The calculation of child support can be a complicated issue for divorcing parties and forms the basis of many family law conflicts. The provincial or Federal Child Support Guidelines serve as the main source of information when calculating how much child support a given party will be expected to pay. Income is determined by the Court in accordance with sections 16 to 20 of the Guidelines. A parent’s annual income is determined using the income sources set out under the heading, “Total income” in the T1 General Form issued by the CRA. This includes income from all sources which are then adjusted in accordance with Schedule III of the Guidelines. The resulting calculation is referred to as “guideline income.”
The implications of capital gains and losses can introduce confusion and potential conflict into the guideline income calculation. Section 6 of Schedule III of the Guidelines states that a party should, “Replace the taxable capital gains realized in a year by the spouse by the actual amount of capital gains realized by the spouse in excess of the spouse’s actual capital losses in that year.” Commonly, only 50% of capital gains are subject to income tax, but for guideline income purposes, the full amount is included, not just the taxable portion. This begs the questions of whether unrealized capital gains factor into an income calculation under the Guidelines, and if they don’t, why not?
The Courts have consistently held that only realized, actual income could be represented as “total income” on the T1 General Form was applicable to a guideline income calculation. In Richardson v Richardson, 2013 BCCA 378, a mother was appealing an order requiring her ex-husband to pay retroactive and ongoing child support. The mother claimed that the father had deliberately concealed his income in various ways, including unrealized capital gains on corporate real estate holdings to prevent paying appropriate child support. The Court found that this unrealized capital was not applicable to the Federal Child Support Guidelines calculation, holding that the appreciation in value of an asset does not represent income available for support. Similarly, in T. (D.M.C.) v. S. (L.K.), 2008 NSCA 61, the Court held that, although unrealized capital gains exist on paper, until they are realized through a disposition of the asset, they are excluded from the guideline income calculation.
The Court appears reluctant to interfere with unrealized capital gains in an income calculation unless there is evidence that the party is attempting to hide their income (Richardson). This hesitancy likely results because (a) these gains may be difficult to quantify, (b) these gains are subject to market fluctuations, and (c) there are absent nefarious intentions – parties are generally free to structure their financial affairs as they deem appropriate. To ensure clarity, these gains are ultimately likely to be considered in a party’s guideline income but only once realized.
Furthermore, and as noted in Emslie v Emslie, 2015 ABQB 581, the consistent treatment of spouses and children who are in similar circumstances is an objective of the Guidelines, per section 1(d). It could be unfair to include capital gains that are unrealized due to their inherent uncertainty and the potential for a present unrealized gain to turn to capital loss over time.
The situation is further complicated by section 17 of the Guidelines. Section 17(1) states that, if the Court determines a spouse’s income pursuant to section 16 is not a fair representation of their income, the Court can determine an amount that is fair and reasonable based on their income over the last three years. This section may be used by parties seeking to exclude non-recurring realized gains earned by their spouse that otherwise may be included in a guideline income calculation. However, section 17 also has the potential to support arguments for judicial leaning towards the inclusion of unrealized capital gains in these calculations when their exclusion makes for an unrepresentative income, or if a spouse is attempting to hide their income through unrealized capital gains. Generally speaking, however, unrealized capital gains are not included as part of a spouse’s total income for child support purposes.
It is important to remain aware that just because a particular write off is permissible when filing taxes, that deduction could still be included as guideline income for child support purposes, and vice versa: the Guidelines are clear that an allowable deduction from the perspective of the Canada Revenue Agency is not necessarily determinative in the context of a guideline income analysis. If you have questions about your income sources that will inform your child support obligations, contact a family lawyer at SVR.