The obligor’s income is the foundation on which the provincial and territorial tables in the Federal Child Support Guidelines fix the monthly amount of basic child support. The recipient parent’s income or that of the child only becomes relevant in those cases where the court is empowered to deviate from the table amount.366Justice Martinson, of the Supreme Court of British Columbia, has formulated the following step-by-step guide to the determination of a parent’s income under the Federal Child Support Guidelines.367The steps are divided in two parts, each of which has four steps. The following summary is extracted from her judgment:
Part I - Actual Earnings
· Step One: Gather mandatory information pursuant to financial disclosure requirements.
· Step Two: Examine separately each source of income identified in the CRA T1 General form and use the most current information available to predict the parent’s prospective annual earnings from each source.
· Step Three: Review historical patterns of income over the last three taxation years to determine whether the predicted income under Step Two is the fairest determination of annual income from each source. If it is not, the historical pattern of earnings can be used to predict the parent’s prospective annual income from each source.
· Step Four: Total the predicted income from each source.
Part II - Imputing Income
· Step Five: Assess the parent’s earning capacity in light of whether a parent is under-employed, unreasonably deducts expenses from income, is not using property to generate income, or is hiding income behind a corporate veil.
· Step Six: Determine whether the parent receives any income tax benefits or concessions or benefits under a trust.
· Step Seven: Decide whether a parent is seeking to avoid the payment of child support by diverting income or not making full financial disclosure.
· Step Eight: Decide whether any other supplemental income should reasonably be attributed to the parent.
Sections 16 to 20 of the Federal Child Support Guidelines define how income is to be determined for the purpose of applying the Guidelines.368Section 16 of the Federal Child Support Guidelines provides that, subject to sections 17 to 20 of the Guidelines, a spouse’s annual income is determined by reference to the sources of income set out under the heading "Total income" in the Canada Revenue Agency’s T1 General form, with adjustments being made in accordance with sections 1 to 10 of Schedule III of the Guidelines.369The T1 General form identifies the sources that make up total income, including:
(a) employment income;
(b) other employment income;
(c) Old Age Security pension;
(d) Canada or Quebec Pension Plan benefits;
(e) disability benefits;
(f) other pensions or superannuation;
(g) Employment Insurance benefits;
(i) interest and other investment income;
(j) partnership income;
(k) rental income;
(l) capital gains;
(m) registered retirement savings plan income;
(n) other income;
(o) business income;
(p) professional income;
(q) commission income;
(r) farming income;
(s) fishing income;
(t) workers’ compensation benefits;
(u) social assistance payments; and
(v) net federal supplements.370
Specified adjustments to the spouse’s income provided under Schedule III of the Guidelines include the following:
· the spouse’s employment expenses that would be deductible under paragraphs 8(1)(d) to (j) and (n) to (q) of the Income Tax Act are deducted;371· CPP contributions and Employment Insurance premiums under section 8(1)(l.1) of the Income Tax Act are deducted if paid in respect of another employee who has acted as an assistant or substitute for the spouse;372· child support that is included to determine total income in the T1 General form issued by the Canada Revenue Agency is to be deducted;
· spousal support received from the other spouse is deducted in calculating income for the purpose of determining the amount of child support under the applicable provincial or territorial table;373· spousal support paid to the other spouse is deducted in calculating income for the purpose of determining an amount respecting special or extraordinary expenses under section 7 of the Guidelines;374· social assistance income is adjusted to include only the amount determined to be attributable to the spouse;375· the taxable amount of dividends from Canadian corporations received by the spouse is replaced by the actual amount of those dividends received by the spouse;376· the taxable capital gains realized in a year by the spouse are replaced by the actual amount of capital gains realized by the spouse in excess of actual capital loss suffered by the spouse in that year;377· the actual amount of business investment losses suffered by a spouse during the year is deducted;378
· the spouse’s carrying charges and interest expenses that are paid by the spouse and that would be deductible under the Income Tax Act are deducted;379· where the net self-employment income of the spouse is determined by deducting an amount in respect of salaries, wages or management fees, or other payments, paid to or on behalf of persons with whom the spouse does not deal at arm’s length, that amount shall be added, unless the spouse establishes that the payments were necessary to earn the self-employment income and were reasonable in the circumstances;380· where the spouse reports income from self-employment that includes income for the reporting year plus a further amount earned in the prior year, the spouse may deduct the amount earned in the prior period, net of reserves;
· spousal income includes any deduction for an allowable capital cost allowance with respect to real property;
· where the spouse earns income from a partnership or sole proprietor-ship, any amount included in income that is properly required by the partnership or sole proprietorship for purposes of capitalization shall be deducted from the spouse’s income;381· where the spouse has received, as an employee benefit, stock options to purchase shares of a Canadian-controlled private corporation, or a publicly traded corporation that is subject to the same tax treatment as a Canadian-controlled private corporation, and has exercised the options during the year, the difference between the value of the shares at the time the options are exercised and the amount paid for the shares and any amount paid to acquire the options is added to the spouse’s income for the year in which the options are exercised;382and
· if a spouse is deemed to have received a split-pension amount under paragraph 60.03(2)(b) of the Income Tax Act that is included in that
spouse’s total income in the T1 General form issued by the Canada Revenue Agency, that amount is to be deducted.383Pursuant to SOR/2007-59, which became effective on 1 April 2007, the Federal Child Support Guidelines have been amended to address the impact of the Universal Child Care Benefit (UCCB). Although the UCCB does not constitute spousal income for the purpose of determining the table amount of child support, it must be taken into account in determining the reasonableness of section 7 expenses and in apportioning those expenses between the spouses insofar as the UCCB is paid for the child in respect of whom section 7 expenses are ordered.384The calculation of income under sections 16 to 20 of the Federal Child Support Guidelines can be exceedingly complex, and the problems are compounded by the fact that accounting procedures applicable under the Income Tax Act are not necessarily the same as those applicable under the Guidelines.
Judicial determination of the income of wage earners is relatively simple, because they usually have only one source of income and their income tax returns are likely to provide a true reflection of their annual income. Where spouses are self-employed, the net income reported on their income tax return is not necessarily a true reflection of their income for the purpose of determining their child support obligations. Business expenses that may be legitimately deducted under the Income Tax Act are not necessarily allowed under the Federal Child Support Guidelines.385For example, capital cost allowances permitted for the depreciation of business equipment may be permissible for income tax purposes, but disallowed in whole or in part for the purpose of determining a spouse’s income under the Federal Child Support Guidelines.386Section 2(3) of the Federal Child Support Guidelines requires a court to use "the most current information" to determine a spouse’s annual income.387
Historical information, based on personal or corporate tax returns or other available data, is often predictive of a spouse’s current annual income and may be relied upon in the absence of any contrary indication.388Reliable current information should be used where it conflicts with historical information
because child support is payable out of current and future income, not out of past earnings.389In determining a spouse’s (parent’s) income for the purpose of determining child support, section 2(3) of the Federal Child Support Guidelines mandates the use of the most current information, but this is only appropriate when the most recent information is likely to accurately reflect the spouse’s prospective annual income. In LAK v AAW,390Johnstone J found that the father’s pay stubs from January through May 2005 were not necessarily reflective of his anticipated annual income. Accordingly, the father’s income for 2005 was determined by reference to his income tax return for 2004. In Green v Green,391the father contended that ill-health would continue to reduce his prospective annual income, as it had over the preceding three years. The applications judge, nevertheless, calculated the father’s prospective annual income by extrapolation from his year-to-date earnings. The Newfoundland and Labrador Court of Appeal...