Imputing Income Part VIII

Beneficiary of a Trust

By Danielle Sawh

In Part VIII of my Imputing Incomes series, we will look at Section 19(1)(i) of the Child Support Guidelines, which states that a Court may impute income to a payor where:

“the parent or spouse is a beneficiary under a trust and is or will be in receipt of income or other benefits from the trust”.

This piece of the legislation gives the Court the authority to impute income to a support payor where the payor receives benefits from a trust even when those benefits are not taxable income.

In Garrick v Saporowski, 2015 ONCJ 607, the Court heard a trial in which the issues of child support, and income to determine child support, were in question. The father (the support payor) had recently been released from prison after serving a 12-month sentence. As a result, he was not yet employed. However, the support payor testified that he was the beneficiary of a trust fund established by his grandfather. The parties and their children benefited from the trust fund during the parties’ relationship. The payor testified that he was able to access as much as $3.5 million from this trust fund, and that he had purchased a penthouse apartment in New York with money from the trust fund. The evidence showed that the payor had used the trust fund to pay for his education at Columbia University.

In the court proceedings, the payor had not provided any financial disclosure with respect to the trust fund. He did not disclose it in any of his Financial Statements. The Court concluded that the payor gave evidence of an affluent lifestyle, which appeared to be partially funded as a beneficiary of this trust fund. The payor clearly had significant access to funds. Based on this evidence, the Court found that income should be imputed to him because he was a beneficiary under this trust and was “in receipt of income or other benefits from that trust”, the particulars of which were not disclosed to the Court.

In Bledin v Bledin, 2021 ONSC 3815, the Court was asked to determine the father’s income for support purposes. The father’s primary source of income during the marriage was derived from a trust settled by the estate of his late mother. The father was a beneficiary of this trust, although the trustees, RBC Wealth Management, had full discretion as to the distributions paid to the father. The question that the Court grappled with was how to treat capital distributions that the father received from the trust in excess of its earned income. The capital distributions, according to an expert report, were substantial during the marriage. Without the capital distributions, the father’s average income was $121,000, whereas with the capital distributions, his average income was approximately $247,000.

The Court considered that generally, courts have not required a payor to draw down or dispose of their capital in order to fund support payments and that the Court of Appeal has held that child and spousal support are based on a payor’s income rather than their capital; however, the Court also pointed out that Section 19(1)(i) of the Guidelines specifically states that the Court may impute income on “income or other benefits” received from a trust. The Court found that distributions from a trust, whether from income or capital, may be taken into account in calculating a payor’s income for support purposes.

The Court considered that the capital distributions the father received were used to fund the parties’ living expenses during the marriage and over 50% of his income over the past four years consisted of capital distributions from the trust. The Court held that these are the kinds of payments that Section 19(1)(i) of the Guidelines intended to capture. The Court found that the capital distributions from the trust were appropriately considered in determining his income for support purposes.

What’s more is that the Court also held that these capital distributions were received free of tax, and therefore it was appropriate to gross-up the amounts payable from the trust to the father to reflect the amount of taxable income the father would have been required to earn “to net him the same amount after-tax”. For a refresher on imputing income by way of grossing up for tax, see Part VII of my series here.  

On the other hand, there are some circumstances in which the Court has not imputed income to a payor despite the payor being a beneficiary of a trust. In FBM v BF, 2019 ONSC 708, the Court determined what income to impute to the father, the support payor, from which to order child support. The father’s disclosure in that case was severely lacking, and there was a host of other issues that led to income being imputed to him for a variety of other reasons. Relevant to this article, the father was a discretionary beneficiary of two trusts: a 2003 Trust and a 2015 Trust. The father received no distributions from the 2015 Trust and was not even aware of this trust until trial. The father did receive distributions from the 2003 Trust within the past year, but he was advised that he would not be receiving any more distributions from that Trust after November 1, 2018.

The Court reiterated that there is authority to impute income to a payor who is a beneficiary of a trust where the amounts are recurrent and used to finance a significant portion of the recipient’s living expenses. But, in this case, the amounts that the father received were not recurrent and were determined by the trustees in their discretion. Moreover, the father’s grandfather testified at trial that distributions to the father from the 2003 Trust would come to an end in November 2018. As a result, the Court did not consider the amounts from the trust in the father’s income.

Receiving benefits from a trust can be complex, and it is important to understand the risks involved when child or spousal support obligations exist. If you have any questions about income for support purposes, contact Danielle Sawh at dsawh@sorbaralaw.com.