“The experts do not agree on the tax rate for grossing up the expenses that are added back to income. Ms. Russell used the marginal tax rate and Ms. Silver used the applicant’s average tax rate. In this case, the marginal tax rate is 31%. The average tax rate varied every year from a high of 18.7% to a low of 14%.
The marginal tax rate is the rate on the last dollar of income earned. This is very different from the average tax rate, which is the total tax paid as a percentage of total income earned.
I accept that the marginal tax rate is proper approach in this case. The applicant’s income has been taxed. We are now adding expenses back to income and it makes sense that we should apply the marginal tax rate, which is the rate on the last dollar of income earned. Ms. Russell testified the marginal tax rate of 31% applies for each year.
I also accept that the marginal tax rate is the correct rate to use because it is the rate applied by Divorcemate. This program has a function that allows the user to enter any non-taxable income. Divorcemate will automatically gross up this income for the purposes of child and spousal support. When grossing up, the program uses the marginal rate. Divorcemate states as follows:
Note that the software will automatically gross up this income in the determination of the party’s Guidelines Income and child and/or spousal support. In other words, the software will determine how much gross employment income the party would have to earn at his/her current marginal income tax rate (including CPP and EI premiums if specified by you), in order to have this non-taxable income.”