Manipulating Income to Reduce Child or Spousal Support
Author: Calgary Family Lawyer Mat Wirove
People hide or manipulate their income for all sorts of reasons. As long as taxes have been around there have been those seeking ways of hiding income. In family law, this can be a common issue when calculating the amount of child support or spousal support payable after separation.
Fortunately, in most family law cases determining income is straightforward. If the person who will pay child support or spousal support is an employee you generally only need to look at their total income or what is known as line 150 of their tax return. Income tax returns outline all the source of income a person has claimed in any particular year.
However, when a person’s financial statements do not accurately reflect their income for spousal support or child support purposes, the Court can “impute”, or make up additional income to them based on a number of different factors. The Federal Child Support Guidelines (“Guidelines”) outline various factors to consider when deciding whether to impute income in a family law case including:
- a spouse is intentionally under-employed or unemployed, other than where the under-employment or unemployment is required by the needs of a child of the marriage or any child under the age of majority or by the reasonable educational or health needs of the spouse;
- the spouse is exempt from paying federal or provincial income tax;
- the spouse lives in a country that has effective rates of income tax that are significantly lower than those in Canada;
- it appears that income has been diverted which would affect the level of child support to be determined under these Guidelines;
- the spouse’s property is not reasonably utilized to generate income;
- the spouse has failed to provide income information when under a legal obligation to do so;
- the spouse unreasonably deducts expenses from income;
- the 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
- the spouse is a beneficiary under a trust and is or will be in receipt of income or other benefits from the trust.
One issue that we frequently deal with are payors of child or spousal support who own their own business, the Child Support Guidelines specifically state that the reasonableness of a business expense deduction is not governed by whether the expense is allowed by the Income Tax Act. Therefore, just because your accountant says you can expense it for your taxes, does not mean you will get the same deduction for the purposes of calculating child support or spousal support income.
In these cases, all of the business expenses are looked at and if any provided a personal benefit, they can be moved out of the expense column, increasing income for child or spousal support. Some expenses may be blended personal and business and for these a percentage will be used. For example, only 50% of the use of the vehicle was for business while the rest was personal. In this case, 50% of that expense will be pulled out and added to the income of the person who will pay support, which will increase the support paid.
Another common issue in the calculation of child or spousal support income is the intentional under-employment or unemployment of the payor of support which leads to an amount of support that is not considered fair to the child or other spouse. However, in Alberta family law cases, the courts apply a difficult test to prove this type of case. The Court of Appeal has outlined the following principles in determining when it is appropriate to impute an income to someone who is intentionally unemployed:
- there must be a deliberate course of conduct for the purpose of evading child support obligations;
- imputing income requires either proof of a specific intention to undermine or avoid support obligations, or circumstances which permit the court to infer that intention;
- there is no obligation to earn the maximum that a payor is capable of earning;
- without more, unreasonable unemployment or under-employment is insufficient to impute income;
- the intention of a spouse to evade support obligations may be found if the unemployment, underemployment or other acts indicate a deliberate refusal to live up to the obligation to support one's children.
Courts in Alberta have found that people are allowed to make their own employment decisions and so long as these decisions are not made to defeat support they will not result in an imputation of income. In these types of cases, the facts will be very important and often a trial or hearing is required.
If you have any questions about imputing income, the lawyers at Crossroads Law can be of assistance.