Capital gains income and support disputes are becoming more common with some separated Canadians making huge capital gains wins on real estate and stocks. One of the main decisions judges and lawyers must make is properly calculating the real income of both spouses including how Capital Gains Income and Support intermesh in a family law case. Employment income and self employed income have their own rules to ensure the right amount of income is used for all parents in a support dispute. Capital gains income has its own rule too. Capital gains income is tricky because it has a preferential tax treatment which means that your tax return shows only part of the capital gain a person makes and because you pay lower taxes on capital gains income than on your salary or business draws. In today’s blog, founder Lorne MacLean, QC explains how Capital gains income and support disputes are dealt with.
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The taxable capital gain realized in a year by a parent should be replaced by the actual amount of the capital gain. realized, in excess of the actual capital losses in that year (Schedule III, s. 6). But this income may not be included at all when deciding spousal or child support. But Why? Our top support lawyers explain below.
In Dunnett v. Dunnett, 2018 BCCA 262, varied 2018 BCCA 292, our highest court held that the nature of the sale of the capital asset must be considered and the court determined that non-recurring capital gains from the buyout of shares under a shotgun clause should not be included in a payor husband’s income for the purposes of child support as it meant he had sold his income producing asset. The court identified the gain as a return of capital, citing Brown v. Brown, 2014 BCCA 152 (at para. 35) as opposed to a gain on capital. This capital, which the husband would continue to receive under the terms of the promissory note, provided a source of income for the future.
New BC Capital gains Income and Support Lawyers 1 877 602 9900
The Dunnett decision was recently relied upon and approved by the BC Court of Appeal in Chan Henry
In short, the husband appealed an order that some of the capital gain from the sale of his principal residence ( normally this is tax free but there was a period of time a portion of the family residence was rented out) should be included in his income for the purposes of determining the child support he is required to pay. He won, as the Court of Appeal held the trial judge erred, in holding that a capital gain should be taken into income for child support purposes, without permitting the husband to adduce evidence with respect to the factors a court should consider in assessing whether a non‑recurring capital gain should be included in a fair determination of income.
Here is the key extract that should guide you in deciding what if any capital gains income should be included for a spousal or child support order:
[82]The third question must be addressed in context. Mr. Chan‑Henry’s counsel says there are a number of factors a court should consider in assessing whether a non‑recurring capital gain should be included as a “fair determination” of income, including those enumerated in Dunnett v. Dunnett, 2018 BCCA 262 :
[22]Although the capital gains received by Mr. Dunnett were amortized over five years, they are of a non-recurring nature, as they were paid from a one-time sale of the shares of his business. Whether these gains should be excluded depends on an assessment of “the fairest determination” of income. What is fair is to be determined in accordance with the objectives set out in s. 1 of the Guidelines.:
a)Is the non‑recurring gain a sale of assets that formed the basis of the payor’s income?
b)Will the capital generated from a sale provide a source of income for the future?
c)Are the non‑recurring gains received at an age when they constitute the payor’s retirement fund?
d)Is the payor in the business of buying and selling capital assets year after year such that those amounts, while the sale of capital, are in actuality more in the nature of income?
e)Is inclusion of the amount necessary to provide proper child support in all the circumstances?
f)Is the increase in income due to the sale of assets which have already been divided between the spouses, so that including them as income might be akin to redistributing what has already been shared?
g)Did the non‑recurring gain even generate cash, or was it merely the result of a restructuring of capital for tax or other legitimate business reasons?
h)Does the inclusion of the amount result in wealth distribution as opposed to proper support for the children?
In the end result the matter was sent back to the trial judge to allow the husband to give evidence on tax issues related to the principle residence sale income and for the judge to make a considered decision on this issue taking into account the factors listed above at (a) to (h).
Key Takeaways 1 877 602 9900
- Tax returns don’t show the full capital gain that should be looked at to decide if it is fairly included for support, so be careful.
- Even adding the full amount of the capital gain is not the end of the calculation as you must gross up the untaxed portion to reflect what an employee would need to earn before tax to net the untaxed amount! (call us we will explain this!) Get experienced family lawyers to help you so thousands of dollars don’t go missing.
- Not every non-recurring capital gain will be included for purposes of spousal and child support awards so get expert legal assistance.
