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

[Janus]

A separation agreement is a collection of several components that you either accept as a whole, or you refuse to sign it.

I agree completely. The problem you have is that "no gross up" was not one of the components. If your agreement had specifically said "no gross up", then that would explicitly be one of the components that you guys had agreed to on a holistic basis.

I refused the tax complication and I said even if she does not like this point specifically, everything else can be moved up or down until both are agreeable that the deal is acceptable in its entirety. And this is what we did.

Do you have evidence that you refused to pay the gross up? The argument can be:

1) She brought up the gross up (as shown by evidence A)
2) I said no (as shown by evidence B)
3) We forgot to mention it explicitly in the agreement, but it was clearly an active issue that was resolved as part of the agreement.

However I would not mind at all if a judge re-did the whole thing. You want me to pay a tax gross-up? No problem. But then we'll re-do the other stuff where I am the one who made concessions for items others than tax gross-up, and who is paying more than I should if we follow the guidelines.

The judge can probably rule on many factors that are not explicitly in your agreement. Anything in your agreement though is much much much harder to change.

Is there something not in the agreement that you want changed? Perhaps that could be an argument you could reasonably make.

You can't have your cake and eat it too. I either want to keep the deal as it was, or re-do the whole thing. But I do not accept my ex's "pick & choose" approach.

Your characterization is incorrect. There are two types of disputes:

A) Things covered in your agreement
B) Things not covered in your agreement

She wants to change a type "B" thing, and you are trying to say that such a change gives you the right to change an "A" thing. That doesn't make sense. Her trying to change a "B" thing gives you the right to change "B" things.

If she was trying to change an "A" thing, she would need a material change of circumstances, and then you could go nuts changing lots of other "A" things.

I am struggling with how to present this in court however.

Basically, you need evidence that the gross up was considered and specifically rejected.

 

[Istanbul]

It sounds like you have buyers remorse. And now you have to undo the damage that can be difficult because time has passed and a status quo has set in.

I still think a Judge might question why you didn't retain a lawyer (if you have the financial means). Lawyers are like Dr's as to privilege, so they would have kept your ex asking for a divorce confidential. That said basically you were self representing and cut yourself a bad deal. Do some research here, they have been many successful people that have self repped.

I agree that the system is adversarial and extremely costly, I am no expert and can offer only the little experience I have had in court, I apologize if I sounded harsh.

I do hope you have a great relationship with your children and fight for them if you have too. If you have the time, read all of Tayken posts, it has been very helpful to me.

Buyers’ remorse? Yes and no, I think. The yes part is that hindsight is 20/20: if I knew that she would bring me to court a few years after we signed an agreement, then I would probably not sign it. The no part is that I would not have remorse about the deal as it was, and as both parties lived by it for a few years in relative peace. I had moved on.

Indeed, money was not a reason for not retaining a lawyer back then; it was all the other issues. Don’t worry about sounding too harsh – I fully realize that people on the forum are here to try to help me and give independent advice and a different perspective, not be a nuisance. I would prefer people here to be harsh rather than be surprised by harshness in court!

Children is another element of the dispute with far more important ramifications than the tax issue…

 

[kate331]

Istanbul, have you considered Arbitration instead of going the Court route? It may be a faster process for you and resolve all of your issues at once.

 

[Istanbul]

There are two types of disputes:

A) Things covered in your agreement
B) Things not covered in your agreement

She wants to change a type "B" thing, and you are trying to say that such a change gives you the right to change an "A" thing. That doesn't make sense. Her trying to change a "B" thing gives you the right to change "B" things.

If she was trying to change an "A" thing, she would need a material change of circumstances, and then you could go nuts changing lots of other "A" things.

I think you have put your finger on an issue where I am confusing two different concepts:
1. There were only two people in the room when the deal was negotiated. I know in my mind and in my heart what was discussed, and what we agreed on. My ex knows it too. Nothing can ever change that, regardless of what is in print, and regardless of what a judge thinks.
2. What the agreement says in writing.

I care mostly about #1 but a judge will care mostly about #2, therefore I need to care about #2 as well. As @arabian pointed out, my task will be to do my best to show intent, because this is the only way that a judge would give any weight to the alleged deal in #1.

I think hiding or lying about what was discussed is important for my ex because then the judge will only have #2 to rely on. This is where I get hung up. If my ex told the truth in court about what the negotiations and discussions were, how that led to what she wrote in the agreement, and then we let the judge decide based on the facts, then that’s fine. I can accept if the judge says I need to pay XYZ if the judge has all the elements in hand. But lying under oath to hide the true intent of the parties and try to mislead the judge to attempt to maximize financial gain, that is an entirely different game. Anyway, it is what it is, so it’s something I have to work with for now and I cannot change it.

So my confusion is that I am treating tax as an “A” thing because it was discussed and covered. However a judge will treat tax as a “B” thing because it’s not written down, unless I can show intent.

Back to how I can show what the intent was, I see two possible angles to exploit.

- The deal says that I will have a minimum imputed income, and that it corresponds to XXX of child support. The two numbers are joined at the hip and they are based on the Canadian CS formula. For illustration purposes, the agreement says my minimum imputed income will be $200k which corresponds to a minimum child support of $41k (the link between these two numbers being from the Canadian CS formula). At the time the separation agreement was signed, I had not lived in Canada for years (and I still do not live in Canada) and as I mentioned earlier in the thread, I have moved around quite a bit. There was no reason to believe I would live in Canada in the future or no knowledge of where I would end up. Then the agreement describes the adjustments to actual income, and tax is not listed. So clearly the agreement uses Canada’s implied tax rates to make the link between income and CS. I do not know if this is an argument that could have any merit, or whether I am simply re-hashing the same weak arguments as earlier in the thread, and that the conclusion remains that it is silent about tax rates, so therefore the link between $200k and $41k must be broken if my residence is any country other than Canada. If the agreement was only stating one number (the minimum imputed income OR the minimum child support), then it would leave the door open to use whatever tax rate to make the link between income and child support. However, I feel my argument is a bit stronger because both numbers are listed in the agreement, which shows what tax rate was intended to be implied: the Canadian one, regardless where I live. Or am I grasping at straws? I need help seeing this more clearly.
- My ex accepted my payments for a couple of years without protesting, and she only filed for divorce and claimed that I underpaid, after I stopped working. So my main question is how long can someone wait before claiming CS retroactively? After about one year, my ex sent me an email reminding me that I needed to adjust for inflation because one year had elapsed, and she asked me when I intended to make this adjustment. So when I want to show intent, the point I would bring up is this: does her behavior not show that there was meeting of the minds about there being no tax adjustment if she worried about something as small as 2% change due to inflation, rather than claiming that I was incorrectly not using a tax adjustment? And why did she wait for more than two years to claim retroactive CS? Both of us followed the agreement without any hiccups for a long time after signing. I am assuming that accepting the payments for XXX length of time shows intent, but I have no idea what XXX is. One year? Two years? Ten years?

Thanks to all for your help and feedback, it is greatly appreciated.

 

[arabian]

I agree with your synopsis, particularly if the two figures were specifically spelled out in your agreement.

You mentioned your ex had legal advice and you did not. This is a rather big "oops" by her legal team. Nevertheless, it is what the two of you initially agreed to and I believe it would carry weight in court.

Your ex would have to come up with a plausible reason why she took so long to change CS. If she can prove that she initiated discussion with you then it MAY be considered from date she first raised the issue. Court could consider, however, the impact on child's life had your ex received more money.

Go on to CanLii and research 'intent or spirit of agreement' or something along those lines and you will find case law to support your position.

Did the two of you agree to and exchange financials on a regular annual basis? If not, then that is another big "oops" for her legal team.

 

[Istanbul]

Istanbul, have you considered Arbitration instead of going the Court route? It may be a faster process for you and resolve all of your issues at once.

Indeed I am considering it. Regarding financial issues, I think it does not matter hugely whether there is quick or slow resolution. Regarding children, it does matter. However I see opposite forces which means I am still unsure of what is the best route, as of today. On one hand, children are not doing well with my ex at the moment and there have been several disturbing incidents. They are anxious at the time we can have joint custody, or at the very least being able to spend more time with me. On the other hand, I think if we go to court which is the longer route with a final outcome perhaps in 18 months from now, they will all be older and their opinion is going to carry incrementally more weight than if we have quick resolution very soon. Hence my question in the other thread "How much say does 12 year old have?"
https://www.ottawadivorce.com/forum/showthread.php?t=21823

 

[kate331]

I am really confused right now, I take it that you live in another Country and your children are in Canada? How can Joint Custody work? Or even an access schedule? I reread that thread and you have the kids every second weekend and a few weeks a year, do you fly in? And keep a residence here?

 

[rockscan]

Most judges cede to the DBS supreme court decision. Even if you both agree to whatever you want, the judge will err on the side of the law. That law basically boils down to following updates when income changes and updating accordingly. Then they decide if there was blameworthy conduct by not updating. In your case you could argue you were following the agreement and were confused by the clauses about tax deductions.

The bottom line is child support is about the kids not you or your ex. She can’t negotiate away cs and you can’t hide behind what you two discussed. You need to figure out what your income is equivalent to cdn dollars and update accordingly. Stop worrying about what you both discussed and agreed to. You may want to look up some cases on Canlii on international income.

 

[arabian]

Very good points Rockscan. I would also encourage the poster to not limit his CanLii search to just Ontario but to expand to include other provinces, particularly BC where this situation is not uncommon.

 

[Istanbul]

This is a rather big "oops" by her legal team. Nevertheless, it is what the two of you initially agreed to and I believe it would carry weight in court.

It would be a “oops” if she intentionally wrote the agreement in an unclear way with the goal of claiming more a few years down the road. But if there was no such intent, then showing both numbers in the agreement was simply her reflecting what the real “meeting of the minds” was: no tax adjustment.

Your ex would have to come up with a plausible reason why she took so long to change CS.

She wrote in her affidavit that it took her some time to “finally get her nerves up” to hire a lawyer to claim more in court. In my humble opinion, this is BS given that she already admitted that she had lawyers working for her during the negotiation of the agreement so why wait so long to go to court for this?

Court could consider, however, the impact on child's life had your ex received more money.

Ex’s assets as shown in her divorce filing are roughly the same as she had at the time of separation, post asset partition, as declared in the agreement. And her expenses have increased since then so it does not seem like she is in a deficit position. If she has a potential claim that she needs more money, it might be prospectively now that I do not work anymore and that CS has dropped to the minimum CS / imputed income spelled out in the agreement. But that is separate issue than what she is claiming retrospectively. And I think her prospective claim is shakier than the retrospective claim; a sign of this is the fact that in mediation she was first willing to let go of her prospective claim but not the retroactive claim.

Did the two of you agree to and exchange financials on a regular annual basis? If not, then that is another big "oops" for her legal team.

No we did not agree to any exchange, and she did not ask me anything after separation until she started the divorce proceedings. She had (temporarily) moved on with her life like I had done, and had accepted everything I sent and we lived peacefully for a while.

So thank you for the feedback, I will exploit these routes if possible. It won’t necessarily be easy for her to build a fully consistent story about how this went down, since she has to lie in order to do so. Hopefully I can find another crack in her story when we go to questioning.

 

[Istanbul]

I am really confused right now, I take it that you live in another Country and your children are in Canada? How can Joint Custody work? Or even an access schedule? I reread that thread and you have the kids every second weekend and a few weeks a year, do you fly in? And keep a residence here?

Indeed my situation is unusual. In order to keep on subject here, I answered in the other thread.

 

[Istanbul]

Most judges cede to the DBS supreme court decision. Even if you both agree to whatever you want, the judge will err on the side of the law. That law basically boils down to following updates when income changes and updating accordingly. Then they decide if there was blameworthy conduct by not updating. In your case you could argue you were following the agreement and were confused by the clauses about tax deductions.

The bottom line is child support is about the kids not you or your ex. She can’t negotiate away cs and you can’t hide behind what you two discussed. You need to figure out what your income is equivalent to cdn dollars and update accordingly. Stop worrying about what you both discussed and agreed to. You may want to look up some cases on Canlii on international income.

Sorry if this is a stupid question, but what is the DBS decision?

I would not say that she negotiated CS away. To overly simplify the situation, we could say that there were cross-subsidies between the three main financial items
A. Asset partition
B. Child & spouse support before I stop working
C. Child & spouse support after I stop working

First, a step back before I clarify. My line of work was in a highly specialized industry where work is available only in a handful of cities in the world. To illustrate with a hypothetical example, let’s say my skills are only usable in a company which is mining a rare metal in the earth crust, which has only ever been found in one city in California, and I make a large income there. Let’s say my ex relocates with the children in the middle of nowhere in Canada, perhaps Yellowknife (no offense to people that live there!). My theoretical income in Yellowknife would be massively different than my income in California.

So in the agreement, I overpaid in A, I got the benefit of no tax adjustment in B, and I agreed to a minimum imputed income in C which is generous because it’s more than the money I could make in Yellowknife (but imputed income in C is less than my previous income in California).

That means indeed I did not pay enough CS in B if you follow the CS guidelines to the letter of the law (and even then, that is debatable because above $150k income there is more flexibility for a judge), however on the flip side I am going to pay more CS than the table amount for years to come in C. I don’t mind paying based on actual income in B in accordance with all Canadian rules including tax, but then let’s follow the rules for C as well instead of some artificial high amount that I would not earn in Yellowknife.

What I tried to explain in my response to @Janus earlier, is that I am struggling in how to present my arguments to a judge. I don’t mind all that much if a judge wants to set the agreement aside and re-do A, B, and C. In theory it might very well be that we’d be trading a dollar for four quarters. In practice of course it depends how it would be done by a judge. There would be a risk that one party would end up not happy about how it’s re-done. The agreement specifically says that either the entire deal stands, or the entire thing is invalid. So if I judge starts messing with A, B, or C, then the judge is basically throwing to the garbage bin an agreement signed in another jurisdiction. That might open the door to a potential appeal. Slippery slope?

The one thing I am reluctant to do, is to change B without changing A and/or C.

I do not think I can ignore what we negotiated, pay her more in B, and unilaterally start paying less in C because I feel I would violate the terms of the agreement. And it would be foolish to pay more in B against the agreement and simply wait for a judge to rule on whether C can be reduced. B and C go hand in hand because of the agreement. Either it stands, or it does not.

So I want to argue in front of a judge what the deal was, and I will try to show intent, and argue that the agreement is valid. And argue at the same time that if the judge disagrees and that the agreement needs to be re-done, that I do not oppose paying more in B as long as I get money back for A and C. It would show some flexibility, but I don’t know if that can even be done. I want to be cautious about arguing from both sides of my mouth: am I saying the agreement is valid or not?

 

[arabian]

You are trying to muddy the waters I think.

Keep it simple.

Jurisdiction is where the children live - they live in Canada now. Courts will want to look at everything on a go-forward basis unless your ex can clearly show that you did not come to the court with clean hands and violated the intent of the agreement. Then they may recalculate (I think that may not be likely unless the difference in what you paid and should have paid is significant and would have made a huge difference to the children's life). Research caselaw to see where you stand here.

Your ex's claims for recalculation/back pay of CS would likely be granted from the time she first raised the issue with you. However, that typically is limited to going back 3 years as far as I know.

If you're trying to argue you "may" be unemployed, don't waste your breath. Courts deal in real facts and figures. You exchange financials each year and adjust. Courts do not care if you agree to it or not. (thus the reason to settle out of court). An Order will be entered in the court and enforced by local maintenance enforcement agency. If there is a reciprocal agreement between Canada and the country you are residing in then that country will enforce the Order.

If and when you stop working you would deal with that at the time, unless of course your agreement anticipated your retirement at a specific point in time. Beware of intentional underemployment. You can quit work and go sail around the world but you very well might still be on the hook for CS & SS.

Of course, as you are likely well aware, there are many variables that are taken into consideration in any agreement.

Be leery of a lawyer who will blow smoke up your arse and tell you what you want to hear. Do your own independent research. You seem to be a high income earner and therefore a nice meal ticket for a lawyer.

Doesn't matter if you are in court or not for motions. Your lawyer represents you. If you want play-by-play info from motion hearing simply order a copy of the transcripts.

 

[Rioe]

It's not helpful to your case, but I'd like to add for the benefit of others perhaps looking back at this thread some day for answers that may apply to their own case, that it is a perfect example of why you should make separation agreements that spell everything out, and do NOT muddy up equalization, child support and spousal support.


Equalization should be done fairly once and be over forever.


Child support should depend solely on income earned by the payor(s) and be adjusted annually to stay current with that income.


Spousal support should depend solely on the factors that existed during the marriage and decisions made about the future.


Never give and take from one category into another.


The only thing you can do after the fact is figure out how you can demonstrate that you made concessions in one area to benefit in another, and try to untangle it for going forward.


And as was pointed out, I think, is that judges are unhappy about doing math. Spell it out in a spreadsheet down to every last detail.



One column about how things were done in your agreement. Another column for how your ex is asking for things to be retroactively corrected. Another column about what your ex is asking for going forward. A last column for what you're willing to change.


If a judge can't understand it, they'll never agree to it.

 

[Istanbul]

You are trying to muddy the waters I think. Keep it simple.

I am trying and I think you guys are being helpful to boil it down.

If you're trying to argue you "may" be unemployed, don't waste your breath. Courts deal in real facts and figures. You exchange financials each year and adjust. Courts do not care if you agree to it or not. (thus the reason to settle out of court). An Order will be entered in the court and enforced by local maintenance enforcement agency. If there is a reciprocal agreement between Canada and the country you are residing in then that country will enforce the Order.

If and when you stop working you would deal with that at the time, unless of course your agreement anticipated your retirement at a specific point in time. Beware of intentional underemployment. You can quit work and go sail around the world but you very well might still be on the hook for CS & SS.

To clarify, here is what the timeline was:
- Working abroad with family living with me.
- Ex says she wants to divorce and move to Canada.
- We sign separation agreement while still abroad.
- Separation agreement states that I intend to stay there and work a bit longer to work, but that I will retire relatively soon. Plans unclear after that.
- Ex moves to Canada with children.
- Couple of years go by, everything fine and no disputes. I pay CS according to Canada's formula, but no tax adjustement. As intended.
- I stop work.
- I start paying CS based on the stated minimum CS in agreement.
- Ex complains for the first time about CS and files for divorce and argues I did not pay enough while I was working, that my imputed income going forward is too low, etc.

A bit off topic, but it sounds like she was just waiting for me to quit my job before filing for divorce and asking for more money because she was fine with the agreement while I was working and she did not want to rock the boat.

So I am unemployed now. I have some minimal investment income, but that is far lower than the minimum imputed income stated in the agreement (part C above).

So first off, I am not unemployed simply because I want to avoid paying CS as some people do. My retirement was planned at the time of the agreement, it's mentioned in it, and it was even planned years before separation so it had nothing to do with separation. In addition, even if a judge does not believe it's true, I am paying CS now based on an imputed income greater than what I could make in Canada so I am not avoiding my responsibilities, nor has it ever been my intent.

Based on your response, sounds like my ex has a weaker claim retroactively because she accepted the payments for a long time. And prospectively I think she does not have much of a case either, but the prospective part is a different issue than tax anyway.

 

[arabian]

Now you can move on to research your definition of "retirement" - this is quite interesting.

Some spousal support payers pay into their 80's. So don't think that "65" is the magic number.

Again, everything can and will go back to the intent of your agreement... how old you and your ex are... how long you were married (spousal support).

Child support is entirely another matter. The only similarities IMO are whether or not you are intentionally under or unemployed. Of course you will have proof of your efforts to gain employment similar to that which you did most recently. You (eligible Canadians who paid into it for 18+years?) can collect CPP at age 60 yet that doesn't mean you are retired though.

You are not the first, nor will be the last, to try to wiggle out of or substantially- reduce support payments. Judges have seen it all before (yes from those who work in other countries).

Being unemployed (intentional or otherwise) is not the same as being retired. If you have debt and not enough income to service the debt then you cannot afford to retire. Simple really.

 

[Istanbul]

Being unemployed (intentional or otherwise) is not the same as being retired. If you have debt and not enough income to service the debt then you cannot afford to retire. Simple really.

Then I have been causing confusion because I was using the two terms interchangeably. I think according to this definition, I am retired rather than unemployed.

Before separation, we planned for my early retirement for years by saving money. Then we separated, I worked a little longer, then retired.

I have enough to support myself and continue CS payments for years to come, using the imputed income we agreed on. Which is greater than what my income would be if I was not retired, but rather working in Canada.

I will do some research on retirement, hopefully I find informative tidbits on Canlii.

Thank you!

 

[kate331]

I am not the sharpest knife in the drawer so bear with me, because I am finding this confusing. You retired, knowing you have young children to support? You have minimum investment income to live off, but can pay child support at an agreed imputed income? So your children's standard of living will go down?

Even though your retired and not working, your staying put and not coming to Canada to help raise your children? Yet you have the money to fly back and forth and pay for hotel rooms?

My guess is you met a "Sugar Mama"

Time is short and precious, your kids are still young, I'd get my ass on the next plane and be a Dad to your kids. There are things in life that money cant buy, like time. When your kids are raised and educated, then go back.

 

[Istanbul]

I am not the sharpest knife in the drawer so bear with me, because I am finding this confusing. You retired, knowing you have young children to support? You have minimum investment income to live off, but can pay child support at an agreed imputed income? So your children's standard of living will go down?

Even though your retired and not working, your staying put and not coming to Canada to help raise your children? Yet you have the money to fly back and forth and pay for hotel rooms?

My guess is you met a "Sugar Mama"

Time is short and precious, your kids are still young, I'd get my ass on the next plane and be a Dad to your kids. There are things in life that money cant buy, like time. When your kids are raised and educated, then go back.

Yeah confusing because the situation is complex indeed.

Basically, if the amount I spend in a year, plus CS, plus SS, is equal to X, and if I have 50 years left to live, then all I need in the bank is 50X. Investment income is just icing on the top! No sugar mama needed although that would be icing on the top too

I have made an offer to settle to my ex where I relocate to Canada to help with children. Denied. My ex wants to keep absolute control of children, heck she is even blocking my phone calls to children when I am away

So yes I am willing to relocate to Canada, but there are different complications to the situation so I will open a different thread to explain and discuss since it's a topic unrelated to tax.