Beyond the Paystub: Understanding Earning Capacity and Imputed Income

Written on behalf of Shariff & Associates

In the emotionally charged landscape of separation and divorce in Ontario, financial matters often loom large, casting shadows over the already turbulent process. Among these, determining child and spousal support is a paramount concern, hinging significantly on the accurate assessment of each party’s income. However, the reality is rarely straightforward. What happens when one party suspects their former partner is deliberately obscuring their true earning potential, or has intentionally orchestrated a reduction in their income? This is where the legal concept of income imputation comes into play, a tool designed to ensure fairness and prevent manipulation within the family law system.

The recent Ontario Court of Appeal decision in Kohli v. Thom provides a crucial lens to understand the intricacies of income imputation, offering valuable insights for individuals navigating the complexities of family law in Ontario.

Unveiling the Nuances of Income Imputation: Beyond Reported Earnings

At its core, income imputation is a legal mechanism that empowers Ontario courts to look beyond a party’s reported income and consider their earning capacity. This capacity represents the income a party could reasonably be expected to earn, given their skills, education, experience, and the prevailing economic conditions. This concept becomes particularly relevant when there are suspicions of intentional underemployment, a lack of reasonable effort to secure appropriate employment, or attempts to conceal income. The aim is to prevent parties from artificially deflating their income to minimize their support obligations, ensuring that financial responsibilities are distributed equitably.

Kohli v. Thom: A Case Study in Income Imputation

The case of Kohli v. Thom provides a compelling illustration of how income imputation operates in practice. Mr. Kohli and Ms. Thom were married for approximately 17 years, during which Mr. Kohli enjoyed a successful career in the technology sector, achieving a peak annual income of around $300,000. Following their separation in 2022, Mr. Kohli experienced a period of unemployment, eventually securing new employment at a significantly reduced annual income of approximately $100,000.

Ms. Thom contended that Mr. Kohli’s current income did not accurately reflect his true earning potential, arguing that his reduced income was a direct result of intentional underemployment. She presented evidence highlighting his extensive experience and high earning capacity and questioned the robustness of his job search efforts. This dispute formed the central issue regarding the imputation of income.

The Trial Judge’s Decision: Imputing a Higher Income

At the trial level, Ms. Thom presented compelling evidence, including a vocational expert report indicating that Mr. Kohli could earn significantly more than his reported $100,000. After considering the evidence, the trial judge concluded that Mr. Kohli had the capacity to earn an income of $250,000 per year and that his reasons for not doing so were not reasonable in the circumstances. Consequently, the trial judge imputed an annual income of $250,000 to Mr. Kohli for the purpose of calculating his child support and spousal support obligations.

Mr. Kohli’s Appeal: Challenging the Imputed Income

Mr. Kohli appealed the trial decision to the Ontario Court of Appeal, raising several legal arguments. He argued that Ms. Thom had failed to provide sufficient evidence of intentional underemployment, that the imputed income of $250,000 was unreasonable, and that the trial judge had failed to adequately consider his reasonable efforts to find suitable employment in a challenging job market.

The Court of Appeal’s Analysis: Upholding the Trial Judge’s Decision

The Ontario Court of Appeal meticulously reviewed the trial record and the trial judge’s reasons. In their decision, they reaffirmed the established legal principles governing income imputation, emphasizing the importance of considering a party’s earning capacity. The Court of Appeal specifically addressed Mr. Kohli’s arguments, finding that the trial judge had correctly identified and applied the legal test for imputing income, considering whether Mr. Kohli was intentionally underemployed and, if so, the reasonableness of his conduct.

Regarding the argument of insufficient evidence of intentional underemployment, the Court of Appeal held that there was sufficient evidence before the trial judge to support the finding. They emphasized the deference owed to trial judges on findings of fact, particularly when those findings are based on an assessment of the credibility of witnesses and the weighing of evidence. The Court of Appeal also found that the trial judge’s imputed income of $250,000 was within a reasonable range, based on the vocational expert report and Mr. Kohli’s past earnings.

Furthermore, the Court of Appeal dismissed Mr. Kohli’s argument that the trial judge had failed to consider his reasonable efforts to find employment, noting that the trial judge had addressed this issue in her reasons and had concluded that, while Mr. Kohli had made some efforts, they were not sufficiently robust given his skills and earning potential. Ultimately, the Court of Appeal unanimously dismissed Mr. Kohli’s appeal, upholding the trial judge’s decision to impute an annual income of $250,000.

Key Principles of Income Imputation: Lessons from Kohli v. Thom

The Kohli decision reinforces several crucial principles regarding income imputation in Ontario family law:

Earning Capacity is Paramount, Not Just Current Earnings:

The court’s primary focus shifts from a party’s current, potentially manipulated income to their inherent earning capacity. This involves a comprehensive evaluation of their skills, educational qualifications, professional experience, and the prevailing labour market conditions in their field. Courts meticulously analyze a party’s employment history, considering factors such as past salary levels, career progression, and the availability of similar positions. This assessment goes beyond simply looking at a party’s resume; it delves into the practical realities of their ability to secure gainful employment. Furthermore, the court will consider a party’s age, health, and any limitations that might affect their ability to work. The exercise aims to determine what a reasonable person with the party’s qualifications and experience could realistically earn.

Intentional Underemployment is a Key Trigger for Imputation:

Courts are particularly vigilant when there is evidence of intentional underemployment or unemployment, especially when it appears to be a deliberate strategy to evade or reduce support obligations. This involves analyzing the party’s actions and motivations. For example, if a party voluntarily leaves a high-paying job to take a lower-paying one without a justifiable reason, the court may infer an intention to reduce their support obligations. Similarly, if a party refuses reasonable job offers or fails to actively seek employment in their field, this can be considered evidence of intentional underemployment. The court will consider the party’s explanations for their employment decisions, but ultimately, the focus is on whether their actions are reasonable and justifiable in the circumstances.

Reasonable Efforts to Secure Suitable Employment are Essential:

Parties are expected to make diligent and proactive efforts to secure employment that aligns with their skills and experience. A lack of such efforts can strongly indicate intentional underemployment and lead to income imputation. This requirement extends beyond simply submitting a few job applications. It involves actively networking, attending job fairs, and pursuing professional development opportunities. The court will consider the party’s job search strategies, the number of applications submitted, and the quality of their efforts. Furthermore, the court will consider the availability of suitable employment opportunities in the party’s field and location. The party must demonstrate that they have made a genuine and sustained effort to find employment.

Evidence is Crucial in Imputation Cases:

Strong and credible evidence is paramount in supporting claims of income imputation. This includes vocational expert reports, which objectively assess a party’s earning capacity and document past earnings, employment history, and job search efforts. Vocational experts can provide valuable insights into the labour market, the availability of suitable positions, and the party’s potential earning capacity. Documentation of past earnings can help establish a baseline for the party’s earning potential. Evidence of job search efforts, such as application logs and correspondence with potential employers, can demonstrate the party’s commitment to finding employment. The strength of the evidence presented will directly impact the court’s decision on whether to impute income.

Appellate Courts Defer to Trial Judges’ Findings on Factual Matters:

Appellate courts generally defer to the findings of fact made by trial judges, particularly when those findings are based on assessing credibility and weighing evidence. Trial judges can observe witnesses firsthand and assess their demeanour and credibility. Therefore, appellate courts are reluctant to overturn trial judges’ findings of fact unless they are clearly unreasonable or unsupported by the evidence. This principle underscores the importance of presenting a strong and compelling case at the trial level.

Legitimate Reasons for Reduced Income: Acknowledging Reality

It’s vital to recognize that Ontario courts acknowledge that there can be legitimate reasons for a decrease in income. Factors such as genuine illness or disability, primary caregiving responsibilities, and reasonable efforts towards retraining or education will be taken into account. The court strives to balance fairness with an understanding of real-life circumstances.

Contact Shariff & Associates to Achieve a Fair Financial Outcome in Your Separation

The Kohli decision underscores the importance of honesty and transparency regarding income in Ontario family law proceedings. At Shariff & Associates, our dedicated family law team understands the complexities of separation and divorce. We’re committed to helping you navigate the division of net family property, ensuring you receive a fair and equitable outcome.

Beyond property division, we offer comprehensive legal services for all aspects of your separation, decision-making, parenting time, spousal support, and divorce proceedings.

To discuss your unique situation and how we can support you, please contact us online or today at 905-591-4545.