MEMO TO:
Alexsei Demo
RESEARCH ID:
#40002927c4e38c
JURISDICTION:
British Columbia, Canada
ANSWERED ON:
February 10, 2021
CLASSIFICATION:
Family law

Issue:

In determining the appropriate reduction to an award for lump-sum retroactive spousal support arrears, will a court consider the amount that the paying spouse has already paid in income tax where the retroactive award is based on imputed income?

Facts:

Husband paid a tax rate of 20% on declared income of $75,000, but was imputed an income of $250,000 and owes arrears of support based on the shortfall according to Spousal Support Advisory Guidelines.

Conclusion:

Retroactive lump sum spousal support orders do not attract the same tax treatment that ongoing spousal support does; therefore, courts adjust the amount to be paid by a percentage that the court deems to be appropriate given the approximate marginal tax rates of the parties. (Robinson v. Robinson; Pirozok v. Pirozok; Hume v. Tomlinson; Gonsalves v Scrymgeour)

The Courts have frequently taken a balanced approach and adjusted the lump sum award based on the mid-point of the parties' respective marginal tax rates, taking into consideration the surrounding circumstances, including the recipeint's needs and the payor's ability to pay. (Pirozok v. Pirozok; Gonsalves v Scrymgeour; Negin v. Fryers)

Where there is no evidence regarding the marginal tax rate of the parties, the courts will fix a notional tax rate and reduce the size of the award accordingly. (Gonsalves v Scrymgeour)

In Vanasse v. Seguin, spousal support was calculated based upon the payor's imputed income of $400,000. Blishen J. reduced the amount of retroactive spousal support owed by 30% as it would not be taxable in the recipient's hands. The payor's tax rate was well over 30% as his income was found to be in excess of $400,000 per annum. Blishen J. reduced the amount by taking into consideration the relative tax positions of the parties based on actual incomes and the fact that some of the spousal support consisted of direct payments for which the payor received no deduction.

In Gonsalves v Scrymgeour, income was imputed to both the payor ($150,000) and the recipient ($30,000). There was no evidence to the parties' applicable tax rates during the relevant period. Glustein J. held that held that without any evidence of marginal or average tax rates in effect at the relevant time periods, it is appropriate to fix a notional tax rate, 30%, to the lump sum retroactive spousal support award.

Law:

In Robinson v. Robinson, 2012 BCCA 497 (CanLII), the trial judge ordered the husband to pay lump sum support in the amount of $330,000. The wife cross-appealed that the trial judge erred by applying an assumed tax rate of 35%. She sought to set aside the trial judge's decision and replace it with a lump sum award adjusted for an assumed tax at a marginal rate of 28.9%. Tysoe J.A. affirmed the trial judge's decision and held that the trial judge was entitled to take into account the tax consequences to the husband in an award of a lump sum:

[33] While it may appear on the surface that the judge used too high of a marginal tax rate, I would not accede to the cross appeal. Although the judge referred to the 35% marginal tax rate in the context of tax payable by Mrs. Robinson, she was entitled to take into account the tax consequences to Mr. Robinson of an award of a lump sum compared to the tax treatment of periodic payments: see, for example, Patton-Casse v. Casse, 2011 ONSC 6182 at para. 12, 8 R.F.L. (7th) 393. In para. 129 of her reasons, the judge did make reference to the relative tax situations, and it may be that she took the tax consequences to Mr. Robinson into account when she arrived at the 35% rate.

[34] The evidence in the summary trial, to which the judge briefly referred at para. 65 of her reasons, was that under German tax law Mr. Robinson would be entitled to a tax deduction of approximately €4,000 a year in respect of periodic spousal support payments but would only be eligible to claim one €4,000 deduction in respect of a lump sum award. Over the course of the period of nine and one-half years of periodic spousal support utilized by the judge, this amounts to approximately €36,000 (or approximately $49,000 at the conversion rate used by the judge) in tax deductions unavailable to Mr. Robinson as a result of an order for a lump sum payment. This offsets the amount of notional tax Mrs. Robinson says the judge should not have deducted in her calculations.

[35] Even if the judge did not take Mr. Robinson’s tax consequences into account and erred in assuming too high of a marginal rate in respect of Mrs. Robinson’s income, then she made a corresponding error in failing to take into account the tax benefits which Mr. Robinson lost as a result of her decision to order that the spousal support be paid in a lump sum. The result is that there was no material error in the amount of the lump sum awarded by the judge.

In Gonsalves v Scrymgeour, 2017 ONSC 1034 (CanLII), income was imputed on an ongoing basis at $150,000 to the payor and $40,000 to the payee. The Court considered the adjustments of the amounts of 2013 to 2015 to address the tax consequences. There was no evidence as to the parties' applicable tax rates from 2013 to 2015. The recipient actually earned approximately $20,000 as a bank teller, and the payor earned approximately $20,000 in employment income plus varying amounts of dividends and capital gains each year. Glustein J. held that without any evidence of marginal or average tax rates in effect at the relevant time periods, it is appropriate to fix a notional tax rate, in this case 30%, to the lump sum retroactive spousal support award:

[193] Doyle J. conducted a thorough review of the case law addressing retroactive spousal support payments when the payor can no longer deduct those amounts from income. She held (Charron, at para. 19):

The courts have taken the approach of netting a payor’s retroactive spousal support payable to take into account the taxes he/she would have been able to deduct.

[194] Doyle J. held that “the appropriate method to be used in this case is the mid-point of the parties’ respective [marginal] tax rates” (Doyle, at para. 49).

[195] Doyle J. noted that the court has taken different approaches to the netting process. She held that “[t]here are variations in calculating this deduction” (Charron, at para. 19).

[196] In particular, whereas Doyle J. had evidence as to the parties’ marginal tax rates, she reviewed the court’s approach when such information was not available.

[197] Doyle J. referred to the decision in Bastarache v. Bastarache, 2012 NBQB 75 (“Bastarache”). In that case, Walsh J. held (Bastarache, at para. 45):

The approach in Murray v. Murray, supra, in Chalifoux v. Chalifoux, 2008 ABCA 70 and in Vanasse v. Seguin, 2008 CanLII 35922 (ON SC), [2008] O.J. No. 2832 (Supr. Ct.), as examples of a solution to this problem, was to fix, somewhat arbitrarily, a notional tax rate to the lump sum retroactive spousal support award. I intend to follow this same approach and will apply a 30% notional tax rate to reduce the size of the award accordingly. In doing so I am comforted by the following observation:

It is clearly an error for the Court to ignore the tax discount issue, but arbitrary determination of tax rates seems to be acceptable in most cases. Courts are aware that this is an imperfect science unless they are provided with clear evidence of what discount rate to use. In addition, the factors of delay and potential interest entitlement of the payee spouse make approximations of the right net amount seem acceptable ...

(Marie L. Gordon Q.C., An Update on Retroactive Child and Spousal Support: Five Years After S. (D.B.) v. G. (S.R.), National Judicial Institute Family Law Seminar, Toronto, Ont. (2012) at p. 66)

[...]

[202] There needs to be some adjustment so that the amount paid is somewhat reflective of the cost to the payor and the benefit to the recipient.

[203] Often, there will not be a precise match between after tax benefit to a recipient and after tax cost to a payor, if the payor and recipient have different marginal tax rates. In those situations, using the mid-point of those marginal tax rates may yield a just result.

[204] In the present case, there is no evidence as to the parties’ applicable tax rate from 2013 to 2015. The SSAG calculations provided are based on imputed income (as the parties both relied on imputed income to determine retroactive support).

[205] Without any evidence as to applicable tax rates, the court is left only with actual earnings during that time. Gonsalves earned approximately $20,000 as a bank teller, and Scrymgeour earned approximately $20,000 in employment income plus varying amounts of dividends and capital gains each year.

[206] There was no evidence of the parties’ marginal tax rates.

[207] However, Scrymgeour’s proposal to “net” support on the basis of the mid-point of the after tax benefit to Gonsalves and the after tax cost to Scrymgeour appears to yield an unjust result.

[208] By way of example, if the court were to use the mid-point of 2013 after tax benefit and cost in the SSAG calculation, the “gross” amount of $1,858 would be reduced to $1,141.50, a reduction of almost 40%. Such a reduction is inconsistent with the reductions applied in the cases reviewed in Charron and Hume, which are generally in the range of 30%.

[209] Without any evidence of marginal or average tax rates in effect at the relevant time periods, I can do no better than the “arbitrary” approach suggested in Bastarache. I reduce each of the “gross” spousal support numbers by 30% and set that amount as the “net” retroactive spousal support Scrymgeour is to pay on a monthly basis from March 2013 to December 2015.

In Negin v. Fryers, 2018 ONSC 4486 (CanLII), the applicant submitted that the respondent owed her $102,944 for net underpayment of spousal support for the period from 2009 to 2017. The court had ordered that $10,000 per year in income be imputed to the respondent Faieta J. held that the general rule is that an award for retroactive spousal support should be reduced to take into account the benefit of the income tax deduction that the payor would have been able to claim using the mid-point of the parties' respective marginal tax rates when such evidence is available:

[15] [...] The general rule is that an award of retroactive spousal support should be reduced to take into account the benefit of the income tax deduction that the payor would have been able to claim using the mid-point of the parties’ respective marginal tax rates when such evidence is available. In this case, any lump sum award of spousal support. [...]

In Samoilova v Mahnic, 2014 ABCA 65 (CanLII), the Alberta Court of Appeal considered what should be deducted from a lump sum spousal support award to account for the inability of the payer to deduct the taxes from his income. The Court held that retroactive spousal support awards may be paid in a lump sum and the lump sum reduced by a percentage to adjust for the lost tax deductibility to the payer:

[27] While the trial judge’s deduction, based as it was upon an averaging of what he considered to be the approximate marginal tax rates of the parties to come up with a single discount rate (30%), may not have been precisely reflective of what the actual tax consequences of periodic spousal support payments would have been had they been paid and received on a current basis, his deduction was based on the evidence which was presented to him. The conclusion he reached using that evidence was not unreasonable and he is owed deference.

[28] Furthermore, retroactive spousal support awards may be paid in a lump sum and the lump sum reduced by a percentage to adjust for the lost tax deductibility to the payer, Mew v Mew, 2012 ABCA 382; Shukalkina v Shukalkina, 2012 ABCA 274; Mancini v Phelan, 2012 ABQB 536 and Arnason v Arnason, 2011 ABQB 393. Indeed, once the issue was raised, it would likely have been an error not to consider the tax consequences of retroactive lump sum spousal support versus periodic spousal support paid as an allowance for the on-going maintenance of the recipient. The trial judge did so, as best he could on the basis of the evidence which was put before him.

In Pirozok v. Pirozok, 2016 BCSC 1434 (CanLII), the wife sought retroactive support from 2009. The court awarded a lump sum retroactive award. The Court held that a deduction of 28%, the midpoint of the difference in the marginal tax rates of the parties from 2010 to 2015:

[103] The SSAG amounts should be reduced to account for the fact that, unlike periodic support payments, lump sum payments are not tax-deductible for the payor and are not taxable income for the recipient: Robinson v. Robinson, 2012 BCCA 497 at para. 33. While DivorceMate can calculate the net present value of a lump sum payment ordered in lieu of future support payments, it is less useful for lump sum retroactive awards because it uses a discount rate of 0.5% based on the rate of return for Government of Canada real return bonds.

[104] Therefore, it may be appropriate to make a deduction for this.

[105] In my view, a deduction of 28% is appropriate in the circumstances. This is the approximate midpoint of the difference in the marginal tax rates of the parties from 2010 to 2015. This results in $51,840. I also make an adjustment for occupational rent of $6,000 (net) over the period. As a result of the foregoing, I set retroactive support at $45,840.

[106] This amount is to be deducted from Mr. Pirozok’s share from the net proceeds of sale.

In Hume v. Tomlinson, 2015 ONSC 843 (CanLII), the parties sought additional direction with respect to calculations of arrears of child support and spousal support owed by the payor to the recipient pursuant to a previous court order. Roccamo J. held that it would be appropriate to reduce the retroactive lump-sum payable for arrears by considering the approximate marginal tax rate of the payor:

[12] On the other hand, the case law I have referenced (see: Vanasse; Bargout; Lalonde v. Lalonde, [2009] W.D.F.L. 297 (Ont. S.C.); Patton-Casse v. Casse, 2011 ONSC 6182, 8 R.F.L. (7th) 393; and, Korkola v. Korkola, [2009] W.D.F.L. 1380 (Ont. S.C.)). has in each case reduced the retroactive lump-sum payable for arrears, taking into consideration the approximate marginal tax rate of the payor, as opposed to adjusting the lump-sum payable based upon the DivorceMate provisions for the “net” or “after-tax” amounts or “Net Disposal Income” NDI amount. As noted, the SSAG’s software, DivorceMate, addresses after-tax amounts for periodic support ordered rather than retroactive lump-sum payments.

[13] As such, I prefer the approach foremost adopted by the courts of this province, and would calculate the arrears owed to be $14, 363.02 from March, 2012 less 37% ($5,314.32) representing the average marginal tax rate of the Respondent. I therefore determine the net amount owing for arrears to be $ 9,048.70.

In Vanasse v. Seguin, 2008 CanLII 35922 (ON SC), Blishen J. reduced the amount of retroactive spousal support owed by 30% as it would not be taxable in the recipient's hands. The payor's tax rate was well over 30% as his income was found to be in excess of $400,000 per annum. The spousal support was based on imputed income. The recipient's tax rate was minimal as she was only receiving ongoing spousal support and child tax credits. Blishen J. found that it was appropriate to reduce the amount payable, taking into consideration the relative tax positions of the parties based on actual incomes and the fact that some of the spousal support consisted of direct payments for which the payor received no deduction:

[231] There was no evidence provided nor submissions made on the income tax implications of characterizing the retroactive spousal support as a lump sum as opposed to periodic payments. Lump sum spousal support is not taxable in the hands of the recipient nor deductible by the payor. However, taking into consideration that three years have passed, that the exercise of refiling tax returns for those years may not result in a deduction to Mr. Seguin, in any event, and that the spousal support is based on imputed income, I am going to order lump sum retroactive spousal support. The total amount payable, as noted above, would be $257,000 less the $157,000 already paid, for a total of $100,000. Given that Mr. Seguin will not receive a tax deduction for paying lump sum spousal support, I will reduce the amount, taking into consideration the relative tax positions of the parties based on actual incomes and the fact that some of the spousal support consisted of direct payments for which Mr. Seguin received no deduction. I order Mr. Seguin to pay retroactive spousal support of $70,000, payable within 30 days.

In Patton-Casse v. Casse, 2011 ONSC 6182 (CanLII), affirmed in Patton-Casse v. Casse, 2012 ONCA 709 (CanLII), the parties were unable to agree on the issue of quantifying the support arrears because of the fact that there are no tax consequences to the payment of retroactive spousal support. The recipient submitted that the lump sum for arrears should be calculated according to the tax consequences for her. While the payor submitted that the tax consequences of the retroactive award should be based on the tax consequences to him. The payor's marginal tax rate was substantially higher than that of the recipient. Justice McDermot stated that there should be a balanced approach taking into account both parties' respective tax positions:

[11] I believe that there should be a balanced approach taking into account both parties’ respective tax positions. Allowances should be given for both the amount the recipient spouse might have achieved, had the support been paid, but also for the deduction available to the payor, should he have made the payments. This is confirmed by Rogerson, C. and Thompson, R., Spousal Support Advisory Guidelines, (July, 2008) at p. 132, where the authors discuss the reduction in support that occurs as a result of a payor having non taxable income where a deduction is impossible:

In every one of these non-taxable exception cases, it is necessary to balance the tax positions of the spouses—the reduced ability to pay of the payor spouse, who can’t deduct the support paid, and the needs or loss of the recipient spouse, who still has to pay taxes on spousal support and only receives after-tax support.

[12] Although in this case, unlike above, there are tax consequences to neither party, the same principle should apply; the positions of both spouses must be balanced and in setting an amount, I must take into account both the fact that the respondent will not receive a tax deduction for the retroactive spousal support arrears that are being paid and the fact that the recipient will not declare the support for income purposes.

[13] The applicant also requests that I also take into account, however, the fact that these are support arrears being paid after a lengthy period of time, and she will not receive an allowance for pre-judgment interest; the respondent has had the benefit of these funds throughout. The respondent states that this should not be taken into account due to the fact that he had a spousal support release; there was no reason to pay support in the face of that release.

[14] I disagree with the latter premise. The spousal support release was dealt with extensively in my decision, and was of no effect considering Alex’s Asberger Syndrome. As such, the spousal support should have been paid, and in determining the lump sum, a midpoint figure would not be appropriate in view of the time that has elapsed, and the lack of pre-judgment interest on the arrears.

[15] I accordingly will not use the midpoint figures from the DivorceMate calculation noted above, and the figure will be closer to that of the applicant than that of the respondent. As such, I find that the lump sum amount of support arrears payable by the respondent to the applicant is $177,000 which is a 25% reduction of the face amount of support arrears in this matter. So ordered.

The Court of Appeal, in Patton-Casse v. Casse, 2012 ONCA 709 (CanLII), upheld the trial judge's decision holding that it was within the discretion of the trial judge to take the approach that he did, namely reducing the lump sum by the approximate mid-point taking into consideration all of the surrounding circumstances, including the recipient’s needs and the payor’s ability to pay:

[23] In these circumstances, the appeal judge decided to award an amount of $177,000. That amount was approximately midway between the positions of the parties. In doing so, he considered all of the surrounding circumstances, including Patton’s needs and Casse’s ability to pay. On this appeal, both parties take issue with the appeal judge’s approach.

[24] In our view, it was within the appeal judge’s discretion to adopt the approach he did. We see no basis to interfere.

Authorities:
Robinson v. Robinson, 2012 BCCA 497 (CanLII)
Gonsalves v Scrymgeour, 2017 ONSC 1034 (CanLII)
Negin v. Fryers, 2018 ONSC 4486 (CanLII)
Samoilova v Mahnic, 2014 ABCA 65 (CanLII)
Pirozok v. Pirozok, 2016 BCSC 1434 (CanLII)
Hume v. Tomlinson, 2015 ONSC 843 (CanLII)
Vanasse v. Seguin, 2008 CanLII 35922 (ON SC)
Patton-Casse v. Casse, 2011 ONSC 6182 (CanLII)
Patton-Casse v. Casse, 2012 ONCA 709 (CanLII)