Children Come First: A Report to Parliament Reviewing the Provisions and Operation of the Federal Child Support Guidelines - Volume 2

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4. SECTION-BY-SECTION REVIEW OF THE FEDERAL CHILD SUPPORT GUIDELINES AND THE DIVORCE ACT (cont'd)

SCHEDULE I: FEDERAL CHILD SUPPORT TABLES

BACKGROUND

The Federal Child Support Tables set out the amount of monthly child support payments for each province and territory based on the annual income of the paying parent and on the number of children for whom a table amount is payable.

For low-income paying parents, there is a threshold level of income (the "adult personal reserve") below which no amount of child support is payable. Child support amounts are specified up to an income level of $150,000 per year. At the $150,000 limit, the tables specify an additional percentage of income above $150,000, which may be added to the table amount for the initial $150,000. Section 4 of the Guidelines provides parents and the courts with two optional approaches for determining child support payments for paying parents with annual incomes above $150,000.[349]

The amounts in the tables are based on economic studies of average spending on children in families at different income levels in Canada. The formula that generates the tables takes into account the "adult personal reserve"; federal, provincial, and territorial income taxes; and the fact that child support payments are no longer taxable in the hands of the receiving parent and no longer deductible by the paying parent. The tables exclude certain refundable credits that do not appear on tax forms, such as the National Child Tax Benefit and the goods and services tax credit for children. Because of differences in provincial and territorial tax rates, each province and territory has a separate table. At lower income levels, the formula is modified to account for the combined impact of taxes and child support payments on the paying parent's limited disposable income.

In most cases, the table amounts are minimum amounts. No reduction is permitted, other than in those situations listed in the Divorce Act or in sections 3(2) to 10 of the Federal Child Support Guidelines.

APPLICATION

ISSUE

UPDATING THE TABLES

Currently, the published tables are based on the 1996 and 1997 tax parameters and tax structures. Changes to tax systems or levels can either increase or decrease child support amounts from those in the tables. Every year since 1997, these changes have been monitored. The Department used an updated formula to recalculate table amounts and compare them with those in the published tables. In doing this, the Department has found that, although there have been some notable changes to taxation in some provinces, the impact on the table amounts is negligible at most levels of the income spectrum. There has been no compelling need to adjust the table amounts.

IMPACT OF CANADA PENSION PLAN BENEFITS

The courts have looked at the impact on the table amount of Canada Pension Plan (CPP) benefits paid to a child (called Disabled Contributor's Child Benefits, or DCCBs). According to Human Resources Development Canada, these payments are strictly intended for the child. A paying parent's own CPP disability benefits are not affected by the DCCBs paid to a child, so this doesn't affect his or her ability to pay child support. Furthermore, according to the Canada Customs and Revenue Agency, the child pays taxes on DCCBs received either by an adult child or by a parent on the child's behalf, as these DCCBs belong to the child.

In an intact family, a child benefits from all sources of income available to the family, including both of the parents' CPP benefits and the child's DCCBs. Children should continue to benefit from all of these sources of income even after their parents separate. Of course, the court can consider benefits paid to a child in cases where it has discretion to do so, such as when there are special expenses or the child is an adult.[350]

CASE LAW

A review of the case law reveals that Schedule I has generally been applied as intended.[351] Many cases have dealt with CPP benefits, including Di Fabio v. Di Fabio,[352] Schroder v. Schroder,[353] Corkum v. Corkum,[354] and Griffiths v. Griffiths.[355] In Rousseau v. Rousseau,[356] the court said that DCCBs are meant to compensate the child for the parent's decreased income-earning ability.

AMENDMENT

The tables were amended in 1997 to correct a typographical error in the Yukon tables at the first two income levels. In 1999, Nunavut was added as paragraph (m) in Note 4 of Schedule I. The child support table for Nunavut, which copies the child support table for the Northwest Territories, was inserted in Schedule I.

RECOMMENDATION

SCHEDULE II: COMPARISON OF HOUSEHOLD STANDARDS OF LIVING TEST

BACKGROUND

GENERAL

Section 10 of the Federal Child Support Guidelines permits parents and courts to determine to an amount of child support that differs from the table values if either parent or a child of the marriage would otherwise suffer undue hardship.[357]

The parent claiming undue hardship must demonstrate not only that circumstances giving rise to undue hardship exist, but also that his or her household does not have a higher standard of living than that of the other parent. If so, the court may order a different amount of support, but it is not required to do so. The courts only compare household standards of living when proven circumstances are giving rise to undue hardship.

Subsection 10(4) of the Guidelines refers to the Comparison of Household Standards of Living Test found in Schedule II. Because use of the test is optional, courts and parents may employ other methods to determine the relative standards of living of each household.

By requiring a comparison of the standards of living of each household, the Guidelines ensure that child support is not reduced when the child is living in a home with an even lower standard of living. The test accounts for the overall standard of living by including not only the parents, but also all members of each household.

THE SIX-STEP PROCESS

The test uses a six-step calculation to objectively compare each household's overall standard of living.

STEP 1

Establish the annual income of each person in each household by applying the formula (A - B) where:

• A     is the person's income determined under sections 15 to 20 of the Guidelines, and
• B     is the federal and provincial tax payable on the person's taxable income.

The court can impute an appropriate amount when the information on which to base the income determination is not provided.

Step 1 calculates the annual income of each person in each household. A household is defined to include the spouse and any person living with the spouse who is a dependent or a provider. The definition therefore includes the spouse's common-law partner and the common-law partner's children who are living with the spouse. A child of the marriage in a shared custody arrangement is considered as part of the household of each parent.

Sections 15 to 20 of the Guidelines and Schedule III are used to determine income, just as they are used when determining income for child support. As when calculating income for child support, income may be imputed in appropriate circumstances under section 19 of the Guidelines. The annual income of each household member is then adjusted for federal and provincial income taxes payable. Taxable income is the same as "Taxable income" in the T1 General form issued by the Canada Customs and Revenue Agency.

STEP 2

Step 2 adjusts the annual income of each household member according to the listed criteria. The adjustments provide a more accurate estimate of the available cash flow in each household.

Paragraph (a) lists three types of deductions from the annual income for each family member, while paragraph (b) lists two circumstances in which one adds to annual income. These deductions and additions recognize amounts that may or may not be available to households when calculating their standards of living.

THE THREE DEDUCTIONS

Under subparagraph (a)(i), any amount the court used to find undue hardship should be deducted from annual income. For example, if $5,000 in annual access expenses leads to a finding of undue hardship to the paying parent, then, the paying parent may deduct $5,000 from his or her annual income for the purpose of the test. See the detailed review of subsection 10(2) of the Guidelines for circumstances that produce undue hardship. The spouse claiming undue hardship deducts a specified amount from his or her annual income. There is an exception: one cannot claim a deduction if the court found undue hardship because the paying parent supported a member of his or her second family who is not disabled or seriously ill. This second family is already factored into the household size when low-income measures are applied, as discussed below.

Subparagraph (a)(ii) lets the paying parent deduct from his or her annual income the child support amount that would otherwise be payable for the benefit of the children of the marriage. So, if the paying parent would had been required to pay, for example, $10,000 per year in child support (before considering an undue hardship claim) was not made, then $10,000 is deducted from the paying parent's annual income for the purposes of the test. The table amount will be deducted unless determining the child support amount allows a departure from the table values, such as when the paying parent's income is over $150,000 (section 4) or when the parents share custody (section 9). Section 7 expenses are not deductible for either parent.

Subparagraph (a)(iii) lets either spouse deduct any amount of support that a household member is obliged to pay under a judgment, order, or written separation agreement. This subparagraph permits a deduction for spousal support. This deduction is available to any household member who has such a support obligation. If the amount was already deducted under subparagraph (a)(i) or (a)(ii), it will not be deducted again. There is no comparable clause requiring the deduction of spousal support received, because this amount is already factored into the way annual income is determined under Step 1.

THE TWO ADDITIONS

Subparagraph (b)(i) requires the receiving parent to include as income the child support amount that he or she would otherwise get if there had not been a claim for undue hardship. As in subparagraph (a)(i), the court may add the table amount. If that is not appropriate, the court may add another, more appropriate, amount.

Subparagraph (b)(ii) requires any household member to add to annual income any amount he or she gets for child support, whether under judgment, order, or written separation agreement.

STEP 3

In Step 3, the total household income for each household is determined by adding the adjusted annual income for everyone in each household. Step 3 ensures that all available sources of income are considered.

STEP 4

The applicable low-income measures amounts are determined for each household based on the following charts.

Low-Income Measures

One person

Household size	Low-income measures amount
One adult	$10,382

Two persons

Household size	Low-income measures amount
Two adults	$14,535
One adult and one child	$14,535

Three persons

Household size	Low-income measures amount
Three adults	$18,688
Two adults and one child	$17,649
One adult and two children	$17,649

Four persons

Household size	Low-income measures amount
Four adults	$22,840
Three adults and one child	$21,802
Two adults and two children	$20,764
One adult and three children	$20,764

Five persons

Household size	Low-income measures amount
Five adults	$26,993
Four adults and one child	$25,955
Three adults and two children	$24,917
Two adults and three children	$23,879
One adult and four children	$23,879

Six persons

Household size	Low-income measures amount
Six adults	$31,145
Five adults and one child	$30,108
Four adults and two children	$29,070
Three adults and three children	$28,031
Two adults and four children	$26,993
One adult and five children	$26,993

Seven persons

Household size	Low-income measures amount
Seven adults	$34,261
Six adults and one child	$33,222
Five adults and two children	$32,184
Four adults and three children	$31,146
Three adults and four children	$30,108
Two adults and five children	$29,070
One adult and six children	$29,070

Eight persons

Household size	Low-income measures amount
Eight adults	$38,413
Seven adults and one child	$37,375
Six adults and two children	$36,337
Five adults and three children	$35,299
Four adults and four children	$34,261
Three adults and five children	$33,222
Two adults and six children	$32,184
One adult and seven children	$32,184

A larger household might have a higher income than a smaller household would, but its needs are also greater. What income would the larger household need to have the same standard of living as the smaller household? The low-income measures set out to adjust the annual household incomes determined in Step 3 by taking into account family size and composition. This provides a means of comparing the relative standards of living between the two households.

The low-income measures presented in Step 4 of the test are those calculated by Statistics Canada's Household Surveys Division for 1994. They represent half the median after-tax family income adjusted for family size and composition and are not a measure of poverty. Relative to each other, the low-income measures are stable from year to year. Moreover, the low-income measures can compare household economic status across a wide range of incomes. The low-income measures objectively compare the relative standards of living of families of different sizes.

The reference value for a single-person household is $10,382. A couple or a single parent with one child is presumed to require 1.4 times the income of a single adult to be as well off, so the low-income measures value for a household of two is $14,535, or 1.4 times the reference value of $10,382. A couple with one child or a single parent with two children is presumed to require 1.7 times the income of a single adult to be as well off, so the low-income measures value for a household of three is $17,649, or 1.7 times the reference value of $10,382. The low-income measures provide a complete series of such related values for all household sizes and compositions.

STEP 5

Divide the household income amount (Step 3) by the low-income measures amount (Step 4) to get a household income ratio for each household.

STEP 6

The household income ratio represents the relative standard of living in each household. Compare the household income ratios. The family with the higher household income ratio has the higher standard of living. If the parent claiming undue hardship has a higher household standard of living, then there can be no finding of undue hardship.

APPLICATION

GENERAL

Use of the Comparison of the Household Standards of Living Test is optional,[358] but if a court doesn't use it, it must find some other way to compare the households' relative household standards of living.[359] As we've discussed, case law has also confirmed that the court may deny an application even when undue hardship exists and the applicant's household standard of living is below that of the other spouse.[360] 

USE OF THE TEST

When the Federal Child Support Guidelines were introduced in May 1997, many observers criticized Schedule II as being too complex, too long, and too difficult to apply.[361] Since this test was not mandatory, courts did not take to it. It was used only in about one-quarter of the early cases involving successful undue hardship claims; more judges used alternative means.[362]

Here are some of the reasons that the test was not used in these early cases.

• The financial situation of the parties may have made the result of the test obvious and therefore unnecessary.
• Those without access to computer software, such as self-represented litigants, may have thought the calculation was too complex.
• It may have been too hard to get all of the required information about other household members, because nothing in the Divorce Act or in the Federal Child Support Guidelines requires the information to be disclosed.
• One has to know the amount of spousal support to finish the test, but one only determines that amount after calculating the child support amount, since subsection 15.3(1) of the Divorce Act directs courts to give priority to child support over spousal support.
• Some people feel that the test itself is artificial because it does not include the value of a family's assets or ongoing expenses and because the low-income measures may not reflect the actual spending patterns of the family.

Many observers called for the test to be either simplified or made mandatory so that it would be used more often and provide consistency and predictability of results.[363] Others argued that the test would be used more if court staff were better trained and if more people had the right computer software.[364]

In spite of early resistance, courts have started using the test more often over time. By March 2000, the test was being used in more than half of the successful undue hardship claims based on second families.[365] Professor D.A. Rollie Thompson says, "In the past year and a half, the Department has seen a significant move [toward using the test], at least in the 'successful' second family cases."[366]

Regardless of the difficulties in applying the test, most observers agree that in appropriate cases, the test can accurately and usefully measure the relative standards of living of different households. While the test is somewhat complicated, it must be so if it is to account for both the composition of the household and the financial contribution of all its members.

OTHER METHODS OF COMPARING HOUSEHOLD STANDARDS OF LIVING

Courts have used other methods to compare household standards of living. In some cases where the households are the same size, judges have simply compared the household's gross income, rather than doing the net income analysis required by Schedule II.[367] In another line of cases, judges adopt an "absolute" rather than the relative test required by Schedule II, ruling that $93,000 a year[368] or $82,245[369] or $60,000[370] is more than enough to maintain a decent standard of living. Some Saskatchewan courts have added a variety of qualitative factors to the test, noting everything from the lower cost of rural living,[371] to the accumulation of RRSPs,[372] to doubts about including the new partner's income.[373] In many other cases, the lack of adequate evidence and Schedule II calculations have left judges to their own resources in applying section 10.

By making the test optional, the Federal Child Support Guidelines recognizes that the test is not always appropriate, such as in cases where families have large assets, debts, or unusual ongoing expenses. The disparate circumstances of Canadian families may make strict adherence to any single statutory test too restrictive.

FINANCIAL DISCLOSURE FROM OTHER HOUSEHOLD MEMBERS

To complete the test, one needs the annual income of each household member. While parents themselves are required to provide full and timely financial disclosure when relevant, nothing in the Divorce Act or the Guidelines compels other household members to do so, although Step 1 lets the court impute income in the amount it considers appropriate if it doesn't receive the information.[374]

The parent claiming undue hardship has the burden of proving it, so he or she must provide income information about all household members or risk having the court reject the claim.[375] But the issue of making the other parent's household members disclose income is controversial. Should disclosure be required in every case where undue hardship is claimed, or only when circumstances giving rise to undue hardship have been proven?

Case law overwhelmingly confirms that full disclosure is required in every meritorious case of undue hardship, but courts have been somewhat divided as to when the disclosure should occur. Some require proof of a prima facie case of undue hardship before ordering disclosure,[376] while others require disclosure whenever a claim is made.[377]

Courts require early disclosure when they want to resolve claims as quickly as possible, whereas they require some proof of undue hardship in advance when they want to discourage abuses of the process and avoid unnecessary inquiries into the private matters of non-parties. A parent responding to a claim for undue hardship cannot avoid disclosure by conceding that his or her standard of living is higher than that the other parent's, because his or her income is also relevant to the determination of the amount of the support order when undue hardship is proven.[378]

AMENDMENTS

Several minor amendments were made to Schedule II in December 1997 to clarify and correct the test.

• The definition of household was amended to include the child of a common-law partner living with the spouse as a member of the household.
• Paragraphs (a) and (b) of Step 2 were corrected to state that the gross amounts of spousal and child support are to be used to calculate income because taxes are already taken into account in Step 1.
• Subparagraph (a)(i) was reworded so that no amount is to be deducted for a second family even if that second family is the cause of the finding of undue hardship, because the second family is taken into account in the low-income measures.
• Subparagraphs (a)(ii) and (b)(i) were amended to ensure that no amount for special expenses is deducted from the income of the paying parent because the contribution of the receiving parent to special expenses is not deducted from his or her income.
• Subparagraphs (a)(ii) and (a)(iii) were amended to ensure that the support amount is not deducted from the paying parent's income twice.

OPTIONS

SIMPLIFY THE TEST

Most observers agree that any useful model for comparing household standards of living must account for the contribution of each household member and must account for household size and composition.[379] Some have suggested that one way to maintain the integrity of the test and simplify it is to use the average tax rate instead of the actual taxes payable. The average tax rate would provide a fairly good estimation of the actual taxes payable and would eliminate the need for the detailed tax calculations required in Step 1. People who do not use computer software to complete the test would welcome this change.

While the use of an average tax rate seems promising, there are two problems with the proposal. First, there is no readily accessible current source of average tax rates. Second, because the results of the test using the average tax rate may vary slightly from results based on actual taxes, the situation will inevitably arise where using the actual tax rate will be more advantageous for a parent completing the test. The court would then be faced with the strong argument that, in the particular case, the actual tax rate should be used. Such arguments could create more confusion and complicate matters if parents complete the test using the most advantageous method.

MAKE USE OF THE TEST MANDATORY

A mandatory test would ensure that parents and courts compared standards of living in every case. Courts would still have the residual discretion to deny a claim even when the test shows undue hardship. This would reduce the use of "absolute" measures of standards of living and ensure a more rigorous evaluation of each claim.

However, as previously noted, the test is not appropriate in every case. For example, where one of the parents has significant assets or unusual expenses, the test is not as useful. Forcing parents and courts to complete the test when it is clearly inappropriate may unduly complicate matters.

REQUIRE FINANCIAL DISCLOSURE BY OTHER HOUSEHOLD MEMBERS

As noted above, courts disagree regarding when and if financial disclosure from other household members must take place. Nothing in the Guidelines compels such disclosure and this has led to uncertainty. The Guidelines could be amended to clearly state when and what disclosure is required, and the section could include specific remedies for non-compliance, including attendance at discoveries.

Many have argued that disclosure in every case may be an abuse of process, particularly if the claim for undue hardship is frivolous. Some say that requiring such disclosure could in fact increase tension and litigation, contrary to the objectives of the Guidelines. The courts have found that a duty to disclose does not breach the section 7 privacy rights enshrined in the Charter of Rights and Freedoms.[380] The courts currently have broad and effective powers to impute income[381] of non-complying household members or to simply dismiss undue hardship claims, and they use these powers when necessary.

INCREASING FAIRNESS OF THE TEST

Many observers have correctly noted that the current test does not account for statutory payroll deductions in the calculation of income. This is contradictory because Step 1 accounts for other cash flow sources. One proposal is to deduct Canada Pension Plan/Quebec Pension Plan and employment insurance payments from income when completing the test. Statutory payroll deductions are conditions of employment and the deductions are not funds that are available to the employee, so removing them from income would make the test fairer.

Recommendations

Schedule III: Sections 1 to 13

Schedule III of the Federal Child Support Guidelines sets out a list of adjustments to a spouse's annual income. These adjustments ensure that the child support amount is calculated based on actual available income.

BACKGROUND

In certain circumstances an employee may be required to incur non-reimbursable expenses due to the nature of his or her employment. The employee must incur these expenses.

Unlike the business expenses of a self-employed individual, such expenses are not set off against gross income, thereby reducing total income. They are deducted on a tax return after the "Total income" line, so they must be deducted from total income for Guidelines purposes.

Section 1 of Schedule III allows the deduction of certain employment expenses permitted by section 8 of the Income Tax Act. The most common expenditures deducted by virtue of section 8 are travel expenses, and professional, association, or union dues.

APPLICATION

ISSUE

Section 1 is generally being applied as intended.

CASE LAW

Initially, there was some confusion in the application of paragraph 1(i) regarding Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) and employment insurance (EI) premiums. As confirmed in Phillips v. Phillips,[382] as well as by many other cases since, the deduction permitted by subsection 8(1)(l.1) of the Income Tax Act is restricted to CPP contributions and EI premiums paid for other employees who act as assistants or who substitute for the spouse. An amendment in December 1997 confirmed the correct application of this paragraph.

AMENDMENT

Section 1 has been amended twice.

On December 9, 1997, paragraph 1(i) was amended to reflect the proper deduction as described in subsection 8(1)(l.1) of the Income Tax Act. The Income Tax Act provides that the deduction is only for CPP and EI amounts paid for by a spouse, who is an employee, for another employee who is performing the spouse's duties of employment.[383]

On November 1, 2000, paragraph 1(a) was repealed. The deduction, which was for a clergyman's residence, differed from the other types of deductions in section 1 in that it allowed a member of the clergy to deduct an amount for a personal residence. Although this is permitted under the Income Tax Act, it was not appropriate for determining income under the Guidelines. The other deductions in section 1 are not related to such personal expenses.[384]

A new paragraph (f.1) was added[385] to include a deduction for an employee's motor vehicle travel expenses in the following situations:

• the employee is ordinarily required to work away from the employer's place of business or in different places,
• the employee is required to pay his or her own traveling expenses, and
• the employee does not get a tax-exempt allowance for traveling expenses.

RECOMMENDATION

No amendments to section 1 are recommended.

SECTION 2: CHILD SUPPORT

BACKGROUND

In determining a paying parent's income for Guidelines purposes, one should deduct any child support that is received and included in total income. These are funds that are not available to the paying parent for child support payments.

The amount of child and spousal support (if any) received by the paying parent during the year is included on line 128 of the federal income tax return. Only the child support amount should be deducted under this section. Whether the spousal support amount is deducted depends on the rules outlined in subsection 3(1).

APPLICATION

ISSUE

There is no issue with regard to this section.

CASE LAW

In the case of Metzner v. Metzner,[386] the receiving spouse's income comprised solely spousal and child support. The court found that, for the purposes of calculating the child support table amount, her income was nil.

AMENDMENT

This section has been amended twice.

On December 9, 1997, the word received was added after child support to clarify that only the recipient of any child support can deduct this amount. The provision ensures that a paying parent's ability to pay is not based on child support payments received for the benefit of another child.[387]

On November 1, 2000, the section was amended to reflect Revenue Canada's change of name to the Canada Customs and Revenue Agency.[388]

RECOMMENDATION

No amendments to section 2 are recommended.

SECTION 3: SPOUSAL SUPPORT

BACKGROUND

Under subsection 3(1), the spousal support amount (in total income) received from a former spouse should be deducted when calculating a support payer's income to find the basic amount of child support from the child support tables.

Under subsection 3(2), spousal support paid must be deducted from total income when determining an amount under section 7 (special expenses) of the Guidelines. Conversely, spousal support received would remain in income for section 7 purposes.

Child support has priority over spousal support under section 15.3 of the Divorce Act. So in most cases, the child support amount will have been determined before the spousal support amount is. Therefore, subsection 3(1) should be used to make sure that one includes all the income available for child support purposes in the Guidelines when applying the tables. If there are special and extraordinary expenses, subsection 3(2) says that the paying spouse should deduct spousal support paid, which is then included in the receiving spouse's income. This allows the courts and parents to determine section 7 expenses and how they will be shared, given any spousal support paid and received.

APPLICATION

ISSUE

This section has caused some confusion. Although the Divorce Act states that child support has priority over spousal support, if there are section 7 expenses, these may be determined and apportioned according to income-an income that must take into account spousal support paid or received between the two spouses. Despite this apparent contradiction, the case law has generally found that the court should decide whether there are any special expenses before determining the spousal support. After the court has decided on spousal support, then the special expenses can be apportioned between the parties, keeping in mind that any spousal support paid to the other spouse should be deducted from income.

CASE LAW

In Schick v. Schick[389] and Mabbett v. Mabbett,[390] the court confirmed that spousal support received by a spouse from the other spouse should be deducted from income when determining the table amount.

In the case of Metzner,[391] the receiving spouse's income comprised solely spousal and child support. The court found that, for the purposes of calculating the child support table amount, her income was nil.

The cases of L'Heureux v. L'Heureux[392] and Blair[393] confirmed that the issue of spousal support must be determined before apportioning section 7 expenses.

And in several other cases,[394] the court stated that spousal support paid to another spouse must be deducted from total income when determining income for the purposes of sharing special expenses between the parties.

AMENDMENT

This section has not been amended.

RECOMMENDATION

No amendments to section 3 are recommended.

SECTION 4: SOCIAL ASSISTANCE

BACKGROUND

This section was designed to ensure that only the social assistance income directly attributable to the spouse be included as Guidelines income. If a spouse gets social assistance on behalf of other members of the household, this money should not be included in the spouse's income.

APPLICATION

ISSUE

There is no issue raised under this section.

CASE LAW

The case law clearly sets out that social assistance income must be included when calculating income under the Guidelines,[395] but only the social assistance attributable to that spouse.[396]

AMENDMENT

This section was amended effective November 1, 2000,[397] to clarify that only the social assistance attributable to the parent is to be included in the parent's income. The amendment adopted wording already used in other sections in Schedule III to provide consistency.

RECOMMENDATION

No amendments to section 4 are recommended.

SECTION 5: DIVIDENDS FROM TAXABLE CANADIAN CORPORATION

BACKGROUND

Dividends from taxable Canadian corporations are reported and taxed differently than regular income. On the tax return, a spouse reports 125 percent of the actual dividends received. Therefore, it is appropriate, when determining Guidelines income, to include a spouse's actual dividends, not the taxable dividends reported on the tax return.

APPLICATION

ISSUE

The application of this adjustment to income is straightforward. There is no issue.

CASE LAW

The courts have applied this section as intended.[398]

AMENDMENT

This section has not been amended.

RECOMMENDATION

No amendments to section 5 are recommended.

SECTION 6: CAPITAL GAINS AND CAPITAL LOSSES

BACKGROUND

Capital gains are reported and taxed differently than regular income. A spouse reports 75 percent of the actual capital gains on his or her federal income tax return, even though the spouse benefits from the entire capital gain. Therefore, subject to subsection 17(2) of the Guidelines,[399] it is appropriate, when determining Guidelines income, to include the actual capital gains and not the gains reported on the tax return.

For income tax purposes, capital losses are set off against capital gains, so only the net taxable capital gain is included in total income. By substituting actual net capital gains for taxable capital gains, no further adjustment is required for capital losses incurred in the year. If capital losses exceed capital gains, one can carry the excess loss forward. One can also carry back these capital losses to any of the prior three years, setting these losses off against any capital gains in those years. The Guidelines only let one adjust income by the capital losses in that year.

APPLICATION

ISSUE

This section has been applied as intended.

CASE LAW

There is very little case law applying this section. In Mertler,[400] the court confirmed that under the Guidelines, all the net capital gain should be included in a spouse's income.

AMENDMENT

There has been no amendment to this section.

RECOMMENDATION

No amendments to section 6 are recommended.

SECTION 7: BUSINESS INVESTMENT LOSSES

BACKGROUND

Seventy-five percent of actual business investment losses are reported on the federal income tax return. These are called an allowable business investment loss on line 217 of the T1 General Form. The Income Tax Act gives special treatment to capital losses that are business investment losses, allowing taxpayers to deduct them against any type of income, not just against capital gains.

Subject to subsection 17(2) of the Guidelines,[401] it is appropriate, when determining income for child support purposes, to deduct the actual investment loss and not the allowable business investment loss. A spouse's business investment losses that are deducted below the "Total income" line on the tax return should be deducted from total income in calculating Guidelines income.

APPLICATION

ISSUE

This section has generally been applied as intended.

CASE LAW

There is very little case law applying this section. In various cases, the courts outline when it is appropriate to deduct business investment losses per the Guidelines.[402]

AMENDMENT

There has been no amendment to this section.

RECOMMENDATION

No amendments to section 7 are recommended.

SECTION 8: CARRYING CHARGES

BACKGROUND

Carrying charges include interest, investment counsel fees, and other expenses incurred to generate income. For example, a spouse may borrow money to invest in stocks. The income earned from the stocks is included as investment income in total income. However, carrying charges and interest expenses are not deducted before determining total income. Therefore, when determining Guidelines income, section 8 lets spouses deduct from total income any carrying charges and interest expenses incurred to generate this investment income.

APPLICATION

ISSUE

This section has been applied as intended.

CASE LAW

Only interest and carrying charges can be deducted from income, not payments on principal.[403] In Lamparski v. Lamparski,[404] the spouse was allowed to deduct interest expenses incurred in running a daycare business.

AMENDMENT

There has been no amendment to this section.

Recommendation

No amendments to section 8 are recommended.

SECTION 9: NET SELF-EMPLOYMENT INCOME

BACKGROUND

This section prevents business owners from diverting income to other family members as a way of artificially reducing their Guidelines income. The owner of a business must show that, to earn income, he or she had to pay parties not at arm's length and that these payments were reasonable in the circumstances.

APPLICATION

ISSUE

This section has been applied as intended.

CASE LAW

There is very little case law on this section. Cases decided under subsection 18(2) of the Guidelines may be applicable. In Omah-Maharajh,[405] the husband paid his current wife a salary to run his medical practice. The court found that the amount paid was both necessary and reasonable. Therefore, no additional income was imputed to the husband. Section 9 was applied similarly in Andersen v. Andersen.[406]

In Wilcox,[407] the Nova Scotia Court of Appeal stated that where the father did not establish that the income splitting with his present wife was necessary to earn his self-employment income and was reasonable in the circumstances, his income should be recalculated.

AMENDMENT

There has been no amendment to this section.

RECOMMENDATION

No amendments to section 9 are recommended.

SECTION 10: ADDITIONAL AMOUNT

BACKGROUND

If reported self-employment income for a given reporting year includes income earned in previous years, a spouse must deduct this additional income, net of reserves, from total income.

People who became self-employed before 1995 may have a fiscal year-end other than December 31. For tax purposes, this option was eliminated for fiscal periods starting after 1994.

Transitional income tax rules are in effect until 2004 that require the self-employed to calculate their income from the end of their 1995 fiscal year to December 31, 1995. This "sub period" income is included in income at the minimum rate of 5 percent in 1995, 10 percent in each of 1996 to 2003, and 15 percent in 2004. Therefore from 1996 to 2004, income reported on the tax return may be increased to include income that was actually earned prior to 1996 (the "stub period" income). Therefore, total business income may not truly reflect income earned in the year.

Section 10 deducts this stub period income to reflect only the actual business income earned in the year. Section 10 refers to this stub period income as the amount earned in the prior period, net of reserves.

APPLICATION

ISSUE

This section has been applied as intended. One issue has arisen in the case law. Although the stub period income may be deducted from income, taxes are paid on all income, including the stub period income. As such, the support-paying parent pays more income tax and therefore has less income from which to pay the child support amount.

CASE LAW

The case law states that there is no reduction to account for the tax paid on the additional income.[408] In Merritt v. Merritt,[409] the court stated that the Guidelines did permit the court to adjust the net income of the father to deduct the additional tax burden. However, if the father had claimed the residual income tax liability as a liability on his financial statement and used this to calculate equalization, then it would be double recovery if the father claimed this liability yet again to reduce his Guidelines income.

AMENDMENT

This section was amended effective November 1, 2000.[410] As the fiscal year-end of a parent's business may not fall on December 31, reference to that date was removed. In addition, the section was clarified by referring to the relevant sections of the Income Tax Act.

The French version of section 10 was amended, replacing the word réserve with the word provision, which is the word that appears in the Income Tax Act.

RECOMMENDATION

It is recommended that section 10 not be amended at this time. This provision is transitional and will no longer be required after 2004.

SECTION 11: CAPITAL COST ALLOWANCE FOR PROPERTY

BACKGROUND

Only CCA taken on real property is added back. CCA claimed on equipment or on other business or rental assets is not added back because the value of these assets does depreciate and they will have to be replaced from time to time.

APPLICATION

ISSUE

Courts have been using discretion when applying this section. In some cases, mostly those dealing with farming income, the courts are also including the payor's deduction for allowable CCA for equipment or other business or rental assets. In these cases, they are finding that these deductions are not reasonable under the circumstances, per section 19 of the Guidelines. As noted earlier, an expense permitted per the Income Tax Act is not necessarily reasonable in determining Guidelines income.

CASE LAW

There have been several conflicting decisions under section 11 of Schedule III, mostly involving farming cases where CCA is claimed on farm machinery and equipment. In Rudachyk v. Rudachyk,[411] the father deducted CCA on equipment. The court decided that unless it believed CCA was unreasonably deducted, only CCA related to real property depreciation could be added back to income. A useful challenge to any CCA item would involve finding out when (or if) equipment will be replaced, how much doing so would cost, and perhaps whether one needs to replace it to produce income.

In Wilson,[412] the court stated that despite the possible deduction under section 11 of Schedule III, paragraph 19(1)(g) specifically says that expenses deducted for income tax purposes can be added back into income when "[t]he spouse unreasonably deducts expenses from income."[413] The court also held that under 19(2), the reasonableness of an expense deduction was not solely governed by whether the deduction was permitted under the Income Tax Act.

Most cases have asked whether a full deduction allowed under the Income Tax Act fairly recognizes the actual income available to the spouse from that income source. As with other income tax deductions, the courts are using their discretion when determining Guidelines income.

AMENDMENT

There has been no amendment to this section.

RECOMMENDATION

No amendment to section 11 is recommended. Although this section was inconsistently applied at first, that is changing as jurisprudence sets new parameters for reviewing CCA for both personal and real property.

SECTION 12: PARTNERSHIP OR SOLE PROPRIETORSHIP INCOME

BACKGROUND

On a personal income tax return, one includes one's share of income earned from a partnership, even if one didn't (or couldn't) withdraw it from the partnership. For example, because of cash flow problems, the partners may withhold income to cover operating costs, or they may withhold their income to finance new capital spending they need.

These funds would not be available to a spouse for Guidelines purposes. Therefore, one can deduct from total income any partnership income that the partnership leaves in the business.

APPLICATION

ISSUE

This section has been applied as intended.

CASE LAW

There is very little case law applying this section. In the case of de Goede v. de Goede,[414] the court considered the amounts the paying parent paid to reduce the mortgage on rental properties held through a partnership. The court decided that the paying parent could deduct this money from his total income because his partnership needed the money for capitalization.

AMENDMENT

This section was amended effective December 9, 1997.[415] The words or a sole proprietorship were added after partnership, since sometimes a sole proprietor needs to deduct capitalization costs.

RECOMMENDATION

No amendments to section 12 are recommended.

SECTION 13: EMPLOYEE STOCK OPTIONS WITH A CANADIAN-CONTROLLED PRIVATE CORPORATION

BACKGROUND

Section 13 sets out how to adjust income for Guidelines purposes when a parent exercises options to purchase shares.

When this section was first drafted, tax law treated employee stock options of Canadian-controlled private corporations (CCPCs) differently from non-CCPC corporate stock options. For a non-CCPC stock option, the income benefit[416] was included in income for tax purposes when one exercised an option to buy shares, rather than when one sold them, as was the case with CCPC stock options.

Section 13 ensured that one included the income benefit of CCPC stock options as income in the year one exercised the option. Under section 13, CCPC and non-CCPC options were treated the same way for Guidelines purposes. One could deduct under subsection 13(2) in the year one sold the options, so that there would be no double counting.

The Government of Canada's February 2000 budget allowed tax law to treat the gains on certain employee stock options in public company shares just as CCPCs are treated. In other words, these gains would now be taxed when sold, not when bought. As such, section 13 was expanded to include these options.[417]

Another minor amendment was made to subsection 13(2) in 2000. The word a was substituted for the word the to make the subsection consistent with the more correct French wording.[418]

In most cases, employees exercise options and sell the shares simultaneously. This way, they can use the money from the sale to finance the purchase price and pay the personal tax. Their profit is the excoess of the fair market value of the shares (sale price) over the cost of the shares (option price), and this profit is taxed in the year in which the shares are sold. When options are exercised and sold the same year, the benefit will be included in income in the same year the option is exercised.

APPLICATION

ISSUE

This section has been applied as intended.

CASE LAW

In MacDonald v. MacDonald,[419] the Alberta Court of Appeal stated that when the father left his job in 1996, he had to include in his 1996 income his entire net capital gain for disposing of stock options. The Court confirmed that stock options, when exercised, are an income source and should be included in income.

A parent bears the burden of proof when trying to exclude stock options from income on the grounds that they are non-recurring or capital in nature.[420]

RECOMMENDATION

No amendments to this section are recommended.

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