Imputing Income In Family Law
When parties with dependent children go through a separation or divorce in Ontario, child support is an important factor that both parties should put their mind towards. Not only do parents have a moral obligation to jointly support their children based on their ability, section 26.1(2) of the Divorce Act codifies this child support obligation.
Determining how much child support a parent has to pay is generally a simple calculation for a family lawyer – based on the payor parent’s gross income and the corresponding Table amount value. However, this somewhat simple task can become complicated where, for example, the payor parent is self-employed and their personal income is not accurately reflected in their income tax documents (e.g. Notice of Assessment) for family law purposes. Another example is in situations where the payor parent is purposefully under-employed or unemployed. To address these particular scenarios, section 19 of the Guidelines allows for imputing income on a parent based on their capacity.
Section 19(1) of the Guidelines sets out nine scenarios in which imputing income can occur; however, it is important to note that the courts have clearly stated that this list is not exhaustive for imputing income. Furthermore, a court is granted discretion to impute such income as it considers appropriate.
When can a Court Impute Income?
Listed below are the nine circumstances that are laid out by section 19(1) of the Guidelines which may result in imputing income:
- the spouse is intentionally under-employed or unemployed (unless the under-employment or unemployment is a result of the needs of the child or any child under 18, or due to the reasonable health or educations needs of the spouse);
- the spouse is exempt from paying income tax (federal or provincial);
- the spouse resides in a country whose income tax rates 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 payor’s property is not reasonably utilized to generate income;
- failure to provide income information when under a legal obligation to do so;
- unreasonably deducting expenses from income;
- where the payor spouse derives a significant portion of income from dividends, capital gains or other sources that have a lower tax rate than employment or business income or that are exempt from tax; and
- the payor spouse is a beneficiary under a trust and is or will be receiving income or other benefits from the trust.
Of the above list, two of the most common scenarios of imputing income in family law is in cases of intentional under or unemployment, and unreasonably deducting expenses from income. This article will focus on these two scenarios and briefly describe the courts approach and implications for parties in family law litigation.
Child’s Right to Support
It is important to note that courts almost always place precedence of the child’s right to support over the parent’s freedom relating to employment choices. Once the imputation of income becomes an issue in a family law court case, the court has the power to critically examine a party’s career decision and, if self-employed, even how they operate their business.
A simple example of how a court may scrutinize a parent’s career choice is when a parent decides to stop working to pursue self-employment. While individuals have every right to pursue business opportunities, the court may find that in a parent’s particular situation, where no significant income is being generated, such a decision may be unreasonable after looking at all relevant factors.
Imputing Income in Cases of Intentional Underemployment or Unemployment
The leading court case for the issue of intentional underemployment or unemployment is the Ontario Court of Appeal case of Drygala v. Pauli.
The Court in Drygala laid out a 3 part test when deciding imputation of income cases relating to intentional underemployment or unemployment. The three questions that courts must consider in these types of cases are as follows:
(1) Is the underemployment or unemployment intentional?
(2) If so, is the situation due to a spouse’s reasonable educational needs?
(3) If not, what income should be appropriately imputed?
When taking a look at this test, it is worth noting that the term “intentional” in this test means a voluntary act and does not require any bad faith to have occurred. The party is considered intentionally under or unemployed when they earn less that their capacity to earn based on the circumstances.
Bear in mind that the onus rests with the party arguing for imputation of income to provide some evidentiary basis to show that the other party is intentionally under or unemployed. What this means in practical terms for divorce lawyers and family lawyers is that they will have to gather relevant evidence such as the party’s education, work experience, skills, health and the income the other party may make if they worked according to their ability.
While starting a business or pursuing an alternate a career path may be important to the payor spouse and may be done in good faith, the courts will not relieve a party from their obligation or reduce their obligation when a party engages in unproductive or impractical career goals. The court will scrutinize a party’s career choice or self-employment decision to see if it was reasonable under the circumstances. If the court finds that a party’s decision was not appropriate in light of their support obligations, they may impute income.
Imputing Income for Unreasonable Deduction of Expenses from Income
Another common scenario where imputation of income becomes an issue is where a party is self-employed. In family law cases the court will consider whether an expense deducted to reduce a party’s income was reasonable, even if the deduction was allowed under the Income Tax Act.
While the onus rests with the party arguing that an expense was unreasonably deducted, the payor party will still have to provide justification and evidence to support their calculations. This means that the payor party will have to provide explanations for expenses and calculations, which will necessarily require evidence to be submitted so that the court can assess the reasonableness of the deductions.
It is important to note that the court does not have to find that the payor party acted improperly or in bad faith by deducting expenses from income, rather, the main issue revolves around whether the deduction (full or partial) results in a fair picture of the actual income for support purposes.
From a review of court cases, the courts have determined that an important factor to consider in such cases is whether there was a personal benefit occurring from the business expense claimed as a deduction. The following are just some examples of where the court added back claimed expenses, in part or in full, into the payor’s income for support purposes because they had an element of personal benefit:
- Notional deductions for home office
- Food
- Car
- Telephone and cell phone
- Entertainment
For more information about imputing income in family law and divorce cases, or about obtaining a divorce in Ontario, please contact our Toronto divorce lawyer.
NOTICE AND DISCLAIMER: The material posted on this website is for informational purposes only and should not be relied upon as legal advice. If you are in need of legal advice relating to your particular situation it is highly recommended to consult with a lawyer.
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Division or Equalization of Family Property
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