Imputing Income Part VII

Grossing Up for Tax

By Danielle Sawh

Special or unusual income tax treatment can lead to income being imputed to a payor by way of grossing up income for support purposes. Section 19(1)(b) and (c) of the Child Support Guidelines give the Court authority to impute income to a parent or spouse in circumstances where the payor is:

(b) exempt from paying federal or provincial income tax;

(c) lives in a country that has effective rates of income tax that are significantly lower than those in Canada.

The Child Support Guidelines are generally based on a payor who receives income to support their family from money that is taxable. When a payor receives money that does not fit this mold, the more a stream of tax-exempt funds resembles taxable income, the more a Court may find that this stream should be found to be income for the purposes of determining support (Rivard v Hankiewicz, 2007 ONCJ 180 (CanLII).

In many cases, when a Court finds that these tax-exempt funds resemble taxable income, they are grossed up and imputed as income for determining support. Below are examples of circumstances in which the Court has grossed up income for support purposes:

Income Replacement Settlement Funds

In Saroli v Grette, 2022 ONSC 148, the father was in a motor vehicle accident and entered into a settlement agreement. $3,000,000 of this settlement was invested into a structured settlement, which was divided into two parts and the income from the structured settlement was non-taxable. The Court found that it was likely that some of this settlement was intended to replace income, and some was to compensate for future care costs and other losses. The component of the settlement that represented income replacement was imputed to the father as income for support and grossed up for taxes.  

Income Earned Outside of Canada

In Knowles v Lindstrom, 2015 ONSC 1408, the Court heard a motion for interim spousal support in which the payor, a wealthy businessman, was from the US. His 2014 declared annual income was approximately CAD $1.5 million, and he did not pay tax on this income because of various tax exemptions and deductions available to him under US tax law.

The Court reiterated that the Child Support Guidelines, with respect to grossing up for income tax, are commonly applied to spousal support scenarios in order to ensure consistency of treatment where a party’s affairs are arranged to pay less tax on income. The Court stated that the default position should be that a gross-up for tax is prima facie reasonable. In this case in particular, the Court held that it would be unfair for the recipient (who was Canadian) to use her gross income subject to payment of tax in the same calculation as the payor’s net income. The Court awarded interim spousal support in an amount using a grossed-up income for the payor.

In Brandt v Belguarni, 2022 ONSC 4791, the Court heard an uncontested trial in which the support recipient sought to impute income to the support payor who did not participate in the court proceeding.

The recipient provided evidence that the payor, who resided and worked in Qatar, earned approximately $2,530.30 CAD per month. The recipient also gave evidence that during the parties’ relationship, the payor worked as a firefighter in Doha, Qatar, and earned between $28,000 and $40,000 CAD, and she believed he continued to be employed in that role. The payor’s LinkedIn profile listed his job title as “firefighter” with the Qatar Ministry of the Interior. The recipient sought to gross-up the payor’s income because there is no personal income tax payable in Qatar. Based on the evidence that the payor historically worked as a firefighter in Qatar and the fact that there is no personal income tax in Qatar, and the evidence of the payor’s employment benefits the Court imputed income to the support payor in determining his child support obligation.

Tax-Exempt Income Within Canada

In Jacobs v Jacobs, 2021 ONSC 1433, both parties were of First Nations heritage and held status pursuant to the Indian Act. The payor was employed as a constable with the Six Nations Police Service and his employment income was non-taxable under the Indian Act and the Income Tax Act. Both parties sought an order grossing-up the other’s income based on the tax-free treatment of their income.

The Court in Jacobs reiterated that one of the primary objectives of the Child Support Guidelines is to establish a fair standard of support for children that ensures that they continue to benefit from the financial means of both spouses after separation. The Court further held that the payor would not suffer any prejudice from the application of imputing income to him under Section (19)(1)(b) of the Child Support Guidelines with the stipulation that the order is without prejudice to his right to challenge the constitutionality of the provisions at trial (which the payor sought to do). The Court stated that any financial prejudice to the payor resulting from an overpayment of child support in the event his constitutional challenge succeeds was balanced by the financial prejudice to the recipient resulting from an underpayment of child support if the constitutional challenge did not succeed. The Court ultimately grossed-up the payor’s income to determine his support obligations.

Income Earned in Cash

In Hayward v Hayward, 2015 ONCJ 212, the Court heard a motion in which the recipient sought to impute income to the payor due to the nature of his employment income. The payor was working for cash for his close friend and paid no income tax on his cash income. The Court held that this employment remuneration was highly suspicious and there was almost no evidence on which to find that the payor’s alleged declared income was accurate. The Court stated that “the cash nature of business invites a grossing up of his declared income”. Ultimately, the Court imputed income to the payor by grossing up his reported income by 15% because his income was paid in cash and was unverifiable.

Conclusion

There are many cases in which special tax treatment of income leads to income being imputed to a support payor to determine their child and/or spousal support obligations. Declaring all income sources, and understanding the various tax treatment of each source, is critical in determining appropriate support obligations. If you would like to speak to a family lawyer about these issues, please contact Danielle Sawh.