The What and Why
To impute income to a person, means to say that the income is X despite their claims that their income is actually Y.
There are three primary reasons to impute income, all are aimed at setting a persons income closer to reality, rather than what they claim it is:
Thwart one's attempt to deliberately under employ themselves or under pay themselves; by ways such as only working part time, or taking lessor paying jobs.
In the case of self employed individuals, to gross up, or add inappropriately claimed business expenses into personal income (hint... there is a 2 pronged approach to this method).
When one litigant refuses to disclose financial information, generally seen as an attempt to hide their income from the court.
The starting point for imputing income to individuals is minimum wage at full time hours, which calculates as follows :
$16.55/hr. X 40 hours per week X 52 weeks = $34,424
Under Employment
Many a Judge has commented, dripping with sarcasm, how remarkable it is that as soon as someone is separated, their income drops precipitously. While this can legitimately happen, such as it did for many when COVID struck, this has always been "a thing" from before, and to now.
The most efficient way to combat this, is look at the historical income of the individual in question. What was their average 3 year income leading up to the date of separation. In these instances income is imputed to their earning potential, rather than their actual income.
However, it of course is possible that a person may have legitimate reasons for not earning as much, and when used as a defense could persuade the courts to accept their lower income and not impute.
Medical Reasons
Perhaps the person has suffered from a medical condition that didn't impede their ability to work prior to separation. For this to be raised the following would have to be provided in admissible and non hearsay evidence form to succeed. Admissible would be sworn affidavits, and records (such as medical records and notes taken by the professionals) kept in the normal course of business. Hearsay evidence that would not be allowed would be letters from doctors
A diagnosis
What the treatment plan is, and proof that the person is following that treatment plan
What impact this has on the person's ability to work
What the long term (or short term) prognosis is.
Benefits to the Children
For example, if prior to separation, a litigant was commuting an hour away, and spending some overnights away from the home in order to earn an income; they courts may allow for the litigant to accept a lessor paying job if it means they can work closer to the home of the children, and be more involved in the lives of the children than they were previously.
This is a case by case analysis. The court is unlikely to accept an extreme change from a CEO making $500,000 to a labour worker making $80,000. But has been persuaded for an aging forest/lumber worker, working hours away from the children, to earn $50k at a local high school as a caretaker.
Resources to the (new) Family
Canada operates on a first family principal. Meaning if a person re-partners, and they have a new child with that partner, their support obligations to the previous family does not reduce, even if that second partnership fails and they have to pay support to that second child.
However, the courts have allowed for that person to earn less income in a new job if a new job was required to better support that second family. For instance, perhaps the new child was a special needs child and required more hands on care from the parents would be one such example.
Going Back To School
If a litigant wants to temporarily go back to school for additional training, that they could prove to the court would result in a better job with a better than marginal pay increase that would result in higher support payments for the family, the court could be persuaded to temporarily allow that person to have a lower income for that duration of time.
Grossing Up
All support payments are based on a person's gross income. The support calculations do this so support isn't artificially deflated by various income reduction techniques such as RRSP contributions, home office write offs, etc. It makes for a level playing field for all.
It's however common practice for business owners to embed person expenses into the company; simply because an incorporated company pays less tax than the individual; thereby artificially (and illegally) lowing their gross income which would then thwart the accuracy of support calculations.
There are two method to Gross up one's income, the first is fairly obvious, the second not so much.
Personal Expenses put into Business Expenses
One is to do a very detailed analysis to see what expenses are listed in the disclosed business records. These means going through line item expenses, one by one and preparing a spreadsheet. And some a more subtle than others.
For example, items such as if someone claims their entire house as a business expense, all of their gas (personal and work), 100% of their cell phone (when there isn't a separate personal cell phone), 100% of home internet, 100% of their vehicle expense when the vehicle is also a personal one, 100% of all meals eaten out of the home, or even 100% instead of CRA'S allowed 50% claimed meals, vacation expenses etc. In some cases just a portion of these expenses should be added into their personal gross expenses, while in others the entire line would be moved.
Also, look for things that you don't see that should be there, which would point to cash transactions. These normal expenditures should show up in everyone's accounts, if you don't see them anywhere in the opposing sides accounts, this is a problem for them. If you see these things, question as to why not:
No or very low grocery expenses
No entertainment or eating out, especially when tied to social media posts
No or very little fuel costs
If they have vices (alcohol, gambling, smoking), and those don't appear in their purchase history
Gifts around the holidays and birthdays
Vacation expenses.
Tax Benefits of those Expenses
This is a little more nuanced. By putting the expenses above into their business expenses, they received a tax benefit, and are expected to continue doing so. If the person saved $10,000 in tax benefits from putting it into business expenses, as opposed to personal income, then they received a potential tax break of $5,000 if they were in a 50% tax bracket. The difference between the business tax implications and the personal tax benefit ($5,000) may amount to a savings of $2,500 at the end of the day, which should be added back into the persons gross income.
Refuse To Disclose
When a party refuses to disclose either their income (no NOAs or tax returns or T4s), and/or business records in the case of a self employed litigant; the court has the uneasy task to try and guess what their income is. Unlike criminal proceedings where an individual has a right to not speak on a claim/accusation, and no negative inference shall be taken; that right doesn't exist in a civil proceedings. Should a party decline to address the subject of income (be it through lack of testimony and/or lack of financial disclosure), the courts can do will take a negative inference.
In these cases a few things can be done.
Rely on historical documentation that the opposing party can produce (old tax records, loan applications etc.)
An analysis of the person's spending habits. These could include high monthly car payments, value of the home, vacations taken, social media posts, etc.
Statistics Canada is a great source to supply admissible evidence for income for someone with similar qualifications and job title.
Historical testimony on purchased made in the last 3 years of marriage including gifts purchased, vacations taken, private school for the children, etc.
In addition to the income analysis, a party can partition the court with a motion pursuant to FLR 1 (8) for various reliefs, one of which is to strike the pleadings of the other side and allow them to proceed to trial uncontested and potentially without notice of involvement of the other party.
* Special Circumstances *
There are some special circumstances that require additional explanation.
Retirement
People have a right to retire, and the courts recognize this. You have to keep in mind, that judges are people too, and some day they want to retire.
However, if you want to retire early, that may cause a problem. If there is a support order in place, they may seek a Motion To Change in order to reduce or eliminate their support obligations.
If their retirement is shockingly early, chances are the court won't allow it. This will result in a defacto imputing of income should they remain retired.
However, if the retirement comes at a reasonable age, the court most likely would approve it, so long as notice was given to the recipient of support that there would be a change of income due to retirement. As retirement is a planned event, the court may want to see as much as a year's notice given first. If a person retires without notice, and seeks a Motion to Change; that reduction in income may be delayed for a period of time thereby created a defacto imputation of the original income for the duration of the notice period the court determines.
You're better off waiting until at least 60, and giving 1 year's notice to cover your bases.
Criminal Activity
This is an interesting one. One party may be working as a drug dealer, making significant money, with a lavish lifestyle. However, the courts generally decline to impute income to represent the income obtained through criminal enterprise.
Why?
Because there's a greater society good issue at play. By imputing income to what was criminally obtained, the court would be setting the stage to encourage that criminal activity to continue as a necessity to meet the support obligations. The court would rather enable the litigant to cease criminal activities and pay a much lower support. You can see this expressed concisely at B.G.M.S. v J.E.B, 2018 BCSC 1628 (CanLII), at para 202.
[202]Clearly it is in BED’s best interests for the respondent to cease his involvement in drug trafficking, in addition to making other profound personal changes. This as well as the broader public policy issue lead me to conclude that I cannot properly impute an income to the respondent that will likely require him to continue his illegal and dangerous business activities.
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