DivorceMate – Two Key Gross-Ups

Since DivorceMate began providing family law software solutions in 1987, it has since become ubiquitous in the Canadian marketplace. Simply enter a little information, hit a few buttons, and voilà – spousal support calculations in accordance with the Spousal Support Advisory Guidelines (SSAGs) and child support calculations in accordance with the Federal Child Support Guidelines, all in a blink of the eye.

As with most software solutions, however, the results are only as accurate as the inputs relied upon. “Garbage in, garbage out” is a true maxim when relying on DivorceMate calculations. One area of common confusion when entering information into DivorceMate is the concept of “gross-ups.” We discuss and differentiate two different gross-ups available within DivorceMate, which we refer to as the “Income Tax Act (ITA) Gross-Up” and the “Tax Savings Gross-Up”.

ITA Gross-Ups

Dividends paid from taxable Canadian corporations (public or private) are paid from after-tax corporate funds. To avoid double-taxation (corporate tax plus personal tax), the Income Tax Act attempts to “integrate” the two tax rates. This is partially accomplished on a personal tax return by reporting not the actual dividend received, but rather a “grossed-up” amount to reflect what dividend would have been paid if it was paid from pre-corporate tax funds. For example, if Dave receives a $1,000 eligible dividend from Microsoft, he would report $1,380 “grossed-up” dividends on his personal tax return.

When determining income for purposes of child or spousal support, the starting point is often “total income” or “Line 150 income,” as reported on the personal tax return. In Dave’s situation, his Line 150 income would include the $1,380 grossed-up dividend rather than the actual dividends received of $1,000. Without removing the gross-up, his income would be overstated.

The Federal Child Support Guidelines specifically address this issue in Schedule III, indicating to “replace the taxable amount of dividends from taxable Canadian corporations received by the spouse by the actual amount of those dividends received by the spouse.”

To simplify the calculations, DivorceMate allows users to clearly indicate whether they are using the actual dividends received or the “grossed-up” amounts. The end result for the calculations remains the same, as long as users clearly indicate what option they are using. Whether you report $1,000 in actual dividends or $1,380 in “grossed-up” taxable dividends, the support calculations should provide the same quantum of support determination.

Tax Savings Gross-Up

Dividends and capital gains are taxed in Canada at lower tax rates than most other types of personal income. As a result, someone who receives significant dividend or capital gain income will pay less tax than if they had received the same amount of employment income.

For example, Lucy and Michael each earn $100,000 per year, but Lucy is paid through a salary and Michael is paid through dividends. Because Lucy will pay more tax than Michael, their $100,000 incomes are not equivalent to each other. In Ontario in 2019, Lucy would need to receive a salary of $131,800 to have the equivalent after-tax funds that result from Michael’s $100,000 dividend.

To account for the differences between incomes that look similar on the surface, section 19(1) of the Federal Child Support Guidelines indicates: “The court may impute such amount of income to a spouse as it considers appropriate in the circumstances, which circumstances include the following … the spouse derives a significant portion of income from dividends, capital gains or other sources that are taxed at a lower rate than employment or business income or that are exempt from tax.”

To enable users to easily perform this calculation, DivorceMate includes an option to “include and gross-up tax savings”. The end result for the support calculations can be significantly different if the tax savings gross-up option is chosen.

In the above example, where the “include gross-up tax savings” option is chosen, Michael’s $100,000 dividend is treated as if it were actually $131,800 of regular income. Depending on each circumstance, it may be appropriate to include the “tax savings gross-up” within income when determining support obligations.

Whether your income is simple, complex, or anywhere in between, the experts at Davis Martindale can help determine an appropriate income to calculate support. Call us today for a personalized discussion.