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Business Valuations

Income for Support – To Average or Not to Average? – This is the Question.

What is Income For Support?

Income for support becomes more challenging when an individual is self-employed, as by virtue of owning their own business they will have certain tax planning opportunities that enable them to reduce their taxable income and achieve after-tax benefits that employed individuals often do not have. This includes but is not limited to retaining income within the business so that it does not appear on their personal tax return, income splitting with family members, and expensing personal items as write-offs in the business.

When these items are present for parties in the midst of separation or divorce, they reflect examples of situations that may make income determinations more complicated than your average salaried individual.

What happens when Income fluctuates from year to year? What then?

Section 17 of the Federal Child Support Guidelines (the “Guidelines”) provides that where the Court is of the opinion that the total income shown on an individual’s personal tax return does not provide a fair determination of the parent’s/spouse’s income available for support purposes due to items such as fluctuations in income or non-recurring amounts, the Court may determine the parent’s annual income by examining their income over the last three years.

Commonly used means of dealing with erratic or fluctuating annual incomes under section 17 of the Guidelines is often addressed by way of averaging the annual income over the three most recent calendar years. However, section 17 of the Guidelines is permissive and not mandatory, in that the Courts endeavour to conclude on a prospective figure that reflects the new norm (current situation) for future support amounts, as historic levels of earnings may not be indicative of future levels.

Practically speaking we understand that when establishing retroactive support (i.e., for years in between the date of separation and a current date) the Courts tend to rely on actual income rather than considering an average of three years. We further understand that in establishing a prospective level of income for support the Courts will consider averaging if it results in the fairest determination of income. It is worth noting that a judge may look at individual’s income over a three-year period, however, the Guidelines do not require these years to be averaged, and therefore it is at the Courts discretion to conclude based on an average, the most recent year, or another basis as appropriate in the specific case.

If you are interested in relevant Case Law on this topic, some examples to consider include:

– Ian Lobo, Principal, Valuations


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