Foreign Income for Support: Key Considerations

Previously posted May 11, 2021           

Navigating the complexities of calculating income for child and spousal support purposes in Canada can be a daunting task, particularly when dealing with non-residents. From currency exchange nuances to interpreting the Federal Child Support Guidelines, this blog explores a number of considerations and legal intricacies that shape how foreign income is factored into support calculations.

Foreign Income Considerations in Income for Support Reports

When determining the quantum of child support and spousal support for a non-resident of Canada, calculating each spouse’s income is one of the first steps. The Federal Child Support Guidelines (the “Guidelines”) set the framework for calculating income available for support purposes.

Section 20(1) of the Guidelines indicates that where a spouse is a non-resident of Canada, the spouse’s annual income is determined as though the spouse were a resident of Canada.  We set out four aspects to consider when foreign income is a factor in determining support:

1. Currency exchange;
2. Imputed income;
3. Bundle of foreign services; and
4. Specific tax laws and tax treaties.

1) Currency Exchange

To determine an annual income as though the spouse were a resident of Canada, the income must first be converted to Canadian Dollars. However, difficulties can arise when choosing the correct approach to convert income from a foreign currency to Canadian Dollars. Currencies can have rapidly and widely fluctuating exchange rates, and as a result, the method of conversion can have a significant impact on the resulting Canadian Dollar figures.

For example, in paragraph 36 of Ward v. Ward, 2001 BCSC 847, the average exchange rate over the preceding year was determined to be the appropriate rate. This rate was considered desirable by the Court, as it avoids the complications of fluctuating exchange rates.

2) Imputed Income

The second step is to determine whether any income should be imputed in accordance with the Guidelines. Two noteworthy sections of the Guidelines are:

Section 19(1)(c):

“The court may impute such amount of income to a spouse as it considers appropriate in the circumstances, which circumstances include the following:

(c) the spouse lives in a country that has effective rates of income tax that are significantly lower than those in Canada;”

and Section 20(2):

“If a spouse is a non-resident of Canada and resides in a country that has effective rates of income tax that are significantly higher than those applicable in the province in which the other spouse habitually resides, the spouse’s annual income is the amount that the court determines to be appropriate taking those rates into consideration. ”

Both Sections 19(1)(c) and 20(2) indicate that the income tax rates must be “significantly” lower or higher than in Canada, respectively. The Guidelines, however, do not provide a definition of “significant”.

If it were determined that the income tax rate differential was significant, our approach would be to:

1. Determine the after-tax income earned by the individual, based on their actual foreign personal tax filings; and
2. Determine the pre-tax income required in Canada to result in the equivalent after-tax income that was actually earned.

For example, consider a spouse that earns the equivalent of $150,000 in a tax-free zone of the United Arab Emirates. If the spouse lived in Ontario rather than the UAE, he or she would have to earn approximately $233,000 in 2023 to result in an after-tax income of $150,000. In this circumstance, it may be appropriate to gross up the income under Section 19(1)(h) from $150,000 to $233,000.

3) Bundle of Foreign Services

The third step is to consider whether a bundle of foreign services is relevant. Although the tax rate differential may be “significant”, the respective governments might also provide a different level of services in exchange for those taxes. For example, paragraph 40 of Ward v. Ward, 2001 BCSC 847 contemplates whether a New Jersey resident receives a different level of service from its government than a resident of British Columbia, specifically in regard to the cost of health care. This difference in the bundle of services could impact whether it would be appropriate to consider an adjustment to income under Section 19(1)(c) or Section 20(2).

4) Specific Tax Laws and Tax Treaties

Canada has a different relationship with each country, many of which have tax treaties in place. As tax laws and treaties change over time in other countries, there may be country-specific factors to consider when determining income available for support of a non-resident of Canada.

Key Takeaway

While it might be enticing to simply apply an exchange rate to foreign income, it’s important to consider the variety of factors that come into play when determining income earned by non-residents of Canada.

If you or your clients are in a situation that requires consultation in calculating foreign income for support, give the experts at Davis Martindale a call. We’d love to work with you.

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