A look at dividends, capital gains, pretax corporate income and capital cost allowance.
What is Total Income?
Section 16 of the Federal Child Support Guidelines indicates the starting point for determining “Total Income” for the purposes of child and spousal support is line 150 of the T1 General. For your reference here is the relevant link:
How are dividends treated?
As a general rule, any dividends you receive form part of your income and are included when determining child and/or spousal support obligations.
What about Dividends from Taxable Canadian Corporations?
CRA requires you to gross up the dividends you receive to account for the corporate tax paid. However, for the purposes of support, the amount a court will consider when examining dividends is the actual monies you receive, not the gross amount. So, when you are filling out your Financial Statement, make sure that Section 5 of Schedule III reflects the amount of dividends received, not the reported amount of taxable dividends.
What if I receive a non-recurring capital gain or bonus?
If your income is artificially inflated one year, the court may consider the pattern of income over the last three years to make a fair determination of income. The British Columbia Court of Appeal held in the decision of Brown v Brown 2014 BCCA 152 that if a gain is non-recurring and cannot properly be regarded as enhancing income or financial means of the payor, it will not be regarded as income (see para 35). Courts will consider this issue on a case-by-case basis.
Additionally, Section 17 of the Federal Child Support Guidelines indicates as follows:
“If the court is of the opinion that the determination of a spousal’s annual income under section 16 would not be the fairest determination of that income, the court may have regard to the spouse’s income over the last three years and determine an amount that is fair and reasonable in light of any pattern of income, fluctuation in income or receipt of a nonrecurring amount during those years.”
As such, when considering matters such as a fluctuating bonus or the exercise of stock options, courts may consider your average income over for the past three years to make a fair determination. Additionally, implementing an annual review of child support will help to adjust for any over or underpayment of support in these circumstances.
How is my Capital Cost Allowance treated?
Capital cost allowance on real property is usually imputed back as income available for support purposes.
What about Pretax Corporate income?
Generally, if you are a shareholder, director, or officer of a corporation, the pre-tax income of the corporation may be imputed back to you as income available for the purposes of support. Courts do not have find that the funds were left in the corporation in bad faith to avoid child support. The intention is to allow children to benefit from the monies available to their parents, even if the monies are held within the structure of the corporation. However, if working capital is retained in a company for “reasonable and legitimate business reasons” this income may not be imputed to the payors income (Court of Appeal in the decision of Richardson v Richardson 2013 BCCA) .
For a better understanding of how a court will examine and treat your income for the purposes of support, contact our office and ask to speak to a lawyer.