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During separation and after divorce, the higher income person (the “Payor”) may be obligated to pay spousal and / or child support to the lower income person (the “Recipient”). The amount of the support payment is dependent, in part, on the Guideline Income of the Payor and, in some situations, that of the Recipient.
This article is written to assist readers in obtaining a general understanding of what Guideline Income is, what it is not, and how it is determined. Two areas of common disagreement are highlighted, and each will be discussed further in subsequent articles.
These are complex topics, which require a working knowledge of both generally accepted accounting principles and personal income taxation in Canada. Where possible, the discussion has been simplified, perhaps overly so. Discussions of the many nuances in the determination of Guideline Income are beyond the scope of this article, and readers are encouraged to contact the writer or another experienced professional with any questions regarding their specific circumstances.
The collaborative process facilitates a discussion the many factors that may influence the allocation of UPTCI, as well as the identification and quantification of personal benefits. Often, a range of possible Guideline Incomes becomes evident, as does a range of support obligations.
The parties are then able to select a support obligation that works for them, and is consistent with the other aspects of the divorce, including the property division and parenting agreements. In this way, together the parties will develop a customized solution, and avoid having a resolution imposed upon them by the Courts.
Guideline Income affects the support amount(s) owing from the Payor to the Recipient. While disagreements tend to focus on the amount of the support obligation, the solution is often found through a proper determination of Guideline Income.
For employees who do not earn significant income from other sources, Line 150 of their personal income tax returns may be a reasonable approximation of their Guideline Income.
For individuals with multiple sources of income, and particularly high-income individuals who own private companies (including self-employed people), the calculation of Guideline Income is more complex and involves subjective adjustments. These parties will benefit by involving an independent expert to assist in determining Guideline Income.
For purposes of child support, Guideline Income is determined according to the Federal Child Support Guidelines (“FCSG”), which are part of the Divorce Act and apply to those parents who are divorcing, or those who are changing a child support Order that was part of a divorce action. The Alberta Child Support Guidelines (“ACSG”) are part of the Family Law Act and apply to all other parents, including common law and same sex couples.
For spousal support, Guideline Income is determined according to the Spousal Support Advisory Guidelines (“SSAG”). The SSAG are the results of an academic paper released in 2008, are not law, and are not expected to become law. However, the SSAG are routinely relied upon by the Courts, lawyers, mediators, arbitrators and others involved in family law matters.
Whether you’re relying on the FCSG, the ACSG, or the SSAG, the calculation of Guideline Income is similar. The remainder of this article will refer only to the FCSG.
The FCSG are organized into 27 sections, and three supplementary schedules. Taken together, Sections 16 – 20, inclusive, and Schedule III describe how Guideline Income is determined. The process involves some adjustments that are mechanical, and not open to a range of interpretations. Other adjustments are somewhat subjective, are therefore susceptible to the biases of the parties. These subjective adjustments are commonly the cause of the differences that prevent parties from reaching an agreement themselves, and instead requesting assistance from the Court.
Section 16 of the FCSG sets out that the determination begins with Total Income (Line 150) of the Payor’s personal income tax return. This includes employment income (T4), interest and / or dividend income (T5), as well other sources of income the Payor may have. Line 150 is then adjusted for Schedule III items including:
Where the Court feels that the amount determined under Section 16, is not the fairest determination of Payor’s income, Section 17 of the FCSG provides the Court room to adjust that amount to what the Court considers to be appropriate.
In making adjustments under Section 17, the Court may exclude unusual or non-recurring income or losses in the prior three years when developing an estimate of the Payor’s Guideline Income in future years.
Where the Payor holds an equity interest in a corporation, Section 18 allows for all or a part of the undistributed pre-tax corporate income (“UPTCI”) to be included in the Payor’s Guideline Income. Unfortunately, the FCSG do not provide much guidance as to how to determine what portion, if any, of the UPTCI should be allocated.
Opposing parties tend to allocate different amounts, often consistent with their own biases or those of their respective client. In some cases the UPTCI is significant, and different allocations result in significant variances between Guideline Incomes as calculated by opposing parties. As a result, the support obligation may be significantly impacted, and the impact may be magnified when calculating Guideline Income over a number of years.
A review of the significant jurisprudence on the allocation of UPTCI, or the various methods employed when making the allocation, are beyond the scope of this article. However, it does seem to be well understood that:
Given the potential for a large impact in the support obligation, and the subjectivity involved, the allocation of UPTCI is often the source of the largest disagreement between the parties.
In a variety of circumstances, the Court may rely on Section 19 to impute an appropriate amount of income to a Payor. These circumstances include, but are not limited to:
Additional income is often imputed to the Payor under Section 19(g) when a personal benefit is provided to the Payor by virtue of having caused the company to record as an expense a cost which would otherwise be incurred by the Payor personally, with after-tax dollars.
These expenses reduce the corporate income which may be allocated to the Payor pursuant to Section 18(1)(a), while also enhancing the ability of the Payor to pay support. This inconsistency is resolved by including the personal benefits in Guideline Income, and the inclusion may be ‘grossed-up’ to reflect that the Payor would have had to earn a higher amount of pre-tax dollars in order to pay for the expense personally with after tax dollars.
As with the allocation of UPTCI, the determination of personal benefits is subjective, often leading to different conclusions as to the Payor’s Guideline Income.
Recent jurisprudence regarding personal benefits places the onus of disclosure on the Payor, and that disclosure is required to be in sufficient detail to allow the Recipient to understand how the amounts were determined. In practice, the disclosure is often inadequate, and the Recipient may engage an independent expert to confirm or refute the reasonableness of that disclosure. This is often done through a detailed review of the general ledgers, which is a time intensive and costly process.
It is worth noting that the value of the additional resources directed toward refining the disclosure of personal benefits may easily exceed the benefit of doing so. For example, increasing the Guideline Income of a Payor with 2 children in Alberta from $100,000 to $110,000 will increase the child support payment by $138 per month, from $1,458 to $1,596.
It is worth noting that where the corporation pays for the cost of a personal item, but the amount is charged to the shareholder loan account instead of being recorded as a corporate expense, it is not a personal benefit.
Where the Payor is a non-resident of Canada, and resides in a country where tax rates are higher than the rates in the province in which the Recipient resides, the Court may rely on Section 20 to consider those higher tax rates in determining the Payor’s Guideline Income.
Cameron Brinkman is a partner with Pisko Brinkman Inc. in Edmonton, Alberta, a boutique firm experienced in providing business valuations, guideline income determinations, and other related services primarily in family law matters.
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