How Does Child Support Work If Income Fluctuates?

The amount of child support depends on the payor parent’s income, so how does child support work if the payor spouse’s income fluctuates significantly? In such situations, it may be appropriate to average income over a period of years. In Harras v. Lhotka, 2016 BCCA 246 the Court of Appeal for British Columbia recently clarified the approach to averaging income.

Application to reduce income for child support purposes 

The parties were married in 1997 and divorced in 2013 after having two children. Mr. Lhotka earned income as a film producer. The parties entered into a separation agreement on July 26, 2013 which used a five-year average of Mr. Lhotka’s income for the years 2008 to 2012 inclusive for the purpose of determining child support payable under the Federal Child Support Guidelines, SOR/79-175. Accordingly, Mr. Lhotka’s income for child support purposes was set at $183,000.

In 2014 Mr. Lhotka applied to have his income for support purposes reduced based his 2013 income of $67,000. He argued that the averaging formula in the separation agreement should be set aside and his income set at the 2013 low. The Chambers judge accepted that he earned $67,000 in 2013 but decided that using a three-year average would be fairer than using Mr. Lhotka’s actual 2013 income. The three-year average income was $234,737, resulting in a substantially increased child support obligation.

Appeal from Chambers decision 

The Court of Appeal allowed the appeal and ordered that Mr. Lhotka’s income for the year 2014 be set at $196,604, based on the average of his income for the previous five years. Garson J.A. for the unanimous Court of Appeal held that the fairest manner to assess Mr. Lhotka’s income for 2013 was to apply the same type of formula that the parties agreed to in the separation agreement; that is, a five-year average. The calculation over three years unfairly resulted in a higher figure than the average over five years. Ultimately, the result of the appeal from Mr. Lhotka’s application was an increase in his child support obligation, albeit a less substantial increase than if the Chambers decision stood.

Averaging was appropriate in this case as there was no evidence of a year-over-year decline in earnings that would justify the use of current-year income for support purposes. Mr. Lhotka expressed optimism in his affidavit evidence that the film industry would improve the future and he would find employment. Mr. Lhotka did not demonstrate a lasting decline in his income or an inability to pay support based on the averaged figure.

How does child support work if income is “regular?” 

Section 15 of the Guidelines stipulates that a parent’s annual income is to be determined in accordance with ss. 16-20. Accordingly, the starting point in the determination of income is s. 16, which reads as follows:

Subject to sections 17 to 20, a spouse’s annual income is determined using the sources of income set out under the heading “Total income” in the T1 General form issued by the Canada Revenue Agency and is adjusted in accordance with Schedule III.

How does child support work if income fluctuates?

In the event that annual income under s. 16 does not represent the “fairest” determination of income, the Guidelines provide the court with the discretion to adjust income based on the preceding three years. Section 17(1) reads as follows:

If the court is of the opinion that the determination of a spouse’s annual income under section 16 would not be the fairest determination of that income, the court may have regard to the spouse’s income over the last three years and determine an amount that is fair and reasonable in light of any pattern of income, fluctuation in income or receipt of a non-recurring amount during those years.

The test in s. 17(1) is what is “fair and reasonable”, having regard to the payor’s income in the preceding three years: Harras at para. 22.

When is income averaging appropriate?

Note that while s. 17 allows the court to examine income over the previous three years, there is nothing in the language of the section that requires the use of averaging in setting income. This makes sense; accepting that one of the goals of the Guidelines is the fair determination of the amount available to pay child support, fairness is unlikely to be achieved by the mechanical application of averaging: Harras at para. 24. This raises the question of when averaging is considered appropriate. Garson J.A. answered that question as follows:

[35]        In summary, the averaging approach to income determination under s. 17 is very fact specific. Generally speaking, averaging will be applied where income fluctuates, or where the payor has not demonstrated a lasting decline in earnings. Ultimately, it depends on fairly calculating the amount of income reasonably available to pay child support. Depending on the reasons for a pattern of fluctuating income (or, as in Grossi, declining income), averaging may be more or less appropriate. If, for example, a substantial increase in income in one of the three previous years is due to receipt of what might be fairly viewed as a non-recurring amount, averaging may be inappropriate. If, however, the nature of a payor’s employment or business is such that wide fluctuations in income are normal and expected, averaging may be more appropriate. As the Court stated in Jakob at para. 46, “[w]here income has fluctuated in previous years, in the sense that it has increased and decreased over a fixed period of time, and it is anticipated that it will continue to fluctuate in that manner, it may be appropriate to take an average of fluctuating income for a fixed number of years” to determine current income.

Five year average may better reflect income available for child support purposes

Section 17 of the Guidelines states that the court may have regard to the spouse’s income over the last three years when determining an amount that is fair and reasonable in light of any pattern or fluctuation in income or receipt of a non-recurring amount during those years. On the other hand, s. 19, which outlines circumstances where a court may impute income to a spouse, is not subject to a three year restriction.

In Harras, the parties’ separation agreement provided that a five year average would apply. However, the unanimous Court of Appeal concluded that even without previous agreement by the parties, averaging over a five year period may be an appropriate exercise of the court’s discretion under s. 19. As such, it is open to a court in exercising the broad discretion under s. 19 to conclude that a five-year average more accurately reflects the income available to a payor parent than a three-year average.

How does child support work? The take home point on averaging fluctuating income

The averaging approach to income determination is very much a fact-specific exercise. Whether its adoption is fair depends on the reasons for a pattern of fluctuating income. If the nature of the payor’s employment or business is such that income fluctuations are normal and expected, then averaging may be appropriate. If, on the other hand, a non-recurring event triggers a significant decline in earnings, averaging may be inappropriate. Where a payor parent’s income fluctuates significantly, depending on the facts, guideline income may be based on a three-year or five-year average.