In Canada, when a spousal relationship breaks down, support obligations (whether child or spousal support) are largely driven by the payor’s income. Determination of income for support purposes can be a complicated calculation, especially when a farm is involved. Income of the parties for support purposes is determined pursuant to the Federal Child Support Guidelines. Section 2(1) of the Guidelines provides that “income” means annual income determined under ss. 15 to 20 of the Guidelines.
The starting point under the Guidelines is to look at an individual’s total income as reported at “Line 150” on their personal income tax return. However, given the unique characteristics of the farming industry, Line 150 income will seldom be an accurate approximation of the true income of a farmer. While tax-purposed adjustments available to a farmer on their income tax return may be legitimate for that purpose, such adjustments may (perhaps unintentionally) confuse the true cash flow and income picture of that individual in many cases.
In all cases, the goal will be to find a fair and principled approach to determining income for support purposes; but this is not always a simple task. Nor can it be assumed that the approach for determining farm income for the purposes of income taxes will also satisfy the objectives of the Guidelines.
As a starting point, when looking at income for support purposes it is important to understand what accounting method is used by the farmer. Farmers may report income on their tax return in two different ways: the cash basis or the accrual basis. When a farmer chooses to report income on a cash basis, income is reported in the fiscal year when the farmer receives the payment, and expenses are deducted when the farmer pays them out. Alternatively, if the farmer uses an accrual basis, income is reported in the fiscal year when it is earned – regardless of whether payment is actually received in that fiscal period – and expenses are deducted in the fiscal period in which they are incurred – again, regardless of whether they are paid right then or not.
Why does this matter? Put simply, the accounting method chosen by a farmer affects the timing of his or her income. If a farmer elects to report income on a cash basis, it provides some latitude in the reporting of income through the use of deferred crop payments on grain or other inventory, purchasing inputs that will be used in the next growing season, using optional inventory adjustments, capital cost allowance, etc.
Under s. 17 of the Guidelines, the Court may have regard to income earned 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 non-recurring amounts during those years. That said, while timing differences may average out over the years, in the short run, they can make a major impact on a farmer’s income for support purposes. This may be especially so when a separation is relatively new and initial orders are being put in place to establish interim support arrangements.
Further adjustments to a farmer’s income may be required if the farmer is a shareholder, director or officer of a corporation. In these cases, the Court can look to the pre-tax income of a corporation and determine whether all or part of that pre-tax income should be added to the farmer’s income for support purposes.
The Court can also make adjustments to impute additional income to the farmer if the Court considers it appropriate in the circumstances. Such circumstances may include if a farmer appears to be diverting income or if a farmer appears to be unreasonably deducting expenses from income. These scenarios can, again, also arise when legitimate tax deductions for income tax purposes may not correlate to appropriate adjustments to income for support purposes. Whether on the paying or receiving end of support, it is important that you seek an advisor that understands the complexities that may be a part of a farmer’s income. Your advisor(s) may need to look beyond an income tax return and review a variety of source documents to determine the appropriate income level for support purposes. Depending on the complexity of the operations it may also be wise to consider whether an accounting expert is warranted to give an opinion on income for support purposes.
Kimberly D. Visram
STEVENSON HOOD THORNTON BEAUBIER LLP
500 – 123 2nd Avenue South, Saskatoon, SK S7K 7E6
This article is provided for general informational purposes only and does not constitute legal or other professional advice.
This article was originally published in The Western Producer on January 6, 2022.