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Is Child Support Based On Current Income Or Previous Year?

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The amount of child support depends on the payor parent’s income, so how does child support work if the payor spouse’s income fluctuates significantly? In such situations, it may be appropriate to average income over a period of years. In Harras v. Lhotka, 2016 BCCA 246 the Court of Appeal for British Columbia recently clarified the approach to averaging income.

Application To Reduce Income For Child Support Purposes 

Application To Reduce Income For Child Support Purposes 

The parties were married in 1997 and divorced in 2013 after having two children. Mr. Lhotka earned income as a film producer. The parties entered into a separation agreement on July 26, 2013 which used a five-year average of Mr. Lhotka’s income for the years 2008 to 2012 inclusive for the purpose of determining child support payable under the Federal Child Support Guidelines, SOR/79-175. Accordingly, Mr. Lhotka’s income for child support purposes was set at $183,000.

In 2014 Mr. Lhotka applied to have his income for support purposes reduced based his 2013 income of $67,000. He argued that the averaging formula in the separation agreement should be set aside and his income set at the 2013 low. The Chambers judge accepted that he earned $67,000 in 2013 but decided that using a three-year average would be fairer than using Mr. Lhotka’s actual 2013 income. The three-year average income was $234,737, resulting in a substantially increased child support obligation.

Appeal From Chambers Decision 

The Court of Appeal allowed the appeal and ordered that Mr. Lhotka’s income for the year 2014 be set at $196,604, based on the average of his income for the previous five years. Garson J.A. for the unanimous Court of Appeal held that the fairest manner to assess Mr. Lhotka’s income for 2013 was to apply the same type of formula that the parties agreed to in the separation agreement; that is, a five-year average. The calculation over three years unfairly resulted in a higher figure than the average over five years. Ultimately, the result of the appeal from Mr. Lhotka’s application was an increase in his child support obligation, albeit a less substantial increase than if the Chambers decision stood.

Averaging was appropriate in this case as there was no evidence of a year-over-year decline in earnings that would justify the use of current-year income for support purposes. Mr. Lhotka expressed optimism in his affidavit evidence that the film industry would improve the future and he would find employment. Mr. Lhotka did not demonstrate a lasting decline in his income or an inability to pay support based on the averaged figure.

How Does Child Support Work If Income Is “Regular?” 

How Does Child Support Work If Income Is “Regular?” 

Section 15 of the Guidelines stipulates that a parent’s annual income is to be determined in accordance with ss. 16-20. Accordingly, the starting point in the determination of income is s. 16, which reads as follows:

Subject to sections 17 to 20, a spouse’s annual income is determined using the sources of income set out under the heading “Total income” in the T1 General form issued by the Canada Revenue Agency and is adjusted in accordance with Schedule III.

How Does Child Support Work If Income Fluctuates?

In the event that annual income under s. 16 does not represent the “fairest” determination of income, the Guidelines provide the court with the discretion to adjust income based on the preceding three years. Section 17(1) reads as follows:

If the court is of the opinion that the determination of a spouse’s annual income under section 16 would not be the fairest determination of that income, the court may have regard to the spouse’s income over the last three years and determine an amount that is fair and reasonable in light of any pattern of income, fluctuation in income or receipt of a non-recurring amount during those years.

The test in s. 17(1) is what is “fair and reasonable”, having regard to the payor’s income in the preceding three years: Harras at para. 22.

When Is Income Averaging Appropriate?

Note that while s. 17 allows the court to examine income over the previous three years, there is nothing in the language of the section that requires the use of averaging in setting income. This makes sense; accepting that one of the goals of the Guidelines is the fair determination of the amount available to pay child support, fairness is unlikely to be achieved by the mechanical application of averaging: Harras at para. 24. This raises the question of when averaging is considered appropriate. Garson J.A. answered that question as follows:

[35]        In summary, the averaging approach to income determination under s. 17 is very fact specific. Generally speaking, averaging will be applied where income fluctuates, or where the payor has not demonstrated a lasting decline in earnings. Ultimately, it depends on fairly calculating the amount of income reasonably available to pay child support. Depending on the reasons for a pattern of fluctuating income (or, as in Grossi, declining income), averaging may be more or less appropriate. If, for example, a substantial increase in income in one of the three previous years is due to receipt of what might be fairly viewed as a non-recurring amount, averaging may be inappropriate. If, however, the nature of a payor’s employment or business is such that wide fluctuations in income are normal and expected, averaging may be more appropriate. As the Court stated in Jakob at para. 46, “[w]here income has fluctuated in previous years, in the sense that it has increased and decreased over a fixed period of time, and it is anticipated that it will continue to fluctuate in that manner, it may be appropriate to take an average of fluctuating income for a fixed number of years” to determine current income.

Five Year Average May Better Reflect Income Available For Child Support Purposes

Five Year Average May Better Reflect Income Available For Child Support Purposes

Section 17 of the Guidelines states that the court may have regard to the spouse’s income over the last three years when determining an amount that is fair and reasonable in light of any pattern or fluctuation in income or receipt of a non-recurring amount during those years. On the other hand, s. 19, which outlines circumstances where a court may impute income to a spouse, is not subject to a three year restriction.

In Harras, the parties’ separation agreement provided that a five year average would apply. However, the unanimous Court of Appeal concluded that even without previous agreement by the parties, averaging over a five year period may be an appropriate exercise of the court’s discretion under s. 19. As such, it is open to a court in exercising the broad discretion under s. 19 to conclude that a five-year average more accurately reflects the income available to a payor parent than a three-year average.

How Does Child Support Work? The Take Home Point On Averaging Fluctuating Income

The averaging approach to income determination is very much a fact-specific exercise. Whether its adoption is fair depends on the reasons for a pattern of fluctuating income. If the nature of the payor’s employment or business is such that income fluctuations are normal and expected, then averaging may be appropriate. If, on the other hand, a non-recurring event triggers a significant decline in earnings, averaging may be inappropriate. Where a payor parent’s income fluctuates significantly, depending on the facts, guideline income may be based on a three-year or five-year average.

Is Child Support Based On Current Income Or Previous Year?

To understand the calculation of child support, you need to be aware of what applies in your region or jurisdiction. It includes knowing the specific laws and regulations guiding child support in your region as it usually varies.

In some places, child support is calculated based on the previous year’s income. They believe it gives a clearer picture of the parents incomes. In other cases, child support obligations is based on current income.

Current Income Approach

Current Income Approach

In calculating child support amount based on this approach, the court considers the most recent financial information of the paying parents. It could be current salaries, wages, or other sources of income.

Through this, one gets to see if there has been a significant change in income since the previous year.

Advantages of Current Income Approach 

Some reasons why this method is most preferred are:

Showcases current reality: This approach gives a more accurate reflection of the parents present financial ability. Through this, one can determine how to meet the current needs of the child.

Adjustments for changes in income: Has there been an increase or decrease in total income since the previous year? It can be determined using this approach. Whatever the case might be, the child support amount to be paid can be adjusted to accommodate the changes.

Disadvantages of Current Income Approach 

On the flip side, some disadvantages are:

Fluctuations: In relying on current income, there is the fact that job changes can occur. These fluctuations make it difficult to establish financial stability to calculate child support amounts. It becomes challenging when the paying parent is involved in seasonal jobs. It brings uncertainty in determining the parent’s exact financial situation.

Administrative Challenges: When fluctuations and job changes happen, there is always a need to give the court and legal system updates. It becomes an administrative burden for the court, the paying parent, and the other parent. Each time there is a job change, there is a need to recalculate how much child support to pay. It becomes burdensome and time-consuming. 

Previous Year’s Income Approach 

Previous Year’s Income Approach 

In some places, they calculate child support payments based on income earned during the previous year. The court checks the earnings of the paying parent in the previous year, and uses the information obtained to calculate child support amount to be paid.

Advantages of Previous Year’s Income Approach 

Stability: The court uses this information to check the stability of the parent. Irrespective of fluctuations that may happen in the current year, the court works based on information from the previous year to determine child support.

Smoother Planning: While working with expectations from the last year, parents have an idea of what routine might pop up. This way, they make smoother plans for child support payments.

Drawbacks of Previous Year’s Income Approach 

Some of the challenges of this approach are:

Lack of real-time accuracy: Using this approach may not capture the current reality of a person’s income. It can lead to child support payments that do not align with the parent’s present financial capacity. It further negatively impacts the child’s well-being.

Unexpected challenges: This method or approach does not account for unexpected challenges. For example, there could be health emergencies that pop up which were not accounted for in the previous year. It causes discrepancies between the calculated amount of child support and the actual financial situation of the parent.

What is Applicable?

According to the Supreme Court of Canada and federal child support guidelines, child support should be calculated based on current income. This method considers recent changes in income. It is also a reflection of the present financial state of the parent.

Reach out to us now if you’re struggling with calculating child support. Understandably, the system may sometimes be complex. It is why you need to seek legal advice, and we are here to hold your hands through the process.

Frequently Asked Questions

Is child support in Canada based on gross or net income?

In Canada, child support is based on the annual gross income of the paying parent. The number of children the paying parent has to support is also a factor to consider.

Do you have to pay child support if you’re unemployed in Canada?

Yes, you still have to pay child support. If you lose your job or the amount you earn drops, then the amount you have to pay will also reduce. Child support is calculated based on how much you earn and the number of children you’re supporting.

What happens if a father doesn’t pay child support in Canada?

There will be a fine against you if you do not pay child support in Canada. You even stand the risk of going to jail in some cases.

Have questions about a topic?

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