The court must establish the payor’s income to determine the level of child support or spousal support that a party must pay. This may be more complicated if the payor has received non-recurring capital gains of a significant nature. For example, in a recent Alberta decision, Bradley v. Bradley, 2023 ABKB 128, the court was required to determine the payor husband’s income after he had received a significant sum of money from the sale of his interest in his physiotherapy business.
In this post, we will discuss the factors that the court considered in determining whether to include some or all of the proceeds from the sale of the business in the payor’s income. This post will provide critical insights for family law litigants facing income determination issues involving non-recurring capital gains.
Child support is governed by the Federal Child Support Guidelines, which contain some guidance on addressing non-recurring capital gains to calculate a payor’s income.
According to section 17 of the Guidelines:
17 (1) If the court is of the opinion that the determination of a spouse’s annual income under section 16 would not be the fairest determination of that income, the court may have regard to the spouse’s income over the last three years and determine an amount that is fair and reasonable in light of any pattern of income, fluctuation in income or receipt of a non-recurring amount during those years.
This means that a court can consider evidence that suggests that a party’s income for a particular year is higher or lower due to fluctuations, including receiving a non-recurring amount such as proceeds from selling a business, as in the Bradley case.
What is considered “fair and reasonable” is highly specific to the facts of the case.
For non-recurring gains, the court can consider the following factors, although it is not an exhaustive list (Ewing v. Ewing, 2009 ABCA 227, at para 35):
The payor’s father applied to vary child support after selling his interest in a physiotherapy business in November 2021. He sought to lower his income for child support purposes, as he claimed that the capital gain received from the sale should not be included as part of his income as it was a non-recurring gain.
The total value of the father’s shares that he sold was approximately $1.266 million, which was primarily received in cash. At the same time, the father acquired some Class B shares from one of his co-owners for a nominal amount. He also agreed to continue his physiotherapy practice and management services, for which he would receive a monthly $2,857.14 management fee. As a shareholder of the business, he would still receive dividends. However, he would no longer have control over how those dividends would be issued, as he no longer had an ownership interest in the company. The court noted that the dividends would be less than those received before the sale.
For 2021, the father’s income would be approximately $1.346 million if the capital gain was included.
The court noted that the non-recurring gain arose from selling an interest in an income-producing business. As a result, the gain did not reflect income for the previous year. Also, the court noted that the father was not in the business of purchasing and selling businesses. These factors suggest that the gain should not be included in the father’s income but were not determinative of the issue, as it could also be viewed as a current payment for future income. The children would be entitled to support based on future income, so the court considered that they should also receive support based on a value that is paid in full.
The court found that including the entire amount of the capital gain would not be a fair determination of his income for calculating child support. The court decided that some of the gains would be included in his income. While the father would still receive fees for his physiotherapy practice and management of the company, this would be significantly less than the profits previously received through running the business. The court concluded that part of the capital gain would be considered a future income stream he is receiving now, and child support should reflect this.
There was also no evidence that the father was using the proceeds to invest in another income stream to benefit the children.
The court also considered the children’s lifestyle: they lived a comfortable life during the parties’ marriage and post-separation. While the mother had a new partner with means to provide for the children, he was not found to be legally responsible for the children to lower the father’s income for support purposes. The court found that it was necessary to include some of the capital gains in the father’s income to ensure that the children received proper support, given their lifestyle experienced while the parties were married.
Ultimately, the court included half of the capital gain (approximately $600,000) the father received in his income. His income was therefore found to be approximately $750,000 instead of $1.346 million.
Upon the sale of a business, capital gains may impact the payor’s income, affecting child support. Some or all of the gain may be included or excluded from the payor’s income. This can be a complex matter that is highly specific to the circumstances of the case, so you should speak with one of our family law lawyers at Mincher Koeman who are experienced in assisting business professionals and entrepreneurs with issues involving income for child support. Our Calgary family law lawyers are dedicated to finding the best resolution for you after your divorce.
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