Are Annuities from Inheritances “Income” or “Capital” for Support Purposes?
In a very recent decision called Laurain v Clarke, the Ontario Superior Court of Justice tackled the interesting question of whether, for the purposes of determining “income” for child and spousal support, monthly amounts that one spouse receives as part of an inheritance should be included.
In this case, the now-separated parties had been living together in a common-law relationship for 14 years, and had two children together, aged 12 and 10. At separation, the woman earned only a modest income as a “lunch lady” at a French immersion school. Despite having a university degree, she had essentially been out of the workforce since the birth of the parties’ child 10 years earlier.
In contrast, the man was earning about $130,000 per year; furthermore, he was receiving a tax-free $1,750 monthly annuity from his deceased mother’s estate. The question for the court was simply whether this amount should be included in his income for child and spousal support purposes.
The resulting analysis by the court was comprehensive and complex. The court commenced its judgment by reviewing the legislation authorizing child and spousal support, namely the Ontario Family Law Act and the federal Divorce Act. Both statutes provide for child support to be calculated based on the Federal Child Support Guidelines. Spousal support amounts, on the other hand, are more discretionary, with court awards being informed by the amounts set out in the Spousal Support Advisory Guidelines (which – as the name suggests – are only advisory in nature).
Both the Child Support Guidelines and the Spousal Support Guidelines allow for income to be imputed to a payor spouse, but neither expressly specify how this is to be done. Both rely on the methodology embodied in the Child Support
Guidelines, which involves consideration of various objectives that are set out (in its section 1), including:
• establishing a fair standard of support for children that ensures that they continue to benefit from the financial means of both spouses after separation;
• reducing conflict and tension between spouses by making the calculation of child support orders more objective;
• improving the efficiency of the legal process by giving courts and spouses guidance in setting the levels of child support orders and encouraging settlement; and
• ensuring consistent treatment of spouses and children who are in similar circumstances.
Next, in cases where the parties do not agree on their income amounts for these purposes, the court observed that the Child Support Guidelines (in sections 16 though 20) sets out various means by which “income” is to be determined, including reference to the T1 General Tax Form put out by the Canada Revenue Agency. Courts are also allowed to impute income where appropriate, after considering various elements such as income from dividends, capital gains and other sources, or income derived by a party from his or her status as beneficiary of a trust.
In this context, the court noted that for Family Law purposes there is a distinction between “income” and “capital”: “capital” is generally excluded from a party’s income (although it still forms part of his or her “means” or capacity to earn income, in order to pay child and/or spousal support). Moreover, even if funds received by a party are considered “capital assets” rather than “income”, those assets may still generate income, which would in turn be used in calculating any support obligation.
With this complicated legislative framework in mind, the court then enunciated the following general questions to be asked when determining whether to impute income for items such as the man’s annuity in this case:
• Is the amount included in income for purposes of income tax?
• Is the amount capital that generates income?
• Is the amount, if capital, compensation for loss of income?
• Has the amount, if capital, been equalized, or is it exempt?
• Is the payment of the amount gratuitous?
• Is the payment of the amount recurrent?
• Were the funds typically used to finance a significant proportion of the recipient’s living expenses?
The court then examined the specific annuity in issue in this case. On the facts, it found that the monthly funds received by the man was properly considered “capital”, and were not to be included in his “income” for the purposes of calculating support. However, any money the annuity would generate for him (including any interest) was to be included as income.
Clearly, the law relating to whether these kinds of inheritances or similar “windfalls” are considered income for spousal and child support purposes is highly complex. For this reason, it is vital to consult an experienced Family Law lawyer whenever the question of support arises.
For the full text of the decision, see:
Laurain v. Clarke, 2011 ONSC 7195 http://canlii.ca/t/fp4zx