Support & RRSPs, Stock Options, Severance, Retirement Allowances, Capital Gains

nonrecurring incomeMost people involved in a family law case in Canada know that the amount of spousal support or child support that must be paid is based on income. However, often people receive one-off payments during a year that they don’t normally receive – this is known as non-recurring income. Similarly, a person may suffer a one-off loss during a year. While these one-off payments and losses are considered income or losses for income tax purposes, are they considered income or losses for family law purposes?

The answer is, as always, it depends on the facts of your case. Sections 17(1)(c) and 17(2) of the Child Support Guidelines give judges a discretion to decide whether to include or exclude one-off payments of income or one-off losses. However, over time, certain patterns emerge in judges’ decisions. While they are not “rules” they can provide guidance as to your particular case.

There is a bias in the courts towards including non-recurring income in income for child support and spousal support purposes. The philosophy behind this is that if you can pay more support, you should be required to do so, as this is what’s best for the children. There’s also another guiding principle in the courts, which is that a child’s standard of living should be about the same at each parent’s household.

Some of the most common types of non-recurring income that courts deal with are:

1. RRSP Redemption. Even though RRSP redemptions are included in your income for tax purposes, a one-off RRSP redemption normally would not be considered part of your income for child support or spousal support purposes. However, if you had a pattern of cashing in a certain amount of RRSPs each year, the results might be different.

2. Stock Options. The law about including stock options in income is less clear. If you exercise stock options on a regular basis, the chances are that they will be included in your income. However, if you exercise stock options only once, and this is not part of your normal pattern of income, there are leading cases that say this should be included in income and also that say this should not be included in income. If you have a significant amount of one-off income from stock options, get a good family law lawyer and be prepared to roll the dice.

3. Severance Packages. Severance packages and termination payments are normally (although not always) included in income for support purposes, even if you find a job right away and so have an unusually high income in the year the severance package was paid. The idea behind this is that these sorts of payments are a form of replacement income. One issue that arises is when to include the payments in income. Some cases say that severance and termination payments should be included in income all in the year received. Other cases say that the payments should be allocated over the period of estimated income replacement.

4. Retirement Allowances. Retirement allowances are normally included in income for family law purposes. The logic here is the same as for severance packages in #3. A similar issue exists regarding when to include the payment in income.

5. Personal Injury Awards. Generally, if the damages you receive in a personal injury award are for pain and suffering, this does not need to be included in your income for purposes of calculating support. If the damages you receive are for loss of income, these generally do get included in income for support purposes. If you’re negotiating an out of court settlement of your personal injury suit, you can guess how you want the settlement to read.

6. Capital Gains. The treatment of this type of income is all over the map, but generally one-off capital gains are considered income for purposes of calculating support, particularly whether they arise on the sale of investments such as stocks, bonds, and real estate. On the other hand, generally one-off capital losses are not used to reduce income for purposes of calculating support. The most usual case where capital gains will not be included in income is where the gains are immediately re-invested. For instance, if you sell a business, and re-invest the proceeds into a new business, then generally the capital gains from the sale of your business won’t be considered as part of your income for purposes of calculating child support and spousal support. Note that if included in income it will be the actual amount of capital gains received that is included, pursuant to Schedule III, section 6 of the Child Support Guidelines.

Updated July 2013

Comments

  1. Len Petry says:

    What is the “income calculation” into which non-recurring income is included? That is, if a one-time stock option is exercised, causing income to balloon to a amount never seen before and unlikely to be seen again, is this inflated income level the basis on which child support is calculated? That would seem to impose an unfair financial burden on the payer.

    If, however, the balloon income is merely included in other years’ income, averaged over a few years, that woudl seem to be fairer.

    Any legal calculation that departs seriously from reality needs to be questioned, and the tenure of judges who arrive at decisions at odds with common sense needs to be questioned too.

    Speaking of questionable legal calculations, the calculation of the gain or loss of net worth during a marriage is confusing (and perhaps confused). But perhaps this is not the place to ask the question.

    tandard, and the poor support payer bligatedto pay the higher amount in perpetuity?

    b

  2. It is widely believed that the marital home is split (or at last the value is split) when a marriage ends. But I have also been told that it is not as simple as this.

    The general rule is that each partner’s growth in net assets during the marriage is calculated, and any differential is awarded to the partner with lower asset value. For example, if partner A had assets of $100,000 at the beginning, and $200,000 at the end, his/her asset growth during the marriage was $100,000. If partner B had assets of $25,000 initially, and $50,000 at the end, his/her asset growth was $25,000. The calculation is to add the two net asset growths together, divide by two, and whichever partner is under the median gets an equalization payment to bring hi/her assets up to the median value. In this example, the combined growth values are $125,000, and the median is $62,250. Partner B would get a transfer of $12,500 to bring his/her end-value of $50,000 up to $62,500. So far not too complicated.

    Complication 1:
    But where partner A had a house, worth (say) $75,000 at the beginning, and worth $100,000 at the end, the initial house value is not included in his/her asset calculation, but MUST BE included in the end value. So partner A’s initial asset value is $100,000 (excluding the house) but $300,000 at the end — ($200,000 of other assets plus $100,000 for the house). The new combined growth is $225,000 ($25,000 + $200,000), and the new median is $112,500. Now partner B gets an equalization payment of $62,500, simply for having the foresight to move into the other partner’s home, and not vice versa.

    Complication 2:

    But the complication gets worse. How is the house treated where Partner A suffers a serious loss of the other assets, but the house increases the same $100,000 in value? Remember, partner A’s net growth in assets is zero in this scenario.

    Meanwhile Partner B’s assets grow the same, from $25,000 to $50,000. So the combined asset growth figure is now $25,000, the median value, and now partner B owes A an equalization payment of $12,500.

    Is this correct? Or is the matrimonial home treated as a special asset? In this example, even though partner A lost $100,000 in non-house assets, the $200,00 value of the house is still included in his/her end value. So the combined asset growth is $150,000, the median is $75,000, an partner A still owes an equalization payment of $25,000, to bring B’s assets up to $75,000.

    Effectively partner A would have to sell the house, to find the money for the equalization payment. Yet A needs partner B’s permission to sell A’s own house!! If B withholds permission, it could get real messy, and lots of legal bills.

    I hope I have erred with the facts, because this all seems quite unfair to me.

  3. @Len,

    > What is the “income calculation” into which non-recurring income is included?

    The starting point of the income calculation is line 150 of your tax return. Line 150 will include all sources of income, including non-recurring income.

    > if a one-time stock option is exercised, causing income to balloon to a amount never seen before and unlikely to be
    > seen again, is this inflated income level the basis on which child support is calculated?

    It may well be – it depends on the individual circumstances in your case and also the circumstances of the payment.

    > If, however, the balloon income is merely included in other years’ income, averaged over a few years, that woudl
    > seem to be fairer.

    It could well be and judges have done this in many cases. Again, it is going to depend on the individual circumstances in your case and also the circumstances of the payment. For instance, in one case a person was required due to his company being taken over by another company to exercise all his stock options right away. It was shown that had the takeover not occurred, he would have exercised the options over a three-year period. So, the court allowed him to spread the income from the options over three-year period.

    > tandard, and the poor support payer bligatedto pay the higher amount in perpetuity?

    Child support is normally re-calculated annually. In this blog post, I’m just talking about the year in which the one-off payment is received. So, the answer to your question is no – if there is no expectation that the one-off income will be received again, that income should not be considered when calculating future support.

  4. @Len,

    > It is widely believed that the marital home is split (or at last the value is split) when a marriage ends. But I have also
    > been told that it is not as simple as this.

    You’re right.

    > The general rule is that each partner’s growth in net assets during the marriage is calculated, and any differential is
    > awarded to the partner with lower asset value.

    That’s correct – and so is your example calculation.

    > Complication 1:
    > But where partner A had a house

    I don’t quite follow your calculation. However, the general idea is correct – where upon separation the parties are living in a matrimonial home that was owned by one of them at the beginning of the marriage, then that person will not get a credit for bringing the matrimonial home into the marriage. Whereas if the same home equity had been in any other form of cash or investments, they would have received a credit for it.

    > Complication 2:
    > But the complication gets worse. How is the house treated where Partner A suffers a serious loss of the other assets,
    > but the house increases the same $100,000 in value?

    Again, I have trouble following your example, but you are correct that if your net worth goes down during the marriage, assets get divided unequally in the sense that your negative net family property gets rounded up to 0. So, if you came into the marriage with $200,000 and at the end of the marriage your net worth is $100,000, then your net family property is $0 (and not -$100,000).

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