When a spouse is eligible for spousal support after a separation or divorce, the couple’s respective incomes and assets are compared to determine the appropriate amount and duration of support. As capital assets and income are treated differently in family law proceedings, spouses may wonder whether either party’s assets can be used to increase or decrease the amount of payable spousal support. These issues can become significant when a spouse receives substantial financial distributions from sources other than income.
When making an order for spousal support, section 15.2(4) of the Divorce Act requires a court to consider each spouse’s “condition, means, needs and other circumstances”. In considering the means of a payor spouse, courts are first directed to their income.
The determination of a spouse’s annual income for purposes of spousal support is the same as for child support. Section 16 of the Federal Child Support Guidelines provides that income will generally constitute the amount set out under the heading “Total Income” in a T1 tax form.
The law treats income-producing assets and non-income-producing assets differently when calculating spousal support. Non-income-producing assets are not usually considered income for spousal support purposes. In Bak v. Dobell, the court noted that the support model is based on a payor’s income and not their capital. While income from investments will be part of a payor’s total income, the underlying investments are not. The court went on to say that receipt of capital is not normally considered income as it is not taxed as income.
The court followed these principles in Janmaat v. Janmaat, which involved consideration of an inheritance the wife was set to receive. Based on the income from the inheritance (but not the inheritance itself), the wife was found not to require an increase in support. Instead, she was expected to rely on the income generated by the inheritance to support herself without impairing the underlying capital.
Laurain v. Clarke involved a review of whether a spouse might be obligated to pay support out of assets, which the husband claimed was the appropriate approach. The judge disagreed that draws on capital assets were indistinguishable from other income for the purposes of calculating spousal or child support. In Justice Price’s view, such an approach overlooked the distinction between property and income evident in the legislation. It also obscured the “alternative uses that can be made of a capital asset for income generation or for other purposes”. The judge explained how spousal support fits within the economic arrangements between spouses, with courts having to balance the dependent’s need for support with the payor’s need to preserve their capital so that it can be utilized in the future.
Capital held by the recipient spouse is also considered when determining their entitlement to and quantification of spousal support. A payor spouse may allege that a spouse seeking support has sufficient assets to live on such that support is not required, or a lesser amount of support would be warranted. This was the issue in Berger v. Berger, where the husband challenged the trial judge’s finding that the wife was not required to deplete her capital to live on but to invest it to acquire an income. The husband’s submission was that support was not needed and that the wife was obliged to use up her capital. The Court of Appeal disagreed and found the trial judge was correct; the wife did not need to deplete her capital before being entitled to claim support.
While the different treatment between income and capital is a general rule, there are circumstances where support can be ordered to be paid from a party’s assets. In Gonzalez v. Ross, the judge ordered spousal support where the payor had received inheritance and gifts and earned an income of $18,000. The amount of support was based on the payor’s capital rather than income, as the recipient required the amounts to maintain a minimal standard of living.
An additional exception can arise in circumstances where the payor has treated periodic receipts of capital as income. In Jackson v. Jackson, the husband inherited over $1 million in testamentary trusts but had a modest income. Justice Pardu found that where there has been a history of using capital to support a joint lifestyle, it is not appropriate for spousal support to be based only on income instead of the full means available. In the long run, the recipient spouse may move to a lower standard of living. However, on an interim basis, the pre-separation lifestyle could be maintained.
The court’s ability to impute a spouse’s income for the purpose of spousal support is derived from section 19(1) of the Federal Child Support Guidelines. The guidelines include the following circumstances in which the court may impute income:
- the spouse’s property is not reasonably utilized to generate income;
- the spouse derives a significant portion of their income from dividends, capital gains or other sources of income that are taxed at a lower rate than employment or business income or that are exempt from tax; or
- the spouse is a beneficiary under a trust and is or will be in receipt of income or other benefits from the trust.
The legislation makes it clear that a spouse should reasonably use their capital to generate income. Where they fail to do so, a court has the discretion to impute income instead.
In Bak, the Ontario Court of Appeal stated that a payor should not be expected to sell capital assets such as a house or car to generate income for support payments unless the property is not reasonably used to generate income.
The issue also surfaced in Steinfeld v. Koenigsberg, where the prospective support recipient (the husband) argued that the court did not need to be concerned regarding how support might be paid. However, the wife successfully argued that her assets were being reasonably used to generate income, and it would be inappropriate to impute further income from her assets. It was pointed out that her home was rented to tenants producing rental income, her investments generated income, and she was also drawing on her RRSPs as income. As her capital assets were appropriately being used to generate income, the court found there was no basis to look to the value of the assets themselves when fixing spousal support.
Courts have been clear that there is a distinction between considering capital at the stage of determining a payor’s ability to pay support and relying on those assets to determine the amount of support that should be paid. Typically, neither the support payor nor the recipient will be expected to deplete their capital to pay support or fund their living expenses. However, evidence of lifestyle can be considered in some circumstances. Where capital receipts were used to fund a lifestyle during marriage, those payments may be counted as income.
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