Tuesday, 29 March 2016

How is the Child Support Amount Determined in a Divorce?

In the divorce process in Canada, once the spouses have worked out the child access details, living arrangements, and so on there still remains the question of child support payments. More specifically, how is the actual dollar amount determined?

The parent who does not have the primary care responsibility for the child (or children) is usually responsible to pay child support to the parent that does. The amount of child support is determined based on the Federal Child Support Guidelines (“FCSG”), which is statutory.

The FCSG are set up to ensure a level of consistency and fairness when it comes to determining the actual amount of child support that must be paid. The FCSG provide guidance as to the procedures involved in calculating what is known as “guideline income” (i.e. the income amount used to determined child support). It is VERY important to understand that guideline income under the FCSG is not necessarily equal to accounting income or income you report on your tax return. Also, either party can request income disclosure from the other party once every year.

So how is income for child support purposes calculated?

The easy answer is, it depends. For example, if you work in a job that is your only source of income it may very well be that line 150 of your T1 tax return accurately describes your future earnings potential and that may be the amount used. However, consider a situation where a husband owns 100% of a business through a privately-held corporation. It may be appropriate to include some or all of the pre-tax corporate income into guideline income. A business owner has significant discretion over how income and expenses are reported, when capital expenditures are made, when dividends are declared and paid, the management of working capital, and so on. Because of this, the reported income of the business may not be consistent with “income” as per the Federal Child Support Guidelines and therefore, corporate income may need to be normalized and it may be appropriate to include some, none or all of it to guideline income. A professional chartered business valuator would be able to assist with these types of complex calculations.

Consider the small business owner example. The business owner may aggressively write off expenses which are really discretionary to the business (i.e. they are not really needed for the business operations). He may also insist on paying for all capital expenditures in cash when the business is truly under-leveraged and has access to debt financing. The business owner may also increase business expenses by paying a salary to some relatives who are not really active in the business, for 'tax purposes'. Other important questions that are raised are: how are capital gains handled? Should they be included in income going forward? What if there were banking covenants in a business which precluded the business owner from taking money out? What if the paying spouse decides to stop working or sit on some major unproductive assets? The point is that calculating income for child support purposes can become quite involved and complex.

If the payor spouse is self employed or is a business owner it would be wise to involve a Chartered Business Valuator (CBV). CBV's are the professionals that can help you to calculate guideline income under the FCSG, as they have the training required to do so. A CBV can also calculate the value of a business in a divorce, for the determination of net family property.

Once income as per the FCSG is determined then there are tables set out in the FCSG, grouped by province, which would be used to determine the actual amount that would be payable. They are based on the income that was calculated as per the FCSG and number of children – the monthly payment is based on this.

The other important point is that concept of a theoretical "double dip."  Example - consider a hypothetical situation where a husband owns 100% of a business prior to divorce, which was valued at $1 million.  Under the division of net family property he equalized the business value with the wife and paid her a $500,000 equalizing payment (since she was entitled to 50% of the value).  However, the husband's income that will be calculated as per the FCSG will be based on 100% of the business income, not merely the 50% that was not paid out for equalization. 

It is also important to understand that a court can award an amount that is higher or lower than what is indicated in the tables. For instance, if there are 'special expenses' involved in the care of the child such as daycare, medical, sports, etc. then the court may award incremental payments to cover these special expenses.

The point to the above is that calculating income per the Federal Child Support Guidelines can be difficult and the cost of not doing it correctly can be high. Please contact us to discuss the calculation of guideline income under the federal child support guidelines.

If you disagree with your spouse's income calculation for child support purposes, we can do an income analysis and produce a rebuttal income report or critique another income report.  If you have any questions please call us.

Keystone Business Valuations – serving the GTA & southern Ontario
Steve Skrlac, MBA, CFA, CBV

Note – this blog post is for general information purposes only and is not intended to be professional advice.  Consult a lawyer.

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