What Would Santa Say? Are Gifts Considered Income for Support Purposes?

It’s the season for gift-giving, but as we’ve demonstrated in a recent article about paying for presents as a co-parent,  gifts can be a source of contention if you’re separated or divorced.  And it’s not just about what you give; receiving cash gifts from extended family members can also create conflict in instances where this money could potentially alter a co-parent’s child support payment amounts, post-separation or divorce.

When parents decide to separate, the respective child support obligations of each parent are calculated based on their individual incomes, together with a host of well-established factors dictated by Canadian family law.  But, let’s say that the mother’s parents provide her with a generous cash gift, or an all-inclusive vacation for her and the child for Christmas.  Should her entitlement to receive child support from the child’s father be adjusted downward, with this gift in mind?

Under Canadian family law, the answer is: It depends.

When Are Gifts Considered “Income” in the Recipient’s Hands?

To determine the outcome in any given scenario, the analysis begins with the Federal Child Support Guidelines, which sets in no uncertain terms that true gifts are not included as part of a spouse’s presumptive income (as found on his or her income tax return), and ordinarily are not counted as such.

This aligns with the common meaning of “gift”, which one court describes as a “one-time indulgence to mark a special occasion, or limited assistance in a time of crisis.”[1]   Indeed, courts see a significant distinction between gifts received from extended family members on an inconsistent basis (especially post-separation), as opposed to those that amount to a steady stream of income or benefits that are used to support the family over a long period of time.

So, it would be very uncommon for a one-time cash gift to be factored into child support payments, but the distinction between annual gifts and regular financial support can be a fine one.

• In one case,[2] a young family had been primarily supported by the husband’s father, amounting to roughly $100,000 per year. When the couple split, the grandfather stopped providing support to both of them, and made it clear that it was because he didn’t want the money counted as income in the husband’s hands when it came time to calculate the spousal support he owed.  However, the grandfather continued to cover a portion of his grandchildren’s school fees, and the cost of trips for the husband to visit him in Switzerland.  The court found these were true gifts and not part of the husband’s income tally. It noted that the grandfather had sole control over whether he wanted to continue paying, and the court could not compel him to do so.
• In a ruling from New Brunswick,[3] the wife received financial support from various family members, mostly after the marriage had already broken down. The generosity had been sparked by a desire to help her through a difficult period.  Since the court found there was no indication that the gifts would continue once she got back on her feet, it declined to add their value to the wife’s income.
• Similarly, another Ontario decision[4] involved a wife who had been receiving “advances on her inheritance” from her own mother, which amounted to almost $300,000 in the 10 years since her separation. The court declined to count this as part of her income.  The mother’s payments were not given regularly during the marriage, and were equally sporadic afterwards; she increased them when the wife needed money because the husband had suddenly stopped paying her support.  They were unlikely to go on indefinitely.  Rather, they were payments from “a concerned mother who wanted to ensure that her daughter was able to meet her family’s needs when her spouse was not doing so.”

In contrast to these cases, the courts are much more likely to impute income where the gifted funds become a part of the recipient’s lifestyle, especially where it was always so, even pre-separation.   In one case[5] the wife succeeded in having the court add $50,000 to the husband’s income each year, since this was the amount he received from his wealthy parents annually for about 8 years both during and after the marriage.  In convincing the court, the wife submitted email evidence where in writing to her, the husband referred to the fact that his parents had given him “$50,000 each year to help with all your expenses” and that she should not “expect to see that anymore.” The court decided the gifts were nonetheless likely to continue in the foreseeable future, especially since the money had been used for the family and their lifestyle, and to uphold the charitable obligations of their religious faith.

What are the Legal Tests for My Situation?

When deciding whether to add (or “impute”) income to a gift recipient, Canadian courts must consider several factors, namely:[6]

• The regularity of the gifts;
• The duration of their receipt;
• Whether the gifts were part of the family’s income during the marriage or living-together period, that entrenched a particular lifestyle;
• The circumstances of the gifts that earmark them as exceptional;
• Whether the gifts do more than provide a basic standard of living;
• If there is any income generated by the gifts, and in what proportion to the support-paying spouse’s income;
• Whether they are being paid to support an adult child through a crisis or period of disability;
• Whether the gifts are likely to continue; and
• The true purpose and nature of the gifts.

The Child Support Guidelinesalso dictate several added principles that must guide the court’s decision:[7]

If a parent is not properly using his or her earning capacity to the fullest, it is more likely that income will be imputed.

Situations that lean toward imputing income include those where:

• the gifts represent a significant portion of the recipient’s overall income;
• the gifts are part of a planned or intentional diversion of income, or they substitute for income previously earned from a related source (e.g. a family business);
• the recipient parent relies on the gifts’ ongoing and regular nature as an income source, and as a replacement for pursuing employment that is appropriate to his or her capabilities; and
• the recipient has failed to fully disclose these gifts to the other parent and the court.

In short, courts will impute income when gifts from parents or other family members start looking like a long-term subsidy, as in the case described above.  They are also more likely to impute income if there has been dishonesty, underreporting, or concealment on the part of the spouse who receives the gifts.

What’s the Take-Away?

If you are a separated or divorced spouse or parent who is the beneficiary of financial assistance from parents or other family members, the key to avoiding having these gifts imputed into your income is to make sure they are:

1) clearly identified as being short-term;

2) aimed at reducing a temporary need; and

3) not intended to enrich the family’s lifestyle on a long-term basis.

Gifts from extended family should never be hidden from the other spouse.  Any family loans should also be clearly earmarked, and ideally documented in writing, with repayment expectations set out.

If a gift can be structured so that it is essentially a one-off event (or as close to it as possible), it will be excluded from your income, and impact your support obligations accordingly.  That may make for a happier (more financially stable) new year.

It will be the gift that keeps on giving.

If you have more questions about finances and support, bring them to us.  We would be happy to help you with your matter.

[1]Malkov v. Stovichek-Malkov, 2017 ONSC 6822 (CanLII), http://canlii.ca/t/hnrjk

[2]Yunger v. Zolty, 2011 ONSC 5943 (CanLII), http://canlii.ca/t/fnd6z

[3]A.L. v. J.N., 2017 CarswellNB 254 (N.B. C.A.)

[4]Burke v Burke, 2017 ONSC 4046 (CanLII), http://canlii.ca/t/h4l0f

[5]Horowitz v. Nightingale, 2015 ONSC 190 (CanLII), http://canlii.ca/t/gfxgn

[6]Bak v. Dobell, 2007 ONCA 304 (CanLII), http://canlii.ca/t/1r7rl

[7]Whelan v. O’Connor, 2006 CanLII 13554 (ON SC), http://canlii.ca/t/1n473