Cross-Border Child Support and Spousal Support Implications
For the majority of Canadian couples that separate, both parties continue to live in Canada and have reasonably predictable incomes. Determining income for support in such situations is a relatively straight forward process involving obtaining personal tax returns and using the Tables provided by the child support and spousal support guidelines, to determine the child and spousal support obligations. However, sometimes when couples separate, one of the separated spouses chooses to move to a different location and sometimes beyond the borders of Canada.
The Tables are built to account for Canadians working in Canada. When one of the separating parties lives abroad (in the U.S. or elsewhere) the determination of income for support becomes far more complicated. Some of the issues to consider are: where the recipient of the support lives; the currency in which the income is earned; and the differences in tax rates between Canada and where the other party lives.
Support recipient’s location
The residency of the recipient of the support dictates the rules and regulations to be followed to determine the support amount. If the recipient lives in Canada, then the support is determined based on Canadian rules. However, if the recipient lives outside of Canada, that country’s rules apply.
Currency exchange differences
When the recipient lives in Canada, but the Payor lives outside of Canada, the income available for support must be translated into Canadian equivalent dollars. The exchange rate used is based on the average exchange rate for the year. For example, assume the Payor’s income for support purposes is $100,000 US earned in Florida in 2016. To get an equivalent Canadian amount, multiply the amount by the average US / Canadian exchange rate for the year of 1.325, resulting in equivalent Canadian amount of $132,500.
Typically, it is the after-tax income that is translated to Canadian dollars (discussed further below). However, in some situations, if the tax effect is not significant (for example, if the tax rates of the two countries are comparable, or if the income levels are very low) then the gross income may be translated.
Tax rate differences
Income for support is determined based on after-tax earnings. Different countries have different tax rates. The result is that the after-tax income can vary significantly depending on where the income is earned.
Going back to our example above, the Payor earned $100,000 US in Florida in 2016. Florida does not have state income tax, so the Payor is only subject to federal income taxes. The Payor’s US tax liability would be approximately $18,500 US, resulting in net income after taxes of about $81,500 US. Using the average exchange noted above, the Canadian after-tax equivalent would be $108,000 CDN ($81,500 x 1.325). You then need to determine what the Canadian equivalent gross income would have to be, to be left with $108,000 CDN after taxes in Ontario. To earn $108,000 CDN after tax in Ontario, you would have to earn approximately $160,000 CDN.
To learn more about cross-border child support and supposal support implications, contact one of DJB’s financial services professionals.Download