In many cases, when a spouse or parent is self-employed and not reporting his or her true income, or is unemployed or underemployed and not earning what he or she could, the court is often requested to impute an income so the proper amount of support is paid.
Section 19(1) of the Child Support Guidelines addresses the imputation of income and reads as follows:
19. Imputing Income— (1) The court may impute such amount of income to a parent or spouse as it considers appropriate in the circumstances, which circumstances include,
(a) the parent or spouse is intentionally under-employed or unemployed, other than where the under-employment or unemployment is required by the needs of any child or by the reasonable educational or health needs of the parent or spouse;
(b) the parent or spouse is exempt from paying federal or provincial income tax;
(c) the parent or spouse lives in a country that has effective rates of income tax that are significantly lower than those in Canada;
(d) it appears that income has been diverted which would affect the level of child support to be determined under these guidelines;
(e) the parent’s or spouse’s property is not reasonably utilized to generate income;
(f) the parent or spouse has failed to provide income information when under a legal obligation to do so;
(g) the parent or spouse unreasonably deducts expenses from income;
(h) the parent or 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; and
(i) the parent or spouse is a beneficiary under a trust and is or will be in receipt of income or other benefits from the trust.
(2) Reasonableness of expenses. — For the purpose of clause (1)(g), the reasonableness of an expense deduction is not solely governed by whether the deduction is permitted under the Income Tax Act (Canada).
Imputing income is one method by which the court ensures compliance with the joint and ongoing obligation of parents to support their children. In order to meet this obligation, a parent must earn what he or she is capable of earning. If he or she fails to do so, he or she will be found to be intentionally under-employed. Clause 19(1)(a) of the Guidelines has been found to be a test of “reasonableness.” The test for imputing income for child support purposes applies equally for spousal spousal purposes.
To be sure Section 19 of the Guidelines is not an invitation to the court to arbitrarily select an amount as imputed income. There must be a rational basis behind the choice of the amount. The amount chosen is an exercise of the judge’s discretion and must be grounded in the evidence. The need to provide adequate evidence cannot be overstated.
A self-employed person has the onus of showing the basis of his or her
net income. This includes demonstrating that the deductions from gross income should be taken into account in the calculation of income for support purposes. If he or she improperly deducting expenses they will be added back to income and grossed up for tax purposes.