generally broadly exercised to achieve a fair result in all the circumstances. This resulted in a correspondingly wide range of child support orders. Since January 2005, the Court has had the advantage of the Divorce Act, R.S.C. 1985, c. 3 (2nd Supp.) Federal Child Support Guidelines, SOR/97-175 which have assisted the Court in providing better certainty and predictability to the quantum and duration of spousal support.
Federal Child Support Guidelines Objectives
The objectives of the Guidelines, which inform the meaning of the particular provisions at issue, are outlined in section 1 of the Guidelines as follows:
(a) to establish a fair standard of support for children that ensures that they benefit from the financial means of their parents and, in the case of divorce, from the financial means of both spouses after separation;
(b) to reduce conflict and tension between parents or spouses by making the calculation of child support more objective;
(c) to improve the efficiency of the legal process by giving courts, and parents and spouses, guidance in setting the levels of child support and encouraging settlement; and
(d) to ensure consistent treatment of parents or spouses and their children who are in similar circumstances.
With these objectives in mind, and except as otherwise specifically provided by the Guidelines, Parliament has determined that child support for minor children should be in "the amount set out in the applicable table" based on the number of children and on "the income of the parent or spouse against whom the order is sought"
Federal Child Support Guidelines, section 3(1)
Section 3 of the Guidelines provides as follows:
3(1). Unless otherwise provided under these guidelines, the amount of an order for the support of a child or children under the age of majority is:
(a) the amount set out in the applicable table, according to the number of children under the age of majority to whom the order relates and the income of the parent or spouse against whom the order is sought; and
(b) the amount, if any, determined under section 7.
To maximize predictability and consistency, Parliament has provided a definition of income that is clear and unambiguous and that significantly narrows the scope of judicial discretion to determine what it should deem to be income for support purposes. Section 2 of the Guidelines restricts the definition of "income" for support purposes to being presumptively a person's line 150 income from the taxpayer’s tax return adjusted where appropriate by the section 15 to 20 of the Guidelines factors.
Section 15(1) provides that subject to section 15(2), a spouse's annual income is determined by the court in accordance with sections 16 to 20. Section 15(2) stipulates that where both spouses agree in writing on the annual income of a spouse, the court may consider that amount to be the spouse's income for the purposes of the Guidelines if it thinks that the amount is reasonable.
Federal Child Support Guidelines, section 15
Section 16 of the Guidelines specifically provides that a spouse's annual income is to be determined in accordance with 'Total income' in the T1 General form issued by the Canada Revenue Agency. Thus, income for support purposes is presumptively the payor spouse’s income as it appears on line 150 of his or her income tax return. The definition of presumptive "income" is that income which is subject to taxation.
Federal Child Support Guidelines, section 16
Section 17 of the Guidelines is relevant to cases where a party's income fluctuates. Section 17 provides as follows:
Pattern of income
17. (1) If the court is of the opinion that the determination of a spouse's annual income under section 16 would not be the fairest determination of that income, the court may have regard to the spouse's income over the last three years and determine an amount that is fair and reasonable in light of any pattern of income, fluctuation in income or receipt of a non-recurring amount during those years. Non-recurring losses (2) Where a spouse has incurred a non-recurring capital or business investment loss, the court may, if it is of the opinion that the determination of the spouse's annual income under section 16 would not provide the fairest determination of the annual income, choose not to apply sections 6 and 7 of Schedule III, and adjust the amount of the loss, including related expenses and carrying charges and interest expenses, to arrive at such amount as the court considers appropriate.
Federal Child Support Guidelines, section 17
Some of the questions which the Court has found may be relevant to the decision as to whether the income analysis should be undertaken pursuant to section 16 or section 17 of the Guidelines are as follows:
a. Is the non-recurring gain or fluctuation actually in the nature of a bonus or other incentive payment akin to income for work done for that year? b. Is the non-recurring gain a sale of assets that formed the basis of the payor's income? c. Will the capital generated from the sale provide a source of income for the future? d. Are the non-recurring gains received at an age when they constitute the payor's retirement fund, or partial retirement fund, such that it may not be fair to consider the whole amount, or any of it, as income for child support purposes? e. Is the payor in the business of buying and selling capital assets year after year such that those amounts, while sale of capital, are in actuality more in the nature of income? f. Is inclusion of the amount necessary to provide proper child support in all the circumstances? g. Is the increase in income due to the sale of assets which have already been divided between the spouses, so that including them as income might be akin to redistributing what has already been shared? h. Did the non-recurring gain even generate cash, or was it merely the result of a restructuring of capital for tax or other legitimate business reasons? i. Does the inclusion of the amount result in wealth distribution as opposed to proper support for the children?
The Obligation to Provide Support
The Court has very clearly said that the need to ensure that appropriate financial support is provided for the children of a failed or ended marriage is an important obligation. In order to meet a spouse/parent’s legal obligation to a child of his marriage, a parent must earn what he is capable of earning. A parent should not put self interest ahead of a child’s needs because the decision to have children carries with it the obligation to make personal sacrifices and career compromises to promote a child’s best interest.
Of course, the corollary to that is that if a spouse is working to his full potential and has reasonably accounted for his stated income means, the Court has no right to impute additional income to him.
The Court addresses the child support objective by imputing income to a spouse where an inaccurate or inappropriate amount of income has been formally declared by a payor spouse or where the payor spouse has structured his financial affairs to be able to avoid paying support. Imputing income is a method by which the Court can give effect to the joint and ongoing obligation of parents to support their children to the more true extent to which the parents are able to do so. Accordingly, the Court has a broad discretion to impute income where a spouse is not working to his or her potential or has not declared income in order to avoid a support obligation.
The Guidelines are the statutory provisions that serve to adjust the presumptive amount of Table support from income shown on line 150 declared income. The Guidelines allow for adjustments to be made to the presumptive determination of income. This has given rise to an additional body of law about the level of section 19 imputation of income determined by the Court. It is open to the Court to find new circumstances in which to impute income. If there is no income or the income is not high enough, the Court has wide powers to impute income. In light of the Court of Appeal decision in Drygala v. Pauli, one does not have to find bad faith or intention to avoid a support obligation in order to impute income to a payor spouse.
When considering whether a circumstance is an appropriate one in which to impute income, a court will bear in mind the objectives of the Guidelines: to establish fair support based on the means of the parents in an objective manner that reduces conflict, ensures consistency and encourages resolution.
Regardless of the basis upon which income is imputed, the amount of income that the court imputes to a party is a matter of discretion. The only limitation on the discretion of the court in this regard is that there must be some basis in the evidence for the amount that the court has chosen to impute.
A list of the general principles the Court will consider regarding child support and when determining whether to impute income are the following:
1. The fundamental obligation of a parent to support his or her children takes precedence over the parent's own interests and choices. 2. A parent will not be permitted to knowingly avoid or diminish, and may not choose to ignore, his or her obligation to support his or her children. 3. A parent is required to act responsibly when making financial decisions that may affect the level of child support available from that parent. 4. Imputing income to a parent on the basis that the parent is "intentionally under-employed or unemployed" does not incorporate a requirement for proof of bad faith. "Intentionally" in this context clarifies that the provision does not apply to situations beyond the parent's control. 5. The determination to impute income is discretionary, as the court considers appropriate in the circumstances. 6. Where a parent is intentionally under-employed or unemployed, the court may exercise its discretion not to impute income where that parent establishes the reasonableness of his or her decision. 7. A parent will not be excused from his or her child support obligations in furtherance of unrealistic or unproductive career aspirations or interests. Nor will it be acceptable for a parent to choose to work for future rewards to the detriment of the present needs of his or her children, unless the parent establishes the reasonableness of his or her course of action. 8. A parent must provide proper and full disclosure of financial information. Failure to do so may result in the court's drawing an adverse inference and imputing income.
The Onus of Proof on Proving the Reasonableness of the Need for the Court to Impute Income
In original proceedings, unlike in motion to change applications, the onus is on the party requesting the Court to impute income to establish the grounds for this request.
The Ability of the Motion Judge to Reach the Right Conclusion on Imputing Income
Where there is insufficient evidence to enable the Court to conclude that the case is a situation of underemployment, the Court should decline to impute income to a spouse for the purpose of determining interim support, and the issue is one which is a matter that is best left to a determination to be made by a trial judge.
The Court of Appeal has confirmed that in determining what amount of income which should be imputed to a spouse, some cases may involve too complicated questions of fact to be determined based solely on the evidence available on a motion. Where the issue requires an evaluation of in-person testimony and cross-examinations to properly answer it, it is a job best left to the trial judge.
The Ontario Court of Appeal has confirmed that the court’s use of Section 19 of the Guidelines is not an invitation to the Court to arbitrarily select a particular sum of money as being imputed income for support purposes. There must be a rational evidentiary basis identified by the Court underlying the selection of any such figure for imputed income. That means that the amount selected in the exercise of the court's discretion must be grounded in the evidence before the Court.
What level of income the Court will consider to be reasonable for support purposes is a question of fact which is to be based on the following factors, namely, the spouse’s:
- Age,
- Education;
- Experience and skills;
- Availability of job opportunities;
- Other non work obligations; and
- Health.
If the spouse does not provide the Court with adequate information on these factors, the Court can consider the spouse’s previous work earning history and impute an appropriate percentage thereof to determine the quantum of imputed income.
In the Bekeschus case, the court had made a temporary "without prejudice" order for the father to pay child support of $335 per month based on annual imputed income of $22,000. The Husband moved for a suspension of child support and for an order that no income be imputed to him. On the support issue the Court said that with regard to the issue of the father's income, the primary question is not what he is earning, but rather, whether there should be income imputed to him.
The father maintained, without explanation, that he was living on $575 per month, despite a rent expense of $1,350 and car expenses of $700 per month. On the evidence provided and without the benefit of in-person cross-examination on these financial issues, the court was unwilling to find that no income should be attributed to the father. While the father's financial circumstances were far from clear, the court found that the father had manipulated his financial affairs to reduce his income for support purposes because he had made choices that contributed to his current financial situation. The father had divested himself of businesses with healthy financial statements at unreasonable sale prices. Accordingly, the Court said that it was open to it, based on the basis of the evidence on the motion, to find that he was intentionally under-employed.
In Bekeschus, the Court said that the issue of the father's income could not be resolved on the basis of the affidavit evidence before the motion judge, even where questioning had been held on the affidavits, because the Court said that in the complicated factual circumstances before it, it was in no position to evaluate and to assess the credibility of affidavit evidence on the motion. These issues required oral evidence, cross-examinations in person, and the ability to determine credibility; the things one gets at a trial or on a trial of an issue.
The Evidentiary Role which The Payor Spouse Must Fulfil
A payor spouse must adduce evidence that the decisions and actions which were taken to have caused or resulted in the formally reported amounts of income were decisions which were reasonable and justifiable.
The clear legal policy reason for the evidentiary reverse onus on the payor spouse is the important social principle that parents should not be allowed to shirk their child support obligations without a convincing reason for doing so.
The Court’s conclusions at trial on the issue of imputing income can be guided by findings and concerns about the sufficiency of the documentary and independent evidence adduced by the payor spouse on his financial transactions. For example,
A payor spouse should explain why he sold his interest in an income generating property to a debt rather than selling non income generating properties, A payor spouse should not keep a poorly performing business in operation,
With regard to the profitability of rental properties reveals the payor spouse should answer questions in relation to the significant decreases in the income of rental property businesses, and adduce documentary evidence to support the expenses which are claimed against rental income or to justify losses on properties,
A payor spouse should provide independent proof of the fair market value of properties which are transferred to non – arms length parties.
The Payor Spouse’s Lifestyle
Gifts and lifestyle not caught by the s. 19(i) Guidelines on imputation of income. They are factors which are specifically exempt from being included in a payor's presumptive income for support purposes because neither is subject to taxation. The Guidelines are relatively clear on this issue. Only income is to be used to pay child support.
While Gifts and lifestyle are specifically exempt from being included in a payor's presumptive income for support purposes, they are still relevant to the income imputation in certain circumstances.
The Court of Appeal in Bak confirmed that a payor's lifestyle often will be relevant to whether a court may impute income under s. 19(1) of the Guidelines. For example, it may be apparent from lifestyle that a payor is receiving undeclared income because he lives a lifestyle which is inconsistent with the level of income which he declares for tax or child support purposes. In such a case, the recipient who calls evidence of the payor's lifestyle will ask the court to draw the reasonable inference that the payor must have a greater income than he or she has disclosed.
Where the evidence from the payor spouse indicates that there is an absence of any cogent explanation for a contested amount of income, evidence of lifestyle can permit the Court to draw an inference that the true earnings of the payor spouse were more than what was reported. A party's lifestyle then can inform the question of fact as to whether it is more likely than not that the payor spouse has diverted income, or underreported his income, for support purposes.
The law on the issue of “lifestyle” highlights the importance of full disclosure to be made by a payor spouse. When a complete set of financial facts are disclosed evidencing what the payor spouse has truly earned, there is no basis for the Court to resort to using lifestyle to make the factual inference to attempt to answer the question which the payor spouse has not specifically or directly addressed, - namely, what his true level of income is - but which question he should have done or is obligated to do, directly by way of the direct evidence from the relevant documentation.
The Court of Appeal has confirmed that while a party's lifestyle can inform the question of whether the payor spouse has diverted income, or underreported income, lifestyle is not a standalone ground for imputing income because the concept of “lifestyle” is not direct evidence. Lifestyle is not income, but rather merely evidence from which a factual inference may be drawn that the payor spouse, for support purposes, likely has additional undisclosed income or more truly a different income from that which has been formally reported, and because of that likelihood, that in attempting to arrive at the most just result, additional income should be imputed to the payor spouse for the purpose of determining the right amount of child support.
The Relevance of Payments from a Spouse’s Parent/Family
The law does not require grandparents to support their children. A grandparent does not incur support liability by voluntarily funding a spouse. However, section 19(1)(i) provides that income can be imputed when the spouse is a beneficiary under a trust and is or will be in receipt of income or other benefits from the trust. If there is a trust and the payor is going to receive money from the trust, the Court will not consider the monetary payment to be a gift for support purposes under the Guidelines and it will impute the trust payment to be income.
However, the Court’s jurisdiction is not without limitation. The open-ended wording of s. 19(1) does not mean that courts have an untrammelled discretion to use all financial circumstances to impute income, particularly when the legislature directed the deliberate intention to exclude particular financial circumstances from imputed income.
All money received from family or from a spouse’s parents should not be considered to be income for child support purposes because those people do not incur any support liability, directly or indirectly, merely by being indulgent in voluntarily funding or supporting a spouse or child who is having financial problems.
In the Drygala case, the Court of Appeal did not say that voluntary family payments are to be or should be considered to be income when determining imputed income. The Court merely stated that a judge had the right to find and that it was open to the Court in the exercise of its discretion, in the right circumstances, to find that payments from other family members could be relevant to the quantum of imputed income determined by the Court. For example, the Court will not allow a spouse/parent to avoid a financial obligation to a child to pay child support by relying completely on the financial assistance from a parent of the spouse.
Gifts
In Bak v. Dobell, the Ontario Court of Appeal said that in general, gifts are not considered to be part of a person's income.
It also noted there may be "circumstances surrounding the particular gift [that] are so unusual that they constitute an 'appropriate circumstance' in which to impute income".
In Bak the Court of Appeal set out the factors a court will consider in determining whether it is appropriate to include receipt of gifts as imputed income:
• the regularity of the gifts; the duration of their receipt;
• whether the gifts were part of the family's income during cohabitation that entrenched a particular lifestyle;
• the circumstances of the gifts that earmark them as exceptional;
• whether the gifts do more than provide a basic standard of living;
• the income generated by the gifts in proportion to the payor's entire income;
• whether they are paid to support an adult child through a crisis or period of disability;
• whether the gifts are likely to continue;
• and the true purpose and nature of the gifts.
The trial judge in Bak did not order the Father to pay any child support as he earned no income and was not capable of earning income. The Mother appealed and sought child support of $1,500 a month on the basis that the Father's lifestyle and his receipt of gifts/money from his father should justify an imputation of income under s. 19 (1) of the Child Support Guidelines. The Mother’s argument was that the gift income was analogous to trust income which is specifically enumerated in s. 19(1) (i) of the Guidelines as being capable of representing imputed income for support purposes.
The Respondent’s father had supported him for years by financing the Respondent’s various career options and by providing a monthly allowance for his day-to-day expenses, including funding for years his son's medical, psychological, chiropractic, and legal bills, in addition to providing monthly support.
The Court said that the expenditures made by the payor spouse’s father for the specific cost of career advancement could not be said to be income under either the Guidelines' definition of presumptive income or as income that it was appropriate to be imputed to the Respondent.
The trial judge accepted that the father supported his son out of a sense of obligation and to prevent him from otherwise being a burden on the taxpayer. The Court declined to impute the funds as income for the purpose of child support because the payments were voluntary and were intended only to encourage the Respondent's self-sufficiency, did not provide the Respondent with an extravagant lifestyle and because the father was a person of substantial means.
The Court of Appeal in Bak said that the Trial judge made no error in refusing to impute income to the Husband and that his receipt of capital from his father should not be considered income because it was not taxable. The Husband's father remained in complete control of his funds, which were closely tied to husband's basic needs, the Husband had no entitlement to stream of income, and the payments could be terminated at any time by the father. The gifts were intended only to encourage disabled husband's self-sufficiency and did not support more than a basic lifestyle. The Court of Appeal made it clear in Bak that monies in the payor's hands which are really a gift, are not to be used for child support purposes based on the statutory interpretation of s. 19.
The principal disagreement between the parties in the Strassburger case related to the quantum of the father's income. The Mother asked the court to impute income to father of $180,000 per year, based upon his salary from his employer, T, together with deemed income from three companies owned or controlled by the father. The Mother asked that income should be imputed equivalent to a "salary" received from T during most of the years of marriage and following separation. The Father argued that these payments were gifts from his father, who owned and controlled T.
In 2011, the applicant paid income tax based on "Line 150" income of $96,544. He maintained that this is the sum total of his salary and taxable benefits and should be the basis for his obligation to pay child and spousal support. The trial judge in Strassburger directed that child and spousal support be based upon an admitted annual income of $90,000 per year, together with $38,000 paid to the respondent by T, which she concluded was "income splitting" as well as a further $5,000 in benefits provided to the husband by way of vehicle use and expenses provided by T. The Husband worked for, and received salary from T, the franchise business controlled by his father and the Husband also controlled or had interests in three other businesses.
On the challenging issue of whether additional income should be imputed to the applicant as a result of payments made to the respondent by T over the years, purported to be a "salary" for which no services were provided, the Court stated in Strassburger that;
“The financial arrangements had all of the earmarks of an income splitting arrangement and no characteristics of a "gift". Accordingly, I find that these payments were not gifts but were income. It is not acceptable to construct a couple's finances in one way for tax purposes during marriage and then upon separation suggest a different construction of those finances.”
The Court of Appeal noted that the Court was presiding on a motion for interim relief and did not have had the advantage of a full evidentiary record as would be presented to the court at trial. The Court of Appeal disagreed with the motion judge on the interpretation of the imputed income issue and said that she had come to an incorrect conclusion in categorizing the payments as an "income splitting" arrangement between the parties.
For the Appellate court, the preponderance of the evidence persuaded it that the payments made were in fact truly "gifts". Although the payments were structured as salary for business's income tax purposes, in order to benefit T’s tax position, they were intended to be and were deemed to "gifts" by the Court. Additionally, the three companies in which the father had an interest were not sufficiently financially viable to provide an income stream for child support purposes.
In Whelan v. O'Connor, the court declined to impute income to the payor on the basis of gifts. After reviewing s. 19 of the Child Support Guidelines and the cases, MacKinnon J. distilled the following principles:
The court should be cautious in imputing income on the basis of gifts when so doing would have the effect of transferring a child support obligation to someone who, legally, does not have that obligation.
Income is generally imputed where a parent is not properly utilizing earning capacity or other resources to support his or her children.
Factors supporting income imputation on the basis of gifts include:
the gifts represent a significant portion of the recipient's overall income;
the gifts are part of a planned or intentional diversion of income or substitution for income previously earned from this source; and
there is reliance upon the regular and ongoing nature of the gifts as an income source in lieu of pursuing other remunerative employment commensurate with the abilities of the respondent.
Failure to make full disclosure is a frequent factor in cases where income is imputed.
A Payor Spouse’s Investments
While income from investments forms a part of a payor's total income, the underlying investments of the payor spouse do not. A payor spouse is not expected to sell capital assets, such as a house and car, for the purpose of generating income from which to pay support, unless the payor spouse’s "property is not reasonably utilized to generate income"
Section 19(1)(e) Family Law Act, R.S.O. 1990, c. F-3,
In the De Zen case (Ont. S.C.J.), the payor worked for his father's business. The Father's compensation was lower than average for top management and other executive vice-presidents at the company. Based on those facts, McWatt J. imputed income to the husband on the basis of her findings that the Father was intentionally underemployed. It was appropriate to impute income to the Father because gifts from his parents made up for the shortfall in his remuneration and the level of his income was tied to his desire to control the level of child support he would be required to pay. In addition, the Father failed to explain why his claimed level of income was inconsistent with his historical earnings. In addition, the case is factually distinguishable because the Father was capable of doing work from which he resigned and had furthermore diverted income that could affect level of child support by giving non-interest-bearing loans to third parties in years before the petition, including a large loan to his mother.
In the Younger v. Zolty case, the issue was whether additional income should be imputed to the father either on the basis of his historic financial contributions to the family or on the basis that funds continue to flow to the father from the grandfather, notwithstanding the father's and grandfather's assertions that the funding has stopped
During the parties' marriage, their chief source of income was money provided by the grandfather. The father says he has not received any financial support from the grandfather in the last year, with the exception of monies the grandfather paid for the children's s. 7 expenses, the father's legal expenses and the father's trips to Switzerland to visit his parents. The mother claimed that the father was living a lavish lifestyle and must, therefore, be receiving assistance from the grandfather, which financial assistance she claimed should be imputed to the father’s income for support purposes.
The Court had no evidence before it of a lavish lifestyle on the part of the father and based on the evidence before it, the Court was unable to find that the father was receiving funds from the grandfather other than funds for the expenses of legal fees, school fees and trips to Switzerland. The Court was also unable to find that the father had any control over what funds he received, and therefore declined to impute additional income on this basis.