Simple Income Determination
Even if you’ve never been through a family law dispute before, you’ve probably heard of child support or spousal support (also known as “alimony”). To determine what someone will owe for support, we must first determine that spouse’s income. This is often easier said than done. For some payors, it could be a straightforward exercise. We simply refer to gross “Total income” on their tax return.[1] If a payor is an employee with an arms’ length employer, and there is no opportunity to reduce or defer income, or write off unnecessary expenses, it can be very quick and easy to determine that person’s income by looking at their tax return.
Income Determination is Not Always Straightforward
Many lengthy volumes can be written about problems that arise if the tax return isn’t a fair representation of a payor’s income. In many cases, it’s a major source of dispute. The legislation we turn to for income determination is the Federal Child Support Guidelines. Payors should know that even if both spouses agree on an amount of income, it’s possible that a Court will not accept that level of income for child support purposes if it can’t be supported by documents. This is because child support is the right of the child, not the recipient parent.
Self-Employed Payors
Disputes tend to arise more frequently with self-employed payors. If a payor is a shareholder, director or office of a corporation, the Court doesn’t have to accept that person’s declared income on their tax return as the amount that should be used for support purposes. It’s possible instead for a Court to look at the pre-tax corporate income and attribute some or all of it to the payor.[2]
Imputation of Income
It’s also possible for a Court to determine what amount of income should be “imputed” to the payor based on their experience, training and skill level. If a payor is intentionally under employed, income will be imputed. A Court may adjust income if the payor lives in a foreign jurisdiction with a lower rate of income tax. A further very common example of when income is imputed, is when a payor unreasonably deducts business expenses when those expenses are actually personal. Sometimes, payors can even be imputed income if they fail to provide reasonable disclosure. There are many other examples of when a court may impute income to a payor.
Financial Disclosure
Documents that are commonly expected to be produced in a family law dispute can include: personal and corporate income tax returns for the last 3 years and Notices of Assessment, as well as corporate financial statements. Depending on the circumstances and complexity of a payor’s income, there could be a much longer list of disclosure that must be provided.
Chartered Business Valuators
For more complex situations, family lawyers rely on Chartered Business Valuators to complete an Income Determination Report. This is another potentially large topic which will be described in a separate post.
