Tax Gross-Up to Income for Countries with Low Tax Rates

[Istanbul]

We have a separation agreement signed in another country where I used to work, where tax rates are low. We verbally discussed the issue of differing tax rates when we negotiated the agreement, and I was not in favor of doing a “tax adjustment” to my income because it would be complicated to clearly define how such an adjustment would be made. So the final agreement was that there would be no such adjustment. The problem is that instead of being specific that there would be no such adjustment, the agreement is simply silent about it. If it’s silent, does it mean that there is no adjustment or not?

The Canadian support guidelines state:
"In cases that go to court, a judge may need to increase the income amount in order to calculate an appropriate child support amount. This is called "imputing" income. It may happen if, for example:
• you live in a country where income tax rates are a lot lower than Canada’s;"

So yes I realize that if we were in court without an agreement, a judge *may* gross-up my income, and the judge would dictate exactly how this is supposed to be done. But here it’s a different issue. We are talking about how a judge would interpret an existing agreement. If it’s silent about the tax gross-up to income, would a judge conclude that the gross-up should not be applied?

[rockscan]

Do you work in that other country now? Do you earn canadian income? If you earn cdn income and pay cdn taxes it doesn’t matter what your agreement says, you will pay cs based on your line 150 or actual income if you own your own business.

More than likely the gross up was done for a different country to exchange the rate to cdn.

[Istanbul]

Do you work in that other country now? Do you earn canadian income? If you earn cdn income and pay cdn taxes it doesn’t matter what your agreement says, you will pay cs based on your line 150 or actual income if you own your own business.

More than likely the gross up was done for a different country to exchange the rate to cdn.

There are actually two separate disputes: what I need to pay for the period while I was working in another country, and what I need to pay after I left that country. I think you are referring to the second time period, however I am referring to the first time period.

Canada has a high tax rate, whereas my previous country had a low tax rate. The issue is whether I should directly use my income without adjustment to calculate CS because the agreement is silent about any such adjustment. Or if my income first needs to be increased to reflect the difference in tax rates, then use that higher income in the CS formula.

[Janus]

and I was not in favor of doing a “tax adjustment” to my income because it would be complicated to clearly define how such an adjustment would be made.

That's hilarious. Reminds me of when rich right wingers say that tax rates need to be flat, because a progressive tax system is too complicated.


I bet I could work out a system to accurately gross up your income in about 5 minutes. Maybe less, depends on how loud my kids are.

So the final agreement was that there would be no such adjustment. The problem is that instead of being specific that there would be no such adjustment, the agreement is simply silent about it. If it’s silent, does it mean that there is no adjustment or not?

As you later mention, grossing up is a form of imputing income. You pay based on your income. That income might be your actual income or an imputed income. You probably would have been better off agreeing to a 10% gross up. That would be hard to attack. Since it is silent, I think that doesn't work out well for you.

If it’s silent about the tax gross-up to income, would a judge conclude that the gross-up should not be applied?

Unlikely, I would expect that the judge would impute income.

[Istanbul]

Thanks for the feedback. I see that I need to clarify what I meant by "complicated". It is not about the progressive tax rates – that would be easy to adjust indeed. The complications have to do with what is taxable income and at what level, for different jurisdictions.

For example, what if hypothetical numbers are:
Salary $50k
Cash bonus $10k
Pension contribution $15k
Health insurance $3k
Stock options vested $8k
Stock options granted but not vested $11k
Dividend income $4k
Capital gains $13k

If this income was from Singapore, what is the grossed-up income in Canada? What if the income is from a Scandinavian country with actually higher tax rates than Canada? Should there be a “gross-down” income? The separation agreement was written to be applied for years in the future, with no knowledge of where I would live, so countries with higher taxes than Canada were not out of the question. How would they be handled according to the agreement? And for low tax countries, would the gross-up depend on which province where my ex lives in Canada, so that means if my ex moves to another province, one would expect the gross-up to change? That calls the question why did the agreement not say anything about the province to use for the gross up?

This is specifically why we did not put in 10% gross-up in the agreement, because it did not say anything about where I would live. I have moved to different countries several times in the past so it does matter.

Of course, these are just hypothetical scenarios above. Why? My point would be to show that if there are no clear answers to these scenarios, is it not because all of this was supposed to be moot = no gross-up? If not moot, then why is there no mention at all on how to proceed?

With the numbers above, I do not think any of this would take 5 minutes to resolve, and that is what I meant with my comment “complicated”. The reality is that the gross-up was discussed, I refused it, and the agreement is silent. Is that enough to conclude that there should be no gross-up? My challenge will be to convince a judge that indeed there should be no gross-up because if there had been a gross-up, surely the agreement would dictate how such adjustment should be made based on several considerations, because there would be a lot of considerations to follow, not only progressive tax rates. Rather than having nothing at all in the agreement. Plus the fact that the Canadian guidelines say that a gross-up MAY be done. It’s not systematic and it allows for leeway for not having a gross-up.

Unlikely, I would expect that the judge would impute income.

If there was no agreement in place, then yes I think the judge would most likely impute income. But there is an agreement, so the judge needs to follow the agreement. If the judge imputes income, how will it be done and why is it not defined by the agreement?

If my arguments above are not convincing and you believe a judge will do a gross-up anyway, then I will adjust my expectations accordingly in court and assume my odds of winning on this specific point are not that great! And I will adjust my arguments in court based on where my logic is perceived to be weakest in order to help my chances.

[denbigh]

[QUOTEThe reality is that the gross-up was discussed, I refused it, and the agreement is silent. Is that enough to conclude that there should be no gross-up?][/QUOTE]
no I dont think so, I am not a lawyer so that this with a grain of salt, but I would think if an agreement does not mention something , no matter what that is, lets say it is topic X. If an agreemetn does not mention topic X, it doesnt mean topic X does not apply, it means topic X was not decided on, and therefore open to future decisions. If there is no language to exclude or include something, then it just hasnt been decided on.

[Istanbul]

no I dont think so, I am not a lawyer so that this with a grain of salt, but I would think if an agreement does not mention something , no matter what that is, lets say it is topic X. If an agreemetn does not mention topic X, it doesnt mean topic X does not apply, it means topic X was not decided on, and therefore open to future decisions. If there is no language to exclude or include something, then it just hasnt been decided on.

That's a good point. Then under that angle, I think my approach should be to say how can a lengthy agreement of several pages long have such an important issue which has simply not been decided on? Is it not because actually it was decided on?

If I had asked for the agreement to clearly say it rather than leave it silent, then I would not have this challenge now. Oh well! Live and learn.

[Janus]

I think there are two options.

Procedure 1

a) Figure out your income for CS purposes in Canada
b) Figure out the tax you would pay on that income.
c) Figure out the tax you did pay on that income
d) (*)If you paid less tax in your country (say, Turkey), add that to your income. If you paid more tax, subtract it from your income.


I put an asterix next to "d" because while it is not accurate, it is probably close enough and avoids complicated calculations. It's a bit less swingy than a real gross up would be.


Procedure 2

Come up with an average worldwide historical gross up figure for the countries in which you have been employed. Use that no matter what. No need to recalculate anything.

Some years it will work out in your favour, others years it will not.

*******************

Pick one of the two options. Alternatively, go to court. Remember that as a group, judges are rather lousy with math, so be prepared to lose even if you are correct if you are arguing math.

[Janus]

Also, I think your "not in the agreement" argument is weak. Lots of agreements are missing things. If your agreement said "no gross up", then that means no gross up, and she has to argue a material change. However, since it is not in agreement, then judge can just rule on it.

Much like the judge could rule on how the summer vacation is split up in 2019, if the agreement does not specify how it is split up.

[denbigh]

Then under that angle, I think my approach should be to say how can a lengthy agreement of several pages long have such an important issue which has simply not been decided on? Is it not because actually it was decided on?

I think that is wishful thinking. That is like saying when you make a separation agreement for your children, if you dont include information for child suuport and section seven when and if they go to university, it is such an important issue, that even though there is no language about it, it must mean you in fact did decide on it, even though you have nothing written down and signed in the agreement.

if it was not written down and signed, then it didnt happen. Y

[arabian]

I moved to another Province and I pay pretty much the same amount of tax.

You are not the first person to work overseas and have children residing in Canada. I suspect you have already received an opinion from your accountant on this matter.

You say you have a lengthy agreement. You sound like an intelligent individual who likely crossed all of his "ts" and went over the agreement carefully and had legal advice as well.

If this is the case then you come across as someone who drew up the agreement with intention of trying to not pay what you are supposed to be paying. At least that is the impression I am left with.

[Istanbul]

You say you have a lengthy agreement. You sound like an intelligent individual who likely crossed all of his "ts" and went over the agreement carefully and had legal advice as well.

If this is the case then you come across as someone who drew up the agreement with intention of trying to not pay what you are supposed to be paying. At least that is the impression I am left with.

I understand why you would have this impression. However, believe it or not, it's the complete opposite. The agreement was entirely written by my ex (along with her lawyers), while I was overloaded with work at the time I signed it without legal representation because I wanted to buy peace and move on with my life.

The deal we discussed was no tax adjustment, and now she is going to court to try to get more out of it because the agreement she drafted did not talk about tax. Ok, I accept that I might have an uphill battle and I can assume responsibility for signing whatever I signed and not getting a lawyer back then. I have nobody to blame for this but myself. So the best I can do is tell the court what happened and let a judge decide if my story is believable compare to what we can see in print. I believe the fact that the agreement was written by her means the interpretation of the agreement could be in my favor whenever there are doubts. Even more so because I did not have a lawyer.

If I follow your line of thought, then we could conclude that it's actually my ex who led me to believe there would be no tax adjustment, then worded the agreement to intentionally not mention it, with the full intent of then going to court later and try to collect more.

If I lose in court on this point, then so be it, I am been fooled by someone dishonest taking advantage of the situation.

[Istanbul]

I think that is wishful thinking. That is like saying when you make a separation agreement for your children, if you dont include information for child suuport and section seven when and if they go to university, it is such an important issue, that even though there is no language about it, it must mean you in fact did decide on it, even though you have nothing written down and signed in the agreement.

if it was not written down and signed, then it didnt happen. Y

Indeed I do not think it's going to be my strongest argument.

Another similar comparison could be: let's say two people have a separation agreement which says the payor will refund 75% of a listing of 20 different kinds of special expenses (section 7 if you will). If another kind of special expense as obvious as day care is not listed in the 20, what should the conclusion be? That it's also 75% refunded? Or because it's not listed, it was not meant to be refunded?

Not a perfect comparison of course, but I throw this out there for discussion purposes.

[kate331]

It can take some of us years to reach an agreement that affects our children and our financial future and your reason for not getting legal advice was you where too busy at work???

If your a professional person with some kind of education and earn a decent wage, I dont think a Judge will buy your excuse. But you never know in Family Court, its a crap shoot.

[arabian]

If you have any evidence or emails or written communication between you and your wife on what you intended at the time you were negotiating your agreement to cover then you might have something.

There have been many cases in family court where the decision came down to the "intent" of the two parties, even though there were blatant errors in the written agreement.

You would definitely have to answer whether or not the issue of taxes was ever raised, how often, in your pre-agreement discussions/negotiations. It very well could come down to a he-said-she-said situation.