“Thus the following two issues arises in relation to these capital distributions:
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- are encroachments on the capital of the Trust that are distributed to the Respondent to be included in the calculation of his income for spousal support purposes in the relevant year; and
- if the answer to the first question is “yes”, should the capital distribution in a particular year be “grossed up” to take account of the fact that no income tax is paid on such distribution
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Should distributions from the Trust’s capital be included in the calculation of the Respondent’s income for support purposes?
Section 15.2(4) of the Divorce Act requires the court making an interim order for spousal support to take into consideration the “condition, means, needs and other circumstances of each spouse…” In determining the “means” of a spouse with an obligation to pay spousal support, the starting point of the analysis is that spouse’s “income” as determined in accordance with line 150 of his or her Income Tax Return: see the Guidelines, s. 3 (1) and 16. But s. 19 (1) of the Guidelines also provides discretion to a court to impute such amount of income to a payor spouse that it considers appropriate in the circumstances, including the following:
(e) the spouse’s property is not reasonably utilized to generate income;
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(h) the spouse derives a significant portion of 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; and
(i) the spouse is a beneficiary under a trust and is or will be in receipt of income or other benefits from the trust.
Subsection 19(1)(e) makes it plain that a spouse must reasonably utilize their property to generate income and that a failure to do so may result in the imputation of income. However, while property must be reasonably utilized to generate income, courts have generally not required a payor spouse to draw down or dispose of their property or capital in order to fund support payments. As the Court of Appeal noted in Bak v Dobell, the Guidelines proceed on the assumption that child and spousal support are based on a payor’s income rather than their capital, and “while income from investments is part of a payor’s total income, his or her underlying investments are not.”: 2007 ONCA 34 at para. 52. Thus in Laurain v Clarke, Price J. declined to impute income on annuity payments being received by a payor spouse on the basis that they were payments of capital, not income generated by capital: 2011 ONSC 7195, at para. 103. The Respondent relies on the distinction between income and capital to argue that, whereas income generated by the Trust is appropriately included within his Guidelines income, distributions of capital are not.
The difficulty with the Respondent’s argument is that s. 19(1)(i) of the Guidelines specifically provides that it is appropriate to impute income on “income or other benefits” received from a trust. What this broad language suggests is that Parliament has made a determination that distributions from a trust, whether from the income or the capital of the trust, constitute part of the “means” of the payor spouse and may be taken into account in calculating a spouse’s income for support purposes.
This was the conclusion reached in Jackson v. Jackson, where Pardu J. found that the receipt by the husband of approximately $105,000 annually from the capital of a trust should be considered to be a “benefit from the trust” and imputed as income pursuant to s. 19(1)(i) of the Guidelines: 1997 CanLII 12392 (ON SC), [1997] O.J. No. 4790. In fact, if the words “income or other benefits from the trust” did not extend to capital distributions paid or payable to a beneficiary, s. 19 (1) (i) would have no practical effect. This is because amounts payable to a beneficiary out of the income of a trust are already taxable and included as line 150 income. By providing that income may be imputed on “income or other benefits” received or receivable from a trust, Parliament must have intended to go beyond amounts that are already taxable and permit inclusion of capital distributions as a “benefit” received from the trust.
To be sure, s. 19 does not require the automatic inclusion in Guidelines income of all amounts received from a trust, since courts have the discretion to impute such amounts as are considered appropriate in the circumstances. In Clapp v Clapp, one spouse had received a number of capital distributions from a trust, with these amounts having been used primarily to renovate a family cottage and to purchase certain vehicles: 2014 ONSC 4591. The last such capital distribution had occurred over seven years prior to the parties’ separation, and the cottage and the vehicles were being included in the equalization of net family property. In these circumstances Price J. declined to impute the capital distributions as Guidelines income.”