Determining Income in Family Law Cases

Target Audience: Lawyers and Legal Professionals

In this blog post, I identify and describe two competing approaches to the calculation of income in support cases - the ‘current income’ method and the ‘tax return’ approach - and argue the tax return approach ought to be applied in most applications about child support.

One of the basic aspects of spousal or child support is determining the income of the person who is supposed to pay. Surprisingly, there is a lot of ambiguity about how exactly income is to be determined. While there is an explicit description in ss. 15-20 of the Federal Child Support Guidelines (which have also been applied in cases of spousal support), these provisions have been interpreted in at least two different ways in different Canadian courts. These differing methods can yield very different results in support obligations, making the outcome of litigation hard to predict. Judges, without suitable submissions from counsel, may simply reflexively apply their own interpretation without recognizing any ambiguity, let alone clarifying it. What is worse, there seems to be little awareness in the bench or profession of this ambiguity, making submissions on the topic difficult.

The starting point for income determination is s. 16 of the Guidelines:

16 Subject to sections 17 to 20, a spouse’s annual income is determined using the sources of income set out under the heading “Total income” in the T1 General form issued by the Canada Revenue Agency and is adjusted in accordance with Schedule III.

Sections 17 to 20 mostly deal with exceptions to section 16, and are not particularly relevant to the present discussion. Likewise, there is little ambiguity in what sources of income are set out under “Total income” in the T1 General form. However, one major cleavage in the caselaw derives from this language.

One line of authorities looks literally to payor’s most-recent tax return to see what is listed under the heading “Total income”, or line 150 - or at least what ought to have been listed there. As The Honourable Madam Justice Huddart states it in Vincent v. Vincent, 2012 BCCA 186, at para. 35: "All determinations of child support begin with finding the spouse’s Line 150 income, a relatively straight-forward step one". I refer to this method as the “Tax Return” approach.

Another line of authorities says, in the words of The Honourable Madam Justice L. Chappel (Crowe v. McIntyre, 2014 ONSC 7106, at paragraph 26): “where a party’s prior year’s income is not predictive of what they are likely to earn in the upcoming year, the court should determine the party’s Guidelines income for the upcoming twelve months from when child support will be paid.” I refer to this as the “Current Income” approach.

The 'Tax Return' Approach to Section 16

Madam Justice Huddart articulates the 'Tax Return' approach to section 16 in Brown v. Brown, 2014 BCCA 152, at paragraph 16:

[16] The legislative scheme for determining Guideline income is fairly straightforward. A court begins, under s. 16 of the Guidelines, with the “total income” from the payor parent’s tax return and then makes specified adjustments. Next, the court is entitled to take further specific considerations into account under ss. 17-20 of the Guidelines to determine Guideline income. This Court outlined the steps in Vincent v. Vincent, 2012 BCCA 186:

…

[35] All determinations of child support begin with finding the spouse’s Line 150 income, a relatively straight-forward step one. The second step is to make whatever adjustments to that amount are required by Schedule III. Once these two steps are completed, the court must look to sections 17 to 20, to determine whether any of the exceptions set down in those provisions applies, and, if so, what effect they should be given on the facts of the case.

The Current Income Approach of Section 16

As compared to the ‘Tax Return’ approach, the ‘Current Income’ approach is more nuanced: the court does not merely look at the most recent tax return, but maintains some discretion when the prior year's Line 150 income is not predictive of what they are likely to earn in the upcoming year. The Current Income articulated by the Honourable Madam Justice L. Chappel in Crowe v. McIntyre, 2014 ONSC 7106, starting at paragraph 26 (emphasis added). 

[26] Section 16 of the Guidelines provides that subject to sections 17 to 20, a spouse’s annual income is determined using the sources of income set out under the heading “total income” (line 150) in the T1 General Form issued by the Canada Revenue Agency, and by then making the adjustments provided for in Schedule III to the Guidelines. Federal Child Tax Benefits and GST/HST Tax Credits for children are not included in the calculation of income for the purposes of child support (Guidelines, Schedule I, para. 6). Section 16 does not require the court to blindly use the previous year’s total income as reported by the party in the T1 General Form for the previous year as a basis for determining ongoing child support. Rather, the goal is to ascertain current income based on the sources set out in the T1 form (Coghill v. Coghill, [2006] O.J. No. 1489 (Ont. S.C.J.)). By virtue of section 2(3) of the Guidelines, the court is required to determine issues relating to income based on the most current information available. Where a party’s prior year’s income is not predictive of what they are likely to earn in the upcoming year, the court should determine the party’s Guidelines income for the upcoming twelve months from when child support will be paid (Nelson v. Nelson, 2005 CarswellNS 18 (N.S.S.C.); Kimla v. Golds, 2005 CarswellOnt 1000 (S.C.J.); Bonthron v. Bonthron, 2004 CarswellOnt 96 (S.C.J.); Lemmon v. Lemmon, 2004 CarswellOnt 771 (S.C.J.), additional reasons at 2004 CarswellOnt 1541 (S.C.J.)).

The Approach to use in BC

While both the ‘Tax Return' and 'Current Income' approaches are supported by good Canadian authorities, the ‘Tax Return’ approach is expressed in at least two relatively recent decisions of the British Columbia Court of Appeal (Brown and Vincent, supra). Conversely, I could find no appellate authority for the Current Income approach in British Columbia. Rather, many of the strongest authorities in favour of the Current Income approach are from other provinces.

The 'Tax Return' approach also has the benefit of being simple to apply. Further, it yields predictable results.

Moreover, the matter of fairness is often raised in support of the 'Current Income' approach. However, at least prospectively, if a payor knows that their income will be used to calculate their child support for the following year, the payor can and should make financial arrangements such that they will be able to afford those payments when they come due, regardless of their current income in the following year. If the payor suffers a reduced income in the following year, they ought to already have the funds set aside for child or spousal support; they will benefit from a lower obligation in the following year.

The final factor in favour of the approach is consistency with all manner of tax liabilities and government benefits, which are typically calculated based on the tax-payor's prior-year income.

The main limitation to this approach will be in applications heard shortly after separation in circumstances where a prospective payor’s income has significantly declined due to reasons outside of his or her control. The ‘Income Tax’ approach would create an obligation based on the higher income risking an untenable and unfair financial burden on that prospective payor. Unlike in the case of separated parties, where the support is known or ought to be known, there is no reason this payor would have had to set aside money for his future post-relationship support obligations. The flexibility of the ‘current income’ approach may overcome the downside of its relative unpredictability in this narrow case - though, again, the stronger authorities in BC support the ‘Income Tax’ approach.