It is easy to look at an Income Tax Return from the previous calendar year to see what ‘Total Income’ is reported. A common mistake is to simply take the Total Income, found at Line 150 of the Income Tax Return, and then apply it to the Federal Child Support Guidelines.
This is a misunderstanding of the Guidelines, however. Section 16 of the Guidelines tells us to use the ‘sources of income set out under the heading Total Income’. This is quite different from using the total of income found at Line 150. It means that we look at the entries for different types of income that are reported for tax purposes. Some types of income are treated in a different manner for tax than for child support.
Dividend income reported at line 120 reflects not the amount of money received from company dividends, but a grossed-up amount value for tax purposes. This is because dividends are paid from a corporation’s after-tax profits – they have been taxed once before the money is paid to the shareholder. The shareholder reports the amount of ‘pre-tax’ money required to pay the dividend, and then receives a Dividend Tax Credit to avoid double taxation.
For child support, Line 150 income that includes dividends is not an accurate reflection of the income received by an individual. The dividend income must be adjusted to properly calculate Guideline income.
Here is an easy example. You own shares in a company, and you receive a cheque for $100.00, paid as a dividend to you. For tax purposes, your T5 slip will show that you have taxable dividend income of $138 (the dividend plus the tax gross-up factor of 38%). This is the number that is reported on your Income Tax Return. You would also receive a credit against your taxable income.
For child support, the $138 would not be used to calculate Guideline income. Instead, Guideline income would include the $100.00 that was received so as to properly calculated child support based on what resources are available.
We can help you determine your income for child support. Send me an email at firstname.lastname@example.org.