Hamilton Law Association Presentation 2010

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“Show Me The Money”Imputing Income For Child &

Spousal Support

January 26, 2010Christine Minelli CA•CBV, CFIVINE VALUATIONS [email protected](905) 549-8463

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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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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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Imputing Income

• FCSG try to identify and quantify income thatis NOT reported in Line 150 of tax return

Relevant Sections:

• S. 17 (1) – pattern of income, non-recurringitems

• S. 17 (2) – non-recurring capital/other losses

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Imputing IncomeS. 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 withservices provided by Spouse

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Imputing Income

• S. 18 (2)

Add:

“Salaries, wages, management fees or otherpayments or benefits to or on behalf of personswith whom corporation does not deal at armslength”

Unless... payments are reasonable in circumstances

How define & identify:“persons” and “non-arm’slength”?

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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 Spouseor by persons or corporations related to Spouse

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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: capitalgains, dividends, exempt income

(i) Beneficiary under Trust & gets or will getincome or other benefits from Trust

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Imputing Income

In the Case ofof Mr. H…

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Imputing IncomeBasic 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 ofinfo!)

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Imputing Income

• Your Client

• Mrs. H

• She usuallyknows a lot!

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Imputing Income – Info From Mrs. H

• Kids’ private school fees $40,000/yr.He pays.

• 3 luxury cars - $250K. Sold, proceeds split$125K each

• UK pension (his) equalized…

• DOS investments of $350K. Mr. H got $175K

• Matrimonial home sold $750K. Mr. H rents 2bdrm apt. for $1K /mo. Ms. H bought town.

• 35 year marriage, Mr. H 60, Mrs. H 59• Two kids, Mrs. H worked at home throughout

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Imputing Income – Other Info, Mrs. H

• 51% shareholder in 100555 Ont. Inc., it only has a$1.00 investment in shares. No taxable income. Noreturns filed… What do you do with thisinformation?

• Mr. H. says his income is (and will be) $125,000,and not a penny more, friend has kids, she doesn’twork, he’s adopting them, can’t pay spousal support

• Mr. H is 100% owner of “Euro Consult Inc”, hasbeen for a long time. Has taken cash from bank inpast.

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Imputing Income – AND More Info!

• Mrs. H. says he has tenure at U of T, he can workuntil 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 UKshares, has family in Ireland, bank accounts in Egyptand Singapore. Probably getting his UK pension!

• Mrs. H says he’s getting money from somewhere, andhas other assets, bought a 4 bedroom cottage on LakeJoseph with his new “ladyfriend”…and a yacht!

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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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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 !


Mr. H






Farming income - - (8,000) (8,000)




Tax Returns Show:


RRSP's 7,500 7,500 10,500 14,000

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Mr. H






Farming income - - (8,000) (8,000)




Tax Returns Show:


RRSP's 7,500 7,500 10,500 14,000

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Mr. H






Farming income - - (8,000) (8,000)




Tax Returns Show:


RRSP's 7,500 7,500 10,500 14,000

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Mr. H






Farming income - - (8,000) (8,000)




Tax Returns Show:


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

so why is his income from

U of T so low post-DOS?

• When did he leave U of S?

• What’s up with 100555

Ontario Inc.? It has $1.00

in assets, no liabilities, and

no taxes filed…but still

around?

• How come Euro Consult

not paying any

dividends?

• What happened to his

bank investments? No

interest?!

• So, now he’s a landlord

and a farmer too?

Right…

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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 IncomeGOT some Info:

• U of T – says he’s only working a 60% load

• U of S – says he worked 1 year, ‘til June2008…they gave his tax info before he left

• Property register shows Mr. H paid $750Kcash for Burlington farm land. Non-productiveasset. Impute @4% rate of return = $30K?

• T1 General tax return shows he bought fourunit rental property, borrowed $, rental income$20K, expenses $24K, CCA $6K each year.

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Imputed IncomeGOT 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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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 owns51%. 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 EuroConsult to pre-tax value. Same for low-tax ratedividend’s & capital gains…if significant…

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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 toearn $201,465 gross (46.41% tax)

• To equalize to Canada, we have to impute/adddifference, being $91,465 to 2007 income

• Also, infer gross of $201,465 for ‘08(6 mos.)

• Lots of issues with foreign income: can behigher cost of living, different incomereporting, etc.

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Imputing Income – the Calcs

• U of T salary : Mr. H underemployed!

• Took only a 60% workload…. His choice…

• Always worked 100%, no health issues, noexplanation given

Impute income:

$132,000 ÷ 0.60 = $220,000 = full-time salary

$220,000 – $132,000 reported = $88,000 imputedadditional

• Can be hard to calc. for self-employed…financialadvisor, accountant, lawyer….

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Imputing IncomeDividend Income

• Adjust dividends to remove tax gross-up andrestate to actual cash received

• Dividend gross up can be 25% (private co) or45% (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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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% toincome for support, recognizes 100%cash

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Imputing IncomeNon-recurring capital loss $25K

• Add back non-recurring capital loss of $25K?

• Sometimes a capital loss is very high because theoriginal cost base is high, or there is a write-off of aninvestment… this type of non-recurring loss cantotally 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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Imputing Income

• Hobby Farm losses…. Why should formerspouse subsidize personal hobby? Add it back!

• Rental losses… may have a good return oneday, when property sold… but this rental lossincludes 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 acorporation and not Mr. H personally?

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Imputing IncomeDiverted income – s. 19(1)(d) - tricky

• Farm land = $750K;Lake Joseph = $500K

• Total cash invested in non-income producingassets: $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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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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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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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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Imputing IncomeLow tax rate income: Dividends, Capital Gains, Benefits

• FCSG – tries to adjust all income to equivalent level ofemployment income…likely because support softwareworks this way?

• Dividends/capital gains, taxed at low 31.33%, amountsignificant?

• 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 $100Knet! 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 wherewere we…???Oh, yeah…

• Show MeThe Money!

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Mr. H’s (Adjusted) Income For Support2006 2007 2008 2009


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$

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Imputed IncomeNotice 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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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

Documents

Hamilton Law Association Presentation 2010