Imputing Income: 3 Responses to 3 Risky Scenarios

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  • May 12, 2015

Imputing Income: 3 Responses to 3 Risky Scenarios

Canadian child support legislation reiterates society’s desire to hold children’s welfare as the first financial priority for families upon separation. A tenant of that principle is the consistent treatment objective of the Child Support Guidelines (CSG). Both spouses earning the same income yet applying different tax treatments (salaried vs. business income) will result in different net amounts of child support. The Ontario CSG ( http://www.ontario.ca/laws/regulation/970391 ) are virtually similar to their federal counterpart.

The objectives of the CSG ensure that all income is disclosed and all available funds including pre-tax income of the corporation are available for distribution. Where scrutiny of a payor’s financial circumstances raises questions, a court has wide discretion to impute or attribute income to realize a fair distribution for a child or former spouse entitled to receive support.

What does imputing income mean?

To impute income is to ‘attribute’ or ‘add back’ income. Depending on the circumstances, this may mean accounting for income which should have been earned or may have been reduced through the choice of how remuneration was accepted.

How does imputing income affect me?

Here are three scenarios where adjustments to income, workplace history, and lifestyle will attract a claim to impute income to the payor in the calculation of a fair amount of child support.

  1. Underemployed: You’ve an accomplished work history with an impressive academic record. Maybe it was being passed over to the C-Suite that led you to forego the search for a new job choosing to receive a regular yet modest stipend from your investments. Your income capacity is not being realized and there is no apparent reasonable justification for it.
  2. Choosing remuneration by dividends to attract a lower tax rate may offend the consistent treatment principle. Shareholders, directors, or officers who elect to take their income by declaring dividends are allowed an adjustment to income (known as the Schedule II adjustment in the CSG)for the calculation of child support purposes. They will be entitled to include the actual dividend deducting the non-cash portion of the dividend. The adjusted lower income corresponds to a reduced amount of support for the recipient.
  3. Refusing or failing to disclose income: Others comment about your envious lifestyle while you bemoan your low income. This contradiction will attract skeptics asking about your true financial circumstances. Paying personal and household expenses through the business will be imputed back into income.

A claim for the imputation of income may be asserted at separation or upon divorce by a spouse seeking child support. Here are three ways to respond to the claim in an attempt to defeat it.

  1. Serious well documented attempts were made to secure employment at a comparable level to that which existed prior to the collapse of your business; the termination of your employment without cause, or an unanticipated market downturn.
  1. The actual declared dividends do not represent a significant portion of the payor’s income all from all sources or are not a recurring source of income. Therefore the actual dividends will not be grossed up for tax or if the dividends were not representative of a pattern of income, they would be excluded from income.
  1. Just separating you are entitled to average annual fluctuating income over the last three years.  Even if the actual dividends received in one calendar year are grossed up for tax, averaging that income with the prior two year’s income from all sources (line 150 on the tax return) may reduce the amount of income from which child support is calculated at least for the first year post separation.
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