Tax Returns and Child Support for Separated Couples in Alberta

Understanding income for the purposes of child support is one of the most critical and often contentious aspects of family law. In Alberta, child support calculations hinge on the paying party’s gross income earned before taxes or other deductions. However, determining “gross income” can be far from straightforward, especially when dealing with unique income sources, deductions, or business structures.

This blog provides a comprehensive overview of how income is calculated for child support purposes, common pitfalls, and strategies for navigating this complex area.

The Foundation: Line 15000 of the T1 Tax Return

For most individuals, the starting point for calculating child support is Line 15000 of the T1 Income Tax Return (formerly Line 150). This line reflects the “Total Income” reported to the Canada Revenue Agency (CRA). While this figure provides a useful baseline, it does not always represent a paying party’s income for child support purposes.

When Line 15000 Falls Short

Several circumstances may lead to adjustments to the income listed on Line 15000 to ensure a fair and accurate calculation of child support:

Deductible Amounts

Certain items included in Line 15000 can be deducted when calculating income for child support purposes:

• Spousal Support Paid: If the paying parent receives spousal support from the other parent, it may be deducted.
• Pension Income Splitting: If the paying party’s income includes pension amounts transferred from the other party, these can often be deducted.
• Employment Expenses: Specific expenses, such as union dues, professional fees, or employment-related costs, may be deducted if they align with CRA guidelines.
• Social Assistance: Amounts received for other household members are typically excluded.
• Excess Dividends: If a paying party’s Line 15000 reflects grossed-up dividends, the actual dividend amount, rather than the taxable amount, is used.
• Business Losses: Net investment or business losses from the year may also be deducted.
• Carrying Charges: Interest expenses related to earning income, such as investment loans, can be deducted.
• Partnership Contributions: Income retained for capitalization in a partnership may be excluded.

Add-Back Amounts

Sometimes, the paying party’s true income may exceed the amount reported on Line 15000. Common examples include:

• Capital Gains: Only 50% of capital gains are taxable in Canada, but the full amount is considered for child support purposes.
• Non-Arm’s-Length Payments: If a business owner pays salaries or benefits to family members, these amounts may be added back unless deemed reasonable.
• Stock Options: If stock options are exercised below market value, the difference may be added to income for support purposes.
• Capital Cost Allowance (CCA): Allowable depreciation on real property may need to be added back to income.

Corporate Income Adjustments

For business owners, directors, or shareholders, additional complexities arise. These individuals have significant control over how and when income is reported, which can obscure their true earning capacity. Courts often examine the following:

• Retained Earnings: Funds left in the corporation may be added to the individual’s income if they could reasonably be paid out as salary or dividends.
• Personal Benefits: Corporate-paid expenses that benefit the individual personally (e.g., vehicle costs, travel, or housing) may be included in income.
• Income Splitting: Payments made to family members through the corporation may be scrutinized for reasonableness.

The Legal Framework in Alberta

Under Alberta’s family law regime, child support is governed by the Federal Child Support Guidelines (FCSG), designed to ensure consistency and fairness. These guidelines outline the process for determining income and calculating child support amounts.

Disclosure Obligations

Both parties are required to provide full and frank financial disclosure. This obligation includes recent tax returns and Notices of Assessment, statements of business or professional activities, information about partnership or corporate income, and details of non-taxable income or benefits. Failure to provide adequate disclosure can lead to the court imputation of income, which may result in higher child support obligations.

Imputation of Income

Imputation occurs when a court assigns an income level to a paying party, often in cases where income is underreported or hidden, the paying party is deliberately unemployed or underemployed, or non-taxable benefits significantly increase the paying party’s actual income. Imputed income ensures that child support calculations reflect the paying party’s financial capacity.

Special Considerations in Complex Cases

Self-Employed Individuals

Self-employed individuals face unique challenges in child support calculations, as their income often includes gross business revenue less allowable expenses. Courts go beyond the individual’s tax returns, examining business financial statements, personal use of business assets, and tax deductions. Some deductions, while reducing taxable income, may not reflect actual reductions in earning capacity. For example, depreciation expenses can be added back to income calculations. Courts may also scrutinize whether the individual is underreporting income or misclassifying personal expenses as business expenses to reduce their apparent income. Establishing a clear and accurate financial picture is critical for fair support determinations.

Seasonal or Fluctuating Income

Courts take a more nuanced approach for individuals with seasonal or fluctuating income. Seasonal workers or contractors often have income that varies significantly throughout the year. Courts may average income over several years to account for fluctuations or consider projected income trends when recent earnings are atypical. This ensures that support payments reflect the individual’s earning capacity rather than a single year’s performance. Courts may also consider secondary sources of income, such as gig work or side jobs when calculating support obligations.

International Income

When income is earned internationally, additional complexities arise. Exchange rates can significantly impact the income’s value when converted to Canadian dollars, and courts must account for fluctuations. Furthermore, international tax obligations can affect the disposable income available for child support. For example, tax treaties between Canada and other countries may dictate whether foreign income is taxable in Canada. Courts must also consider whether foreign income is properly reported and whether international employment benefits, such as housing or relocation allowances, should be included in the income calculation. Addressing these complexities often requires expert financial analysis and a deep understanding of international tax laws.

Strategies for Navigating Child Support Calculations

Engage Professionals Early

Given the complexities of income determination, it is advisable to work with:

• Family Lawyers: To interpret legal requirements and represent your interests.
• Accountants: To analyze financial documents and identify potential adjustments.
• Mediators: To facilitate discussions and avoid prolonged litigation.

It is extremely prudent to work with professionals to navigate complex cases involving business income, fluctuating earnings, or international considerations. Without professional guidance, individuals may overlook critical adjustments or deductions that could significantly impact the calculation of income for child support purposes. This can lead to inaccurate support amounts, legal disputes, or even court-imposed penalties for misrepresentation or non-disclosure. 

Maintain Clear Records

Accurate documentation is critical. Keep thorough records of:

• Tax returns and Notices of Assessment
• Business financial statements
• Employment contracts and benefits packages

Prioritize Transparency

Providing full and accurate disclosure fosters trust and minimizes disputes. Attempting to hide income or assets can lead to legal consequences and unfavourable outcomes.

Contact Mincher Koeman in Calgary & Canmore for Tailored Advice on Complex Child Support Matters

At Mincher Koeman, we understand navigating the divorce process can be overwhelming. Our knowledgeable family lawyers are committed to providing personalized advice and efficient solutions tailored to your needs. Whether you’re facing support obligations, are in need of a separation agreement, or are grappling with hidden assets, our team is here to help support you through it. We’ll work closely with you to understand your situation and develop a strategy that minimizes stress and maximizes your results.

Mincher Koeman has offices in Calgary and Canmore and serves clients throughout Alberta. To schedule a confidential consultation, please call 403-910-3000 or contact us online.