The Child Support Guidelines set the benchmark for calculating income for support purposes. The Guideline’s objectives ensure recipients and payors of support in similar circumstances are treated similarly across Canada.
If a support payor earns foreign income then the income must be converted to Canadian gross income when determining support. Converting foreign income to Canadian income is not just a straight application of currency exchange rates to gross foreign income. There are a number of factors to be considered.[1]
For example, if the payor’s foreign tax rate is significantly higher or lower than Canadian tax rates then the Court can adjust the payor’s income to be in accord with Canadian tax rates. If the foreign tax rate is lower, then the Court can impute additional income to the foreign payor so the payor’s after-tax income is similar to a Canadian payor’s after-tax income in similar circumstances. If the foreign tax rate is significantly higher, then the Court can reduce the payor’s income to ensure equal footing with a Canadian payor in similar circumstances.
Also, whether or not the payor is entitled to claim a foreign tax credit in Canada must be considered. Generally, Canadian residents who earn foreign income which is declared and taxed in Canada are allowed a tax credit if they had to pay foreign tax on the same income. The purpose of the foreign tax credit is to avoid double taxation of the same income.
Whether or not spousal support is paid and its tax treatment is another factor to be considered when determining a foreign payor’s income for support purposes. If the payor cannot claim a tax deduction for paying periodic spousal support, as allowed in Canada, then an adjustment may be required to bring the foreign payor’s after-tax income in-line with a similar Canadian payor’s after-tax income. If the foreign payor cannot deduct spousal support payments in their home country it results in a higher amount of after-tax spousal support being paid than required by a Canadian payor.
Lastly, currency exchange rates are a factor. Generally, the average annual exchange rate is used to ameliorate any widely fluctuating rates.
The usual practice when converting foreign income to Canadian income is to start by converting the foreign gross income to Canadian dollars using an average annual exchange rate, and then deduct the applicable foreign tax rate to calculate the payor’s after tax income in Canadian dollars. Then determine what gross income is required to result in the same after-tax income at Canadian tax rates. That is, the after-tax income is grossed-up using Canadian tax rates.
For example, assuming a foreign tax rate of 10%, a Canadian tax rate of 20%, an exchange rate of 1.35, and no available foreign tax credit (i.e. no foreign income declared in Canada) then:
$100 gross foreign income x 1.35 exchange rate = $135 gross Canadian income;
$135 gross Canadian income – 10% foreign tax rate = $121.50 after-tax Canadian income; and
$121.5 after-tax Canadian income + 20% Canadian tax rate = $145.80 gross Canadian income for calculating support.
Expert evidence is not necessary to show tax rates, etc. provided sufficient evidence is presented to allow the Court to perform the necessary mathematical calculations.
Further, it may be necessary to examine the services each government provides its citizens in exchange for their tax dollars. For example, a country might have a higher tax rate than another, but provides its citizens with services not provided by the first country. Expert evidence from tax specialists from each country is usually required to determine if extra income should be allocated to a payor because of the tax benefits they receive that are not available to the other spouse or parent.
While it is attractive to approach the conversion of foreign income by a straight application of exchange rates, other factors must be considered such as the foreign tax rates, entitlement to foreign tax credits, tax treatment of spousal support, and exchange rates to ensure dependents in Canada receive support appropriate to Canadian standards.
This article was originally published by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.
[1] For reference see: G. (E.B.) v. B. (S.M.), 2016 BCSC 2434, and Gonabady-Namadon v. Mohammadzadeh, 2009 BCCA 448.
