Foreign Income Considerations in Income for Support Reports

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 indicate 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.  In this blog, we set out four aspects that should be considered:

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. Because currencies can have rapidly and widely fluctuating exchange rates, the method of conversion can have a significant impact on the resulting Canadian Dollar figures.

In paragraph 36 of Ward v. Ward, 2001 BCSC 847, for example, 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)

Where 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 normally 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”.

Although written in a different context and specifically about Section 19(1)(h) of the Guidelines (rather than Sections 19(1)(c) or 20(2)), paragraph 122 of Fielding v. Fielding, 2018 ONSC 5659 may be of assistance, as it indicates:

In my view, “significant” in this context should be interpreted having regard to the purposes of the Guidelines enumerated at s. 1, which include “to establish a fair standard of support for children that ensures that they continue to benefit from the financial means of both spouses after separation.” The Merriam-Webster dictionary defines “significant” as “having or likely to have influence or effect.” Thus, to the extent that the lower-taxed income is such that it “would have influence or effect” on the standard of support available to the children, such income should be regarded as “significant” and subject to an income tax gross up pursuant to s. 19(1)(h).”

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

a) Determine the after-tax income earned by the individual, based on their actual foreign personal tax filings; and

b) 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 $240,000 in 2020 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 $240,000.

3) Bundle of Foreign Services

The third step is to consider that 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 would a resident of British Columbia, specifically regarding 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. But as tax laws change over time in each country, there may be country-specific factors to consider when determining income available for support of a non-resident of Canada. For example, a Davis Martindale blog post (A Recent U.S. Tax Reform is Impacting Canadians Receiving Alimony [January 31, 2019]) discusses the change to the treatment of alimony payments in the United States.

In Conclusion

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.