Hume v. Tomlinson, 2015 ONSC 843
This case addresses the issue of whether a retroactive lump-sum support award should be reduced to reflect the tax consequences to the support payor and the support recipient and, if it should be reduced, by how much.
Background
In December 2014, Madam Justice Toscano Roccamo of the Superior Court of Justice ordered the Respondent Husband to pay the Applicant Wife retroactive spousal support from March 2012 to the date of the application. The Court referenced the Spousal Support Advisory Guidelines (SSAGs) and fixed the quantum of spousal support at the SSAG mid-range value. The parties were ordered to offset any over-payment of child support by the Husband against the amounts owed in spousal support.
The parties disagreed on how to calculate the arrears and sought further direction from the Court.
The Wife argued that the calculation of arrears should be based on net totals; that is, the sum of spousal support and child support owing by the Husband, minus child support paid. The husband sought to have the arrears reduced to reflect the fact that a lump sum payment would not likely be treated as tax deductible to him or as taxable income for the Wife.
Analysis
Ordinarily, periodic (i.e. monthly or yearly) spousal support is taxable income to the recipient and tax deductible for the payor, whereas lump sum awards are not. The Court agreed with the Respondent that, where a lump-sum spousal support order references the SSAGs, the tax implications must be considered when determining the appropriate quantum of support.
The SSAG software, DivorceMate, calculates “after-tax” or “net” amounts for periodic spousal support based on the presumption that support payments will be taxable income for the recipient and tax deductible by the payor. DivorceMate does not address retroactive lump-sum payments. Therefore, “[a] retroactive award must be “netted down” to account for its non-taxable status in the recipient’s hands, and its non-tax deductible status in the payor’s hands” (Thompson v. Thompson, 2013 ONSC 5500 at paragraph 75).
If the Court accepted the Wife’s approach to calculate arrears, the parties would be required to apply to the Canada Revenue Agency for an assessment on the appropriate tax adjustments. The CRA’s decision would largely be based on the Wife’s request for a “qualifying retroactive lump-sum payment.” The Court agreed with the Husband that the CRA may be more inclined to give a favourable tax treatment to a support recipient rather than a support payor. It was the Court’s opinion that relying on the parties to make an application to the CRA would not be appropriate because this could not guarantee a fair adjustment between the parties.
The Court elected to reduce the amount of arrears owing, taking into consideration the approximate marginal tax rate of the Husband, the support payor. This is in line with the approach adopted by the courts in Vanasse v. Seguin, [2008] O.J. No. 2832 (Ont. S.C.); Bargout v. Bargout, 2013 ONSC 29; 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.)). In the case at bar, the Husband’s average marginal tax rate was 37%. The support arrears of $14,363.02 was therefore reduced by 37%, for a total of $9,048.70.
It is generally accepted that there is a tax discount for retroactive lump-sum spousal support awards. However, it is less clear as to what rate the award will be reduced by. In this case, the Court used the support payor’s marginal tax rate. In others cases, the courts have used the support recipient’s marginal tax, the support payor’s marginal tax rate, or the average rate between the two. Despite this uncertainty, parties with a retroactive lump-sum spousal support claim should provide their marginal tax rates to the Courts so that it may “net down” the support award in accordance with this information.