If a parent or spouse has an obligation to pay support, and lives in a foreign country that has income tax rates which are significantly different than Canadian income tax rates then the Court will consider a number of factors when converting the foreign income to Canadian dollars. The purpose of converting the foreign income to Canadian dollars is to help ensure consistency between support received by dependents in Canada, and the payor’s available after-tax income as if earned in Canada. Converting foreign income to Canadian income is not just a straight application of the current currency conversion rate to the gross amount of foreign income.
The usual practice1 is to start with converting the foreign gross income to Canadian dollars at a fair exchange rate. Then apply the foreign tax rate to calculate the payor’s after-tax income in Canadian dollars. Once the payor’s after-tax Canadian income is determined, the next step is to determine what gross income would be required to result in the same after-tax income using Canadian tax rates.
For example, assuming a foreign tax rate of 10%, a Canadian tax rate of 20%, and an exchange rate of 1.35 then:
$100 foreign gross income x 1.35 exchange rate = $135 Canadian gross income;
$135 Canadian gross income – 10% foreign tax rate = $121.50 net Canadian income; and
$121.5 net Canadian income + 20% Canadian tax rate = $145.8 gross Canadian income for support purposes.
Further, it may be necessary to examine the services each government provides its citizens in exchange for the tax dollars received. For example, one country might have a higher tax rate than another country, but provides its citizens with free medical, prescription, and dental coverage not provided by the other country. Expert evidence from tax specialists from each country are usually required to determine if income should be allocated to a spouse or parent because of the tax benefits they receive that are not available to the other spouse or parent.
While it is attractive to approach conversion of foreign income by a straight application of exchange rates, the tax regime of the foreign country must also be considered to ensure dependents in Canada receive support appropriate to Canadian standards.
At Pushor Mitchell, our full-service firm can help you with your legal requirements including issues involving family and tax law.
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1Gonabady-Namadon v. Mohammadzadeh, 2009 BCCA 488, 2009 CarswellBC 2767
