Family Law - IMputing Income

1. “Show Me The Money”
Imputing Income For Child &
Spousal Support
January 26, 2010
Christine Minelli CA•CBV, CFI
VINE VALUATIONS INC.
chrism@vine.on.ca
(905) 549-8463
Imputed Income
Imputed Income – A Business Definition
Imputed Income is the cash equivalent
value of the economic benefits that a
spouse obtains through the use of
property they own or control the value of
which has not otherwise been recognized
for income tax purposes.
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2. Imputing Income For Support
Burden of proof is on the person requesting
income be imputed to a spouse
Drygala v. Pauli 2002 ONCA
Homsi v Zaya 2009 ONCA
Proof: evidence, evidence, evidence!
Imputing income can be financially
challenging: do you need to ask a financial
professional experienced in matrimonial
litigation for help?
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Determining A Spouse’s Income
Start with : Child Support Guidelines (CSG)
Personal tax return shows sources of
income(s.16) - this is just the starting point!
Schedule III Adjustments (s. 16)
Imputing Provisions (s. 17-20). Ultimately,
Income is imputed at discretion of Court
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3. Imputing Income
• FCSG try to identify and quantify income that
is NOT reported in Line 150 of tax return
Relevant Sections:
• S. 17 (1) – pattern of income, non-recurring
items
• S. 17 (2) – non-recurring capital/other losses
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Imputing Income
S. 18 (1) (a) & (b)
• Is Spouse a Shareholder/Director/Officer?
• If yes, Income that may be attributable:
 All or part of Corporate pre-tax income
 All or part of pre-tax income of a related Corp.
 Imputed income must be available to Spouse
• Or, impute income commensurate with
services provided by Spouse
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4. Imputing Income
• S. 18 (2)
Add:
“Salaries, wages, management fees or other
payments or benefits to or on behalf of persons
with whom corporation does not deal at arms
length”
Unless... payments are reasonable in circumstances
How define & identify:“persons” and “non-arm’s
length”?
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Imputing Income
“Person”:
• Can be an individual or a corporation (ITA)
“Non-arms length”:
• If individual: related by blood, marriage
(including common-law), adoption, etc.
• If Corporation: means corporation(s)
controlled directly or indirectly by the Spouse
or by persons or corporations related to Spouse
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5. Imputing Income
S 19(1) - Court is the ultimate arbiter
Income Imputed if:
(a) Underemployed, how to prove/quantify?
(b) Exempt from federal/provincial tax
(c) Offshore income, lower tax rate than here
(but see S. 20(2))
(d) Income has been diverted
(e) Property not generating reasonable income
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Imputing Income
S 19(1) – continued
Income Imputed if:
(f) Failure to provide information
(g) Unreasonably deducts expenses (ITA n/a)
(h) Significant low tax rate income: capital
gains, dividends, exempt income
(i) Beneficiary under Trust & gets or will get
income or other benefits from Trust
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6. Imputing Income
In the Case of
of Mr. H…
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Imputing Income
Basic evidence to start with:
• NFP – shows net assets, is it complete and up to date?
• Financial Statement, current income less expense
• Personal tax returns, with attachments, how reliable?
• Notices of Assessment/Reassessment
• Corporate tax returns (federal & provincial)
• Corporate financial statements, including notes (but…
how reliable are they?)
• Partnership FS, if applicable
• Interview with client, eg. non-owning spouse (lots of
info!)
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7. Imputing Income
• Your Client
• Mrs. H
• She usually
knows a lot!
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Imputing Income – Info From Mrs. H
• 35 year marriage, Mr. H 60, Mrs. H 59
• Two kids, Mrs. H worked at home throughout
• Matrimonial home sold $750K. Mr. H rents 2
bdrm apt. for $1K /mo. Ms. H bought town.
• DOS investments of $350K. Mr. H got $175K
• 3 luxury cars - $250K. Sold, proceeds split
$125K each
• UK pension (his) equalized…
• Kids’ private school fees $40,000/yr.He pays.
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8. Imputing Income – Other Info, Mrs. H
• Mr. H is 100% owner of “Euro Consult Inc”, has
been for a long time. Has taken cash from bank in
past.
• 51% shareholder in 100555 Ont. Inc., it only has a
$1.00 investment in shares. No taxable income. No
returns filed… What do you do with this
information?
• Mr. H. says his income is (and will be) $125,000,
and not a penny more, friend has kids, she doesn’t
work, he’s adopting them, can’t pay spousal support
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Imputing Income – AND More Info!
• Mrs. H. says he has tenure at U of T, he can work
until he drops dead (no age limit). Kids live with her.
Not employable
• Her sources say he’s still travelling overseas on
‘business’!
• She says Mr. H worked in UK, large Pubco, had UK
shares, has family in Ireland, bank accounts in Egypt
and Singapore. Probably getting his UK pension!
• Mrs. H says he’s getting money from somewhere, and
has other assets, bought a 4 bedroom cottage on Lake
Joseph with his new “ladyfriend”…and a yacht!
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9. Imputing Income
Questions to ask yourself:
Do you determine Mr. H’s income or do
you call an expert for help?
When to call?
What can an expert really do?
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Imputing Income: Numbers Talk!
Date of Separation - July 2007 2006 2007 2008 2009
Mr. H
University of Toronto $ 220,000 $ 120,000 $ 110,000 $ 132,000
University of Singapore ($C) - 110,000 - -
Taxable dividends 15,000 20,000 20,000 2,000
Taxable capital gains (losses) 5,000 5,000 (25,000) -
Interest income 15,000 30,000 - -
Farming income - - (8,000) (8,000)
Rental income (loss) (4,000) (5,500)
Income from Ltd. Partnership 4,000 4,000 - -
Line 150 T1 General Income $ 259,000 $ 289,000 $ 93,000 $ 120,500
Tax Returns Show:
Carrying charges $ 25,000 $ 35,000 $ 37,500 $ 40,000
RRSP's 7,500 7,500 10,500 14,000
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10. Imputed Income
Notice anything odd
about Mr. H’s
income after DOS?
- Pattern of income
- Sources of income
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Imputing Income: Numbers Talk !
Date of Separation - July 2007 2006 2007 2008 2009
Mr. H
University of Toronto $ 220,000 $ 120,000 $ 110,000 $ 132,000
University of Singapore ($C) - 110,000 - -
Taxable dividends 15,000 20,000 20,000 2,000
Taxable capital gains (losses) 5,000 5,000 (25,000) -
Interest income 15,000 30,000 - -
Farming income - - (8,000) (8,000)
Rental income (loss) (4,000) (5,500)
Income from Ltd. Partnership 4,000 4,000 - -
Line 150 T1 General Income $ 259,000 $ 289,000 $ 93,000 $ 120,500
Tax Returns Show:
Carrying charges $ 25,000 $ 35,000 $ 37,500 $ 40,000
RRSP's 7,500 7,500 10,500 14,000
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11. Imputing Income: Numbers Talk!
Date of Separation - July 2007 2006 2007 2008 2009
Mr. H
University of Toronto $ 220,000 $ 120,000 $ 110,000 $ 132,000
University of Singapore ($C) - 110,000 - -
Taxable dividends 15,000 20,000 20,000 2,000
Taxable capital gains (losses) 5,000 5,000 (25,000) -
Interest income 15,000 30,000 - -
Farming income - - (8,000) (8,000)
Rental income (loss) (4,000) (5,500)
Income from Ltd. Partnership 4,000 4,000 - -
Line 150 T1 General Income $ 259,000 $ 289,000 $ 93,000 $ 120,500
Tax Returns Show:
Carrying charges $ 25,000 $ 35,000 $ 37,500 $ 40,000
RRSP's 7,500 7,500 10,500 14,000
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Imputing Income: Numbers Talk!
Date of Separation - July 2007 2006 2007 2008 2009
Mr. H
University of Toronto $ 220,000 $ 120,000 $ 110,000 $ 132,000
University of Singapore ($C) - 110,000 - -
Taxable dividends 15,000 20,000 20,000 2,000
Taxable capital gains (losses) 5,000 5,000 (25,000) -
Interest income 15,000 30,000 - -
Farming income - - (8,000) (8,000)
Rental income (loss) (4,000) (5,500)
Income from Ltd. Partnership 4,000 4,000 - -
Line 150 T1 General Income $ 259,000 $ 289,000 $ 93,000 $ 120,500
Tax Returns Show:
Carrying charges $ 25,000 $ 35,000 $ 37,500 $ 40,000
RRSP's 7,500 7,500 10,500 14,000
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12. Imputing Income: Numbers Talk!
Date of Separation - July 2007 2006 2007 2008 2009
Mr. H
University of Toronto $ 220,000 $ 120,000 $ 110,000 $ 132,000
University of Singapore ($C) - 110,000 - -
Taxable dividends 15,000 20,000 20,000 2,000
Taxable capital gains (losses) 5,000 5,000 (25,000) -
Interest income 25,000 35,000 - -
Farming income - - (8,000) (8,000)
Rental income (loss) (4,000) (5,500)
Income from Ltd. Partnership 4,000 4,000 - -
Line 150 T1 General Income $ 269,000 $ 294,000 $ 93,000 $ 120,500
Tax Returns Show:
Carrying charges $ 25,000 $ 35,000 $ 37,500 $ 40,000
RRSP's 7,500 7,500 10,500 14,000
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What’s Wrong With These Numbers?
• Mr. H a tenured professor • How come Euro Consult
so why is his income from not paying any
U of T so low post-DOS? dividends?
• When did he leave U of S? • What happened to his
• What’s up with 100555 bank investments? No
Ontario Inc.? It has $1.00 interest?!
in assets, no liabilities, and • So, now he’s a landlord
no taxes filed…but still and a farmer too?
around? Right…
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13. What Now?
Get an Expert and Get More Info!
• Check corporate tax returns (T2)
– Should disclose related & associated corporations
– Identify all related corp’s and get more info!
– T2 shows owners of corporations (but not always)
• Info from 3rd parties ( U of T, U of S, bank, broker…)
• Get personal bank statements? …maybe
• Get corporate bank statements? …probably
• Contact UK Pubco, what happened to his shares
(note- overseas info costly). Maybe UK tax return?
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Imputed Income
GOT some Info:
• U of T – says he’s only working a 60% load
• U of S – says he worked 1 year, ‘til June
2008…they gave his tax info before he left
• Property register shows Mr. H paid $750K
cash for Burlington farm land. Non-productive
asset. Impute @4% rate of return = $30K?
• T1 General tax return shows he bought four
unit rental property, borrowed $, rental income
$20K, expenses $24K, CCA $6K each year.
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14. Imputed Income
GOT more Info:
• Personal bank statements – Mr. H gets £600.00/mo,
about $15,840 CAD, UK pension. Started 2008.
• Pension equalized. Double dipping? Spousal? Child ?
• Units in Ltd. Partnership sold 2007, no more income
• Property search - paid $500K cash for Lake Joseph
Property. Uses it 3 weeks per year. Can impute income
on non-productive? $500K @ 4% = $20K
• Still waiting for UK shares info (don’t hold your
breath!)
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Impute Income??? Absolutely!!
Conclusion Based on Review:
1) U of T – 2009 underemployed, only 60% workload
2) U of Singapore - income not reported at all in 2008
3) Singapore income tax rate (15%) low: to gross-up
4) UK Pension income – not reported, add $CAD.
5) Taxable dividends – Sch. III, restate to cash basis
6) Taxable capital gains – Sch. III, add ½ non-taxable,
7) Allowable capital loss of 2008 – non-recurring;
discretion to deny loss, FCSG s. 17(2)
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15. Impute Income? YES!
Conclusion Based on Review:
8) Impute 100% income Euro Consult– Mr. H controls
9) Impute 100% income 877000 Ont.– Mr. H controls
10) Impute income from 100555 Ont. Inc. – Mr. H owns
51%. Asset and Income diverted
11) Impute income on non-productive assets (farm land &
Lake Joseph cottage… maybe?)
12) Impute income – deny hobby farm loss
13) Impute income – add back CCA on rental property
14) Impute income: gross up personal benefits from Euro
Consult to pre-tax value. Same for low-tax rate
dividend’s & capital gains…if significant… 29
Imputing Income – the Calcs
• Singapore salary – has low tax rate of 15%
• Got $110,000 gross ($C), less tax = $93,500
• To get $93,500 net in Canada, he would need to
earn $201,465 gross (46.41% tax)
• To equalize to Canada, we have to impute/add
difference, being $91,465 to 2007 income
• Also, infer gross of $201,465 for ‘08(6 mos.)
• Lots of issues with foreign income: can be
higher cost of living, different income
reporting, etc. 30
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16. Imputing Income – the Calcs
• U of T salary : Mr. H underemployed!
• Took only a 60% workload…. His choice…
• Always worked 100%, no health issues, no
explanation given
Impute income:
$132,000 ÷ 0.60 = $220,000 = full-time salary
$220,000 – $132,000 reported = $88,000 imputed
additional
• Can be hard to calc. for self-employed…financial
advisor, accountant, lawyer….
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Imputing Income
Dividend Income
• Adjust dividends to remove tax gross-up and
restate to actual cash received
• Dividend gross up can be 25% (private co) or
45% (public co). Need to see attachments!!!!
• Assume Mr. H has 45% gross-up dividends
• 2007 adjustment: ($20,000÷1.45)-$20,000 =
$6,207, etc.
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17. Imputing Income
Taxable Capital Gains
• Capital gain from sale of shares/property
• Calculated as proceeds less cost.
• Taxable portion is 50% of net gain.
Selling spouse gets 100% cash…
• FCSG says to add non-taxable 50% to
income for support, recognizes 100%
cash
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Imputing Income
Non-recurring capital loss $25K
• Add back non-recurring capital loss of $25K?
• Sometimes a capital loss is very high because the
original cost base is high, or there is a write-off of an
investment… this type of non-recurring loss can
totally distort IFS, hurt children, cash still received…
usually costs in the past…
• Here, the amount is not large, but… then again, Mr.
H has not been too forthcoming with his income
• I would adjust, then let the Court/lawyers work it out.
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18. Imputing Income
• Hobby Farm losses…. Why should former
spouse subsidize personal hobby? Add it back!
• Rental losses… may have a good return one
day, when property sold… but this rental loss
includes CCA, or “capital cost allowance”
(a.k.a. depreciation) of building, not cash item
• Sch. III, par.11 says add back CCA to IFS!
• But… what if the property was owned by a
corporation and not Mr. H personally?
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Imputing Income
Diverted income – s. 19(1)(d) - tricky
• Farm land = $750K;Lake Joseph = $500K
• Total cash invested in non-income producing
assets: $1.25 M
• Impute income ? How?
• Can compare to investment in GIC, bonds
• Use rate of, say, 4 % x $750K = $30K
• Use rate of, say,4% x $500K = $20K
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19. How to Impute Corporate Income?
• Corporate income can be very complex issue
• Many business owners reduce income to reduce tax
• Personal expenses run through company: children’s
allowances, their cell phones, income splitting with
wife, payments to mother, father, brother, etc.,
personal cars, management fees to related
corporations, etc. etc.
• Also, some expenses and income are non-recurring,
should be excluded for determining future achievable
IFS: insurance claim paid, R&D tax credit refunds…
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Imputing Corporate Income
SOME OTHER ITEMS NOT DISCUSSED…
• What happens when shareholder spouse not a
controlling shareholder? Could have control even if
less than 51%... If sole director… and shareholders
are family members and they need him…
• De jure vs. de facto control?
• Could the Company actually pay the imputed
income? What if bank covenants prevent payment of
more than $X in salary? Must analyze banking terms.
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20. How to Impute Corporate Income?
Mr. H - Euro Consult : 2006 to 2007
• Euro Consult accounting records show $1.0M
revenue; expenses of $300K; tax of $100K. NIAT
$600K. No debt. Retained earnings $700K
• Personal travel, car, entertainment expense of $80K.
Find through detailed analyses only.
• Oops - personal friend on the payroll! $25K per year
Attribute income: pre-tax $700K + personal (non-
business) expenses $80K + salary $25K=$805K
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How to Impute Income?
Mr. H - Euro Consult 2008 to 2009
• Euro Consult accounting records show $600K revenue
Expenses of $600K; Net income & debt NIL.
• Personal expenses $100K, includes $20K Lake Joseph
repairs. Find through detailed analyses only.
• In 2008 & 2009 expenses include $300K management
fees to new numbered company 877000 Ont. Inc.
owned by Mr. H. T2’s not filed. No salary to friend.
Attribute: NIL income reported + $300K fees +
$100K personal (non-business) expenses = $400K.
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21. How to Impute Income?
Mr. H - 877000 Ontario Inc.
• Management fee income of $300K per year from
Euro, starting in 2008.
• Pays $25K in life insurance.
• $100K loaned to Mr. H each year. Never paid back.
• No dividends paid. No debt. No tax returns filed.
• Don’t double-count…
Attribute: $300K management fee - $300K already
attributed in Euro + $25K shareholder life = $25K
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How to Impute Income?
Mr. H - 100555 Ont. Inc
• 100555 Ont. Inc. is new Co., owned 49% by friend.
• $ 1.00 asset is a patent! Who knew?
• $400K royalty income, pays “management fees” of
$300K to friend. Net inc. $100K, all loaned to Mr. H.
• Appears patent was licensed, ownership transferred
by Mr. H to 100555 Ont but he gifted 49% of shares
to friend. Infer: Diverted asset and income!
Attributed income : $100K net income + $300K to
friend = $400K. But… what if she owned 51%?
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22. Imputing Income
Low tax rate income: Dividends, Capital Gains, Benefits
• FCSG – tries to adjust all income to equivalent level of
employment income…likely because support software
works this way?
• Dividends/capital gains, taxed at low 31.33%, amount
significant?
• Personal benefits received from corporations …
Euro Consulting example -
• Mr. H personal benefits = $100K in 2008
• Need to earn pre-tax income of $215,470 to have $100K
net! 46.41% tax….highest marginal tax rate
• Impute difference of $115,470 ($251,470-$100,000)
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Imputing & Mr. H’s Income
• O.k.… so where
were we…???
Oh, yeah…
• Show Me
The Money!
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23. Mr. H’s (Adjusted) Income For Support
2006 2007 2008 2009
Line 150 T1 General Income $ 261,006 $ 289,000 $ 93,000 $ 120,500
Adjustments:
U of S salary not reported - - $ 110,000
Gross-up U of S salary to pre-tax CDN equivalent 91,465 91,465
U of T salary - underemployed - - 88,000
UK Pension income - - 15,840 15,840
Adjust for non-tax portion of dividends (4,655) (6,207) (6,207) (621)
Adjust for non-tax postion of capital gains 5,000 5,000 - -
Deny non-recurring capital loss - - 25,000 -
Deny farming loss - hobby - - 8,000 8,000
Addback CCA on rental property - - 6,000 6,000
Impute interest on farm land: $750K @ 4% - - 30,000 30,000
Impute interest on Lake Joseph Property - - 20,000 20,000
Impute corporate income: - -
- Euro Consult 805,000 805,000 400,000 400,000
- 877000 Ontario Inc. - - 25,000 25,000
- 100555 Ontario Inc. - - 400,000 400,000
Impute benefit low tax rate dividends 4,221 5,628 5,628 563
Impute benefit personal from Euro Consult 92,377 92,377 115,471 115,471
Total adjustments 901,942 993,263 1,246,197 1,108,253
Total Income available for support $1,162,948 $ 1,282,263 $ 1,339,197 $ 1,228,753 45
Imputed Income
Notice anything about
Mr. H’s income after
adjustments?
- Pattern of income
- Sources of income
- Reflects lifestyle?
- Reflects reality?
- Equitable for spouse?
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24. Imputing Income
Other Issues:
• Bonuses, accruals & timing
• Minority shareholders & control issues
• Bank debt & limitations on distributions
• Self-employment income
• Cash income, unreported altogether (retail,
restaurant, home renovations, etc.)
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Imputing Income – THANK YOU!
• Questions?
Chris Minelli
&
Eveline Reid
(905) 549-8463
Vine Valuations
www.vine.on.ca
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