Non-recurring capital gains and child support

Child support obligations are determined based on the amount of income a payor earns, presumptively, a steady income or salary. However, there are times when a payor owns an investment, or some other asset, and makes a sale upon which a capital gain will be realized. This will naturally get added to the payor’s income for tax purposes, consequently bumping up the child support obligation for that particular year in question. But must they pay child support based on that non-recurring capital gain or is there a way to argue against it? Section 17 of the Federal Child Support Guidelines provides some insight:

17 (1) 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.

Here, the court is given the discretion to do a number of things in the circumstances described above, including, taking the average income of a payor over the past three years or perhaps excluding the capital gain altogether. This will be determined on a case-by-case basis. The Court of Appeal clarified in Decaen v Decaen, 2013 ONCA 218, that this is not a mandatory exercise of the courts:

The language in section 17 is permissive rather than mandatory, allowing the court to look at the spouse's income over the last three years in appropriate circumstances.

Helpfully, the court has also included nine relevant and non-exhaustive questions to ask in their discretionary analysis. These questions were recently applied in a 2019 Ontario Superior Court decision, Fournier v Labranche, 2019 ONSC 4651, where the payor had sold her dental businesses and realized a capital gain of $2 million. The questions being posed are inquiring into the nature of the gain:

1. Is the non-recurring gain or fluctuation actually in the nature of a bonus or other incentive payment akin to income for work done for that year?

A. In the case of Ms. Fournier, it is not.

2. Is the non-recurring gain a sale of assets that formed the basis of the payor's income?

A. In Ms. Fournier's case, the assets did form the basis for much of her income as the Pembroke and Deep River clinics were doing better than the Ottawa clinic at the time. As in Ewing, Ms. Fournier's income would be projected to decrease substantially after the sale.

3. Will the capital generated from a sale provide a sources of income in the future?

A. In Ms. Fournier's case it will not, but for any income she derives from investment of the capital, which investment income did and will continue to form part of her income for support purposes.

4. Are the non-recurring gains received at an age when they constitute the payor's retirement fund, or partial retirement fund, such that it may not be fair to consider the whole amount, or any of it, as income for support purposes?

A. In Ms. Fournier's case, it does come at an age and stage where non-recurring gains constitute her retirement fund, partially by being invested into removing any remaining mortgages on her properties and partially by being otherwise invested, given that she has no other pension plan or security.

5. Is the payor in the business of buying and selling capital assets year after year such that those amounts, while the sale of capital, are in actuality more in the nature of income?

A. In Ms. Fournier's case, she is not in such a business.

6. Is the inclusion of the amount necessary to provide proper child support in all circumstances?

A. In Ms. Fournier's case, it is not. As I indicated in paragraphs 51 through 54 above, Tye's needs have been more than amply met in both households. Her standard of living in each is comparable, and the evidence does not support that her lifestyle while in the care of Ms. Fourner is extravagant. Indeed, the money Ms. Fournier expended directly on Tye for the entire year in 2017 and 2018 was respectively slightly less and slightly more than she currently pays to Mr. Labranche for one month of child support.

7. Is the increase in income due to the sale of assets which have already been divided between the spouses, so that including them as income might be akin to redistributing what has already been shared?

A. In Ms. Fournier's case, it is not, as no assets beyond the jointly held properties were divided between the spouses, nor did Mr. Labranche have entitlement to any of Ms. Fournier's assets.

8. Did the non-recurring gain even generate cash, or was it merely the result of a restructuring go capital for tax or other legitimate business reasons?

A. In Ms. Fournier's case, it did generate cash, but the cash has been invested or is being held for future security purposes.

9. Does the inclusion of the amount result in wealth distribution as opposed to proper support for children?

A. In Ms. Fournier's case, it does, in my view, amount to wealth distribution as opposed to proper support for Tye.

Ultimately, the court found that the factors swayed in favour of excluding the capital gain in the payor’s income for the purposes of child support. While all factors are relevant, it is significant that, pursuant to question 5, the payor was not in the "business" of selling capital assets. In other words, her job was not to purchase and sell capital assets. Her job was related to dentistry, and her asset-sale was her cashing out of that business.

Obvious takeaways? If the payor of child support experiences a sharp increase in their income as a result of a non-recurring capital gain, the court has the power to examine the nature and circumstances of the gain in deciding whether to include that amount of income for child support purposes or not. This is a context-specific analysis.