C. Determination of Annual Income; Use of CRA T1 General Form; Statutory Adjustments
| Author | Julien D. Payne - Marilyn A. Payne |
| Pages | 122-147 |
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Subject to section 15(2) of the Federal Child Support Guidelines which deals with written agreements,4sections 16 to 20 of the Guidelines define how income is to be determined by the court in order to apply the Guidelines.5For the purpose of those sections and also section 21,6words and expressions used therein, which are not otherwise defined in section 2 of the Guidelines, have the meanings assigned to them under the Income Tax Act.7An examination of sections 16 to 20 and Schedule III of the Federal Child Support Guidelines makes it abundantly clear that the calculation of income for the purpose of applying the Guidelines can be extremely complex. The degree of complexity will vary according to the source of income and the particular circumstances of the case. Relevant factors include whether the spouse or former spouse is self-employed or earns commission income, investment income, or dividend income and whether he or she has received capital gains. The difficulties will be compounded when the spouse or former spouse has voluntarily relinquished employment or is underemployed, or failed to realize the income earning potential of property. The time has come when lawyers and judges must use computer software programs in order to determine the appropriate amount of child support. Gone are the days of free wheeling negotiations and submissions premised on supposed going rates. Now, the arithmetical calculations must be precisely applied and access to a reliable computer data base or an accountant is essential if errors are to be avoided in the more complex case.8Fluctuations in income during the year are only relevant to the determination of the obligor’s annual income; they do not permit parties or the courts to reassess the monthly amount of child support on a regular ongoing basis during the year.9Section 16 of the Federal Child Support Guidelines calls for a flexible approach that is based on fairness to both parties. Accounting procedures applicable for the purpose of the Income Tax Act are not necessarily the same for the Guidelines.10Where the obligor’s income tax liabilities play a significant role in the determination of his or her income, the court may grant an order for child support on the assumption that
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the obligor’s claim to a high deduction for taxes is legitimate, while reserving jurisdiction to adjust the order in light of any new information that may be received.11A determination of income should be based on demonstrated earning capacity and not on self-serving speculation.12The court must take account of income received for overtime and standby hours.13The fact that the obligor’s income is derived from intensive and physically demanding labour does not warrant any adjustment to that income under the Guidelines. Although such income may not be sustainable over the long term, children are entitled to a level of support that reflects the obligor’s actual income, regardless of the ease or difficulty in earning it.14Remuneration from public service or from secondary employment is not excluded from an obligor’s income in assessing the amount of child support that is payable.15
In Olchowecki v. Olchowecki,16Wilkinson J., of the Saskatchewan Court of Queen’s Bench, states:
The basic approach in the determination of income is therefore:
(1) to employ s. 16 to determine annual income for the year in which the application is heard, using the most current source(s) of income information available;
(2) the combined effect of ss. 16 and 17 dictates that if there is a material difference between the historical pattern of income and the determination under s. 16, the latter should be questioned for fairness;
(3) mere fact of difference does not make the s. 16 determination unfair. The degree of permanence associated with the difference, the quality of the change in income from historical levels, and the reasons giving rise to the change must all be considered: See: Fuzi v. Fuzi, [1999] B.C.J. No. 2263 (B.C.S.C.);
(4) there is an additional test of fairness applied to a s. 16 determination of income if s. 18 is implicated. If the income earner is a shareholder, director or officer of a corporation, the determination of income may include:
(a) all or part of the pre-tax income of the corporation or any related corporation for the most recent taxation year; or,
(b) an amount not exceeding that pre-tax income which is commensurate with the services provided to the corporation.
Added to the pre-tax income are any amounts paid to or on behalf of persons who are not at "arm’s length" unless the payments are proved to be reasonable;
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(5) fairness in the application of s. 18 will depend on the nature of the relationship between the income earner and the corporation, the nature of the corporation’s business, the legitimate calls on the corporate income, and the corporation’s capitalization requirements, with the court having the ability to consider the historical income pattern of the spouse and non-recurring gains or losses: See: Kowalewich v. Kowalewich, [2001] B.C.J. No. 1406, 2001 BCCA 450, (2001), 19 R.F.L. (5th) 330 (B.C.C.A.) and Boser v. Boser, [2003] S.J. No. 714, 2003 SKQB 477, 240 Sask. R. 55 (Q.B.);
(6) lastly, s. 19 operates to impute additional income in appropriate circumstances, including, but not limited to, the enumerated situations in subparagraphs (a) through (i). Furthermore, imputed income can be used for the purpose of determining a pattern of income over three years pursuant to s. 17 as well as current income: See: Schnell v. Schnell, [2001] S.J. No. 704, 2001 SKCA 123, 213 Sask. R. 174 (C.A.).
Judicial determination of a parent’s income under the Federal Child Support Guidelines requires a court to examine both income and earning capacity. Martinson J., of the British Columbia Supreme Court,17has formulated the following step and step approach: Part I — Determine what a parent actually earns. Part II — Determine whether additional income should be attributed to supplement the actual earnings. Each part has the following four steps.
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 Canada Revenue Agency’s 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.
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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.
Section 16 of the Federal Child Support Guidelines provides that, subject to sections 17 to 20 and adjustment in accordance with Schedule III,18the annual income of a spouse is determined using the sources of income set out under the heading "Total income" in the T1 General form that is issued by the Canada Revenue Agency.19
While using the previous year’s line 150 income as the basis for the next year’s payment obligations will often be a fair, inexpensive way of determining child support obligations, it will be grossly unfair if a dramatic change has occurred that deprives the support creditor of substantial child support for a year or cripples the support debtor by imposing a level of payments that cannot be afforded.20The T1 General Form identifies the sources which make up total income as:
· employment income;
· commissions;
· old age security pension;
· Canada or Quebec Pension Plan benefits;
· disability benefits;21· other pensions or superannuation;
· unemployment insurance benefits;
· dividends;
· interest and other investment income;
· partnership incom;
· rental income;
· capital gains;
· registered retirement savings plan income;
· other income;
· business income;
· professional income;
· commission income;
· farming income;
· fishing income;
· workers’ compensation payments;
· social assistance payments;
· and net federal supplements.22
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Capital gains and registered retirement savings plan income are sources of income...
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