Child Support and the Non-Tax Costs of Tax-Planning Strategies - … · 2019-02-12 · (1997), Vol. 45, No. 3 / no 3 417 Child Support and the Non-Tax Costs of Tax-Planning Strategies

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Child Support and the Non-Tax Costsof Tax-Planning Strategies

Glenn Feltham and Alan Macnaughton*

PRÉCISLes coûts autres que fiscaux sont un sujet riche, mais négligé, derecherche dans tous les domaines de la planification fiscale. Ilsconstituent la raison pour laquelle des contribuables qui pourraientréduire leurs impôts en mettant en oeuvre certaines stratégies ne le fontpas. Les planificateurs fiscaux pourraient tirer profit d’articles danslesquels sont recommandées des stratégies de planification fiscales si cesarticles portaient sur les coûts autres que fiscaux connexes, le genre decontribuables pour lesquels ces coûts peuvent être les plus importants etla possibilité de modifier la stratégie fiscale afin de réduire ces coûts.Cette question est examinée dans cet article, en particulier l’application àdeux stratégies de planification fiscale à l’égard des pensions alimentairespour enfants existantes découlant du budget de 1996, soit la renégociationavant mai 1997 et la modification des pensions après avril 1997.

Les principaux coûts autres que fiscaux liés à ces stratégies relativesaux pensions alimentaires pour enfants, soit les incidences sur lesprestations d’aide sociale, les frais juridiques et les coûts non monétairesliés à ce sujet très émotif, sont examinés dans cet article. Ces coûts ysont quantifiés pour les payeurs et les récipiendaires de pensionsalimentaires pour enfants figurant dans une base de données duministère de la Justice, en utilisant des données tirées de sourcesgouvernementales et d’un sondage auprès de praticiens dans le domainedu droit de la famille. Cet exercice vise à prédire l’utilisation de stratégiesrelatives à la renégociation et à la modification des pensions.

Selon les résultats, les coûts autres que fiscaux réduisent le taux prévudes renégociations à moins de 1 pour cent et celui des modifications à

* Glenn Feltham is an assistant professor in the School of Business and Economics atWilfrid Laurier University and Alan Macnaughton is an associate professor in the Schoolof Accountancy at the University of Waterloo. We gratefully acknowledge financial assist-ance from the CGA-Canada Research Foundation, the Deloitte & Touche Centre for TaxEducation and Research at the University of Waterloo, the Ontario Ministry of the Attor-ney General, and the federal Department of Justice. We worked independently of thefunding organizations, and opinions expressed by us are our own and do not necessarilyreflect the opinions of those organizations. Some of the material used is Ontario govern-ment copyright material and is reproduced with permission. Tammi Feltham of WilfridLaurier University provided useful advice in designing the questionnaire. Helpful com-ments were received from Nick Bala, Jim Barnett, Carolynn Beange, Ken Klassen, an anonymousreferee, and participants in an interdepartmental seminar at the Ontario government.

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29 pour cent. Même un taux de 29 pour cent des modificationsaugmentera considérablement la charge des tribunaux, car il se traduit enun chiffre qui correspond à plusieurs fois le nombre d’ordonnances depensions alimentaires ou de modifications émises durant une annéetypique. Les recettes fiscales devraient initialement diminuer, car laplupart de ces modifications surviennent dans des cas où l’impôt payépar le récipiendaire sur le montant reçu auparavant dépassait l’économied’impôt découlant de la déduction pour le payeur.

ABSTRACTNon-tax costs—the reason taxpayers who could save taxes by executingcertain strategies choose not to do so—are a fruitful but neglected topicfor research in all areas of tax planning. Tax planners might benefit ifarticles recommending tax-planning strategies discussed the associatednon-tax costs, the types of taxpayers for whom these non-tax costs mightbe most important, and whether the tax-planning strategy could bealtered to reduce them. This article examines this issue in general, with aspecific application to two tax-planning strategies for existing childsupport awards created by the 1996 budget: renegotiation before May1997, and variation of awards after April 1997.

The article identifies the key non-tax costs associated with these childsupport strategies—social assistance effects, legal costs, and the non-monetary costs related to this emotionally charged issue—and quantifiesthese costs for a Department of Justice database of child support payersand recipients, using data from government sources and a survey offamily law practitioners. The purpose of this exercise is to predict the rateof use of the renegotiation and variation strategies.

The results show that non-tax costs reduce the predicted rate ofrenegotiations to less than 1 percent and lower the predicted rate ofvariations to 29 percent. Even a 29 percent rate of variations willsignificantly increase court loads, since it translates into a figure that ismany times the number of variations issued in a typical year. Tax revenueshould initially fall because most of these variations arise in situationswhere the tax paid by the recipient on the prior award exceeded the taxsaving from the deduction to the payer.

INTRODUCTIONArticles about tax-planning strategies, particularly those articles directedat tax practitioners, seldom discuss the non-tax effects that these strate-gies may produce. One way in which this “tunnel vision” can lead to poortax advice is that the tax practitioner may understate the benefits of thestrategies to clients by neglecting to mention their non-tax benefits. Forexample, spousal registered retirement savings plans (RRSPs) are oftenadvocated solely on the basis of income-splitting benefits, even thoughthe creditor-protection advantages (where the contributing spouse is sub-ject to business-related personal liability and the other spouse is not) may

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be much more significant for some taxpayers. More commonly, though,tax-planning strategies have non-tax costs that need to be discussed withclients. A strategy can save taxes and yet be a poor decision in the lightof the taxpayer’s overall goals.1

In a previous article, we described two strategies created by the 1996budget proposals to reform the tax and family law rules regarding childsupport.2 First, before May 1, 1997, parties to an existing child supportorder or agreement could have renegotiated the amount of their childsupport payments in order to preserve the benefits of the old deduction-inclusion tax regime while adjusting to the new scale of awards in thefederal child support guidelines.3 Second, on or after May 1, 1997, anyparty to a child support award can unilaterally cause a movement to thenew no-deduction and no-inclusion tax regime by going to court to seek avariation of the award. The two strategies are mutually exclusive in thatparties who have renegotiated will have no motivation to seek a variation.

Non-tax costs are important in determining the popularity of thesestrategies. For example, revisiting the previously settled issue of childsupport may be emotionally costly and may call into question some otheraspect of the post-breakup arrangements, such as custody or visitationrights. In addition, there may be significant legal costs or, for those whochoose to represent themselves, costs in time, aggravation, and uncer-tainty about the outcome.4 Finally, for payers and recipients on socialassistance, any change in the amount of child support paid or receivedmay be fully offset by changes in social assistance payments.

Non-tax costs of child support strategies are of interest to both taxplanners and policy makers. A key question for policy makers is theextent to which the courts will be clogged with variation applicationsafter May 1, 1997. It is estimated below that roughly 388,000 child supportawards are currently in place; if a substantial proportion of these awardsis to be varied, the courts could experience major backlogs. High non-taxcosts could reduce the number of variation applications that would other-wise occur. Another question of interest to policy makers is the tax revenueimplications of the new tax rules. Although tax revenue must ultimatelyincrease as the $410 million tax subsidy is eliminated (as the awardsunder the inclusion-deduction regime phase out), tax revenue could eitherincrease or decrease in the next few years according to the popularity of,and the circumstances of the persons seeking, renegotiations and variations.

1 In the academic accounting literature, this issue was first raised by Myron Scholesand Mark Wolfson, Taxes and Business Strategy: A Planning Approach (Englewood Cliffs,NJ: Prentice-Hall, 1992), 127. Scholes and Wolfson contrast tax minimization with effec-tive tax planning, the difference being that the latter takes non-tax costs into account.

2 Glenn Feltham and Alan Macnaughton, “The New Child Support Rules and ExistingAwards: Choosing the Best Tax and Family Law Regime” (1996), vol. 44, no. 5 CanadianTax Journal 1265-95.

3 A “child support award” is either a court order or a written agreement for child support.4 Parties who do not represent themselves also incur these latter costs, but to a lesser degree.


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The main purpose of this article is to identify the major non-tax costsassociated with the two new tax-planning strategies for child supportcreated by the 1996 budget—renegotiation and variation—and to use thisinformation to predict the number of child support payers and recipientswho will employ these two strategies. Data on non-tax costs are obtainedfrom government sources and a survey of family law practitioners. Thesedata are integrated into a model of the behaviour of parties to child sup-port awards. This model is applied to a publicly available database ofchild support awards, created by the Department of Justice, to producepredictions of the rate of use of the renegotiation and variation strategiesand the consequences for court loads and tax revenue.5 The degree towhich specific non-tax costs affect the use of these two tax-planningstrategies also is studied. Although the deadline for employing the rene-gotiation strategy has now passed, the significance of non-tax costs indetermining the use of this strategy may be useful in studying future tax-planning strategies.

A second purpose of this article is to examine in a more general settingthe role of non-tax costs in tax planning. Accordingly, we begin with areview of the concept of non-tax costs (and the literature relating to it).Next, we briefly describe the statutory changes in child support and theassociated tax-planning strategies. In the main section of the article, wereview the data on payers and recipients available from the Departmentof Justice, government sources, and our own survey of family law practi-tioners. Models of taxpayer behaviour both excluding and including non-taxcosts are presented in the following section. A results section presents ourfindings. Finally, we summarize the conclusions of the study and suggestdirections for further research.

TAX PLANNING AND NON-TAX COSTSResearch on Tax PlanningJoel Slemrod has proposed the following classification of behaviouralresponses to taxes:6

• altering the timing of economic transactions;

• varying financial and accounting responses, including reshufflingindividuals’ portfolios (such as moving existing savings into tax-shelteredvehicles) and repackaging firms’ financial claims (such as changing themix of firms’ financing among debt, common shares, and preferred shares);and

5 The reasons we chose not to rely on family law practitioners’ estimates of the aggre-gate rates of variation and renegotiation are as follows: few family law specialists had asyet examined the costs and benefits for their own clients; even if they had looked atspecific cases, they might not have thought about average effects on their own client base;and they would not be aware of the effects on other lawyers’ practices.

6 Joel Slemrod, “The Economic Impact of the Tax Reform Act of 1986,” in Joel Slemrod,ed., Do Taxes Matter? The Impact of the Tax Reform Act of 1986 (Cambridge, Mass.: MITPress, 1990), 1-12.


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• changing real (that is, non-financial) economic behaviour—saving,labour supply (hours worked), investment, location decisions of busi-nesses, charitable donations, etc.

The boundaries between the categories are sometimes blurred. For exam-ple, if a contribution to an RRSP represents net new saving, it is a changein real economic behaviour, while if it is simply a reshuffling of a portfo-lio, it is a financial or accounting response.

Slemrod argues that this list of behavioural responses is a hierarchy, inthat the top items are the types of behaviour that are most likely to beaffected by taxes while the bottom items are the least likely to be af-fected. This accords with the understanding of tax practitioners in thatpractitioners’ work with clients is clearly concentrated in the top twoitems of this hierarchy. Perhaps for this reason the term “tax planning” isgenerally used to refer only to these high-response types of behaviour.

Michael Brooks and John Head argue that the reason that the top itemson Slemrod’s list are so popular is that their benefit-cost ratio may bevery high. Brooks and Head point to the widespread popularity in Aus-tralia of “contrived and artificial schemes, which do not change thesubstantive character of an activity or transaction but may serve neverthe-less to bring the activity within some tax-exempt or more tax-favouredlegal category” and argue that these schemes are popular because theywere “without significant cost to the taxpayer whether in legal fees or, ineconomic terms, from the adoption of inferior business forms or commer-cial practices.”7

Research on the behavioural response to taxes has been concentratedon the low-response types of behaviour, on which there are abundant datagathered by Statistics Canada and similar agencies in other countries.Thus, there is a vast literature on tax effects on saving, labour supply, andother types of real economic behaviour, reflecting economists’ concernfor the excess burden of taxes.8 At first, it might seem that there is asimilarly vast literature on the tax-planning element of the behaviouralresponse spectrum; however, most of the published Canadian research ontax planning, particularly that directed at tax practitioners, has been lim-ited to describing the tax rules and identifying tax-planning strategies.Non-tax costs and benefits are typically ignored. Even the limited empiri-cal research has concentrated mainly on measuring the responsiveness ofbehaviour to changes in tax rules without attempting to determine why

7 Michael Brooks and John Head, “Tax Avoidance: In Economics, Law and PublicChoice,” in Graeme S. Cooper, ed., Tax Avoidance and the Rule of Law (Amsterdam: IBFDPublications, 1997), 53-91, at 71.

8 See the references cited in Richard M. Bird, David B. Perry, and Thomas A. Wilson,“Tax Policy Forum: Tax System of Canada” (January 9, 1995), 10 Tax Notes International152-80. As Brooks and Head, supra footnote 7, at 71, argue, the fact that the efficiencycosts (excess burdens) of tax-planning schemes may be small should not give policymakers much comfort because the costs in horizontal and vertical equity may be large.


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that degree of responsiveness is observed.9 In essence, all the non-taxfactors that determine taxpayer behaviour are dumped into a black boxlabelled “taxpayer preferences.” Fortunately, this situation has been im-proving in recent years. The literature on estate planning10 and businessacquisitions11 indicates the type of practitioner-oriented research that couldbe conducted in this area.

Research on Non-Tax CostsEssentially, non-tax costs are in evidence where a taxpayer who couldsave taxes by executing a strategy chooses not to do so. Since no tax-planning strategy is adopted by all eligible taxpayers, every strategy hasassociated with it a particular set of non-tax costs. Thus, non-tax costs areextremely diverse.

Most research on non-tax costs has examined tax-planning strategiesof firms that reduce tax payable at the cost of reducing the amount of thefirm’s book income reported to shareholders, lenders, customers, suppli-ers, regulators, and compensation committees.12 The Canadian evidenceon this point is mixed; book-income concerns do not appear to constrainfirms in making the tax-saving choice of average-cost rather than first in,first out inventory accounting methods, while Canadian banks do appearto limit tax deductions for loan loss accruals because of the depressingeffect on book income.13

Perhaps the most interesting example of research on non-tax costs wasconducted by the federal Department of Finance in 1984 in connectionwith the development of a proposal for a corporate loss transfer system.14

9 This deficiency may be partly due to data limitations since specially designed surveysare often required to obtain the needed information. For examples of this literature, seeS.F. Venti and D.A. Wise, “RRSPs and Saving in Canada” (unpublished manuscript, 1994);Gary V. Engelhardt, “Tax Subsidies to Saving for Home Purchase: Evidence from Cana-dian RHOSPs” (June 1994), 47 National Tax Journal 363-88; and Alexander M.G. Gelardi,“The Influence of Tax Law Changes on the Timing of Marriages: A Two-Country Analy-sis” (March 1996), 49 National Tax Journal 17-30.

10 See Constantine A. Kyres, “The Use of Non-Resident Trusts for Estate Planning andAsset Protection” (1995), vol. 43, no. 2 Canadian Tax Journal 314-46; and James J.Barnett and James W. Kraft, “Estate Planning for the Business Owner: A Case Study,”Personal Tax Planning feature (1996), vol. 44, no. 5 Canadian Tax Journal 1416-48.

11 Graham Turner, “Tax Issues in Acquisition Agreements,” in Income Tax and GSTPlanning for the Purchase, Sale, and Canada-US Expansion of a Business, 1996 CorporateManagement Tax Conference (Toronto: Canadian Tax Foundation, 1996), 8:1-26.

12 Alan Macnaughton and Amin Mawani, “Tax Minimization Versus Good Tax Plan-ning” (January-February 1997), 130 CA Magazine 40-43, at 41-42.

13 Jeffrey J. Archambault and Marie E. Archambault, “Inventory Accounting PolicyChoice Among Canadian Firms” (1994), 3 Journal of International Accounting Auditing &Taxation 153-67; and Peter Chen and Lane Daley, “Regulatory Capital, Tax, and EarningsManagement Effects on Loan Loss Accruals in the Canadian Banking Industry” (1996), 13Contemporary Accounting Research 91-128.

14 See Stephen R. Richardson, “Transfers of Deductions, Credits, or Losses WithinCorporate Groups: A Department of Finance Perspective,” in Report of Proceedings of the

(The footnote is continued on the next page.)


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Officials met with representatives of about 20 corporate groups based inVancouver, Calgary, Toronto, and Montreal. Although this was a smallsample and was not selected on a random basis, many different types oftaxpayers were involved. The Department of Finance found that manycorporations were unable to transfer losses to taxable corporations withinthe group because of a wide variety of non-tax costs. For example, withrespect to the use of amalgamations or windups to reduce the number ofseparate corporations, the following non-tax costs were identified:

• corporations operating in regulated industries are either directly lim-ited in how they must conduct their activities or indirectly encouraged bythe existence of regulations to operate non-regulated business in separatecorporations;

• profit centre management controls may not operate as well if theseparate corporate status is eliminated;

• debt covenants may have evolved that restrict different members ofthe group to different degrees;

• minority shareholders may block or delay the reorganization;• groups with high-risk projects or startup situations may conduct ac-

tivities through separate corporations in order to limit liability to theequity directly related to individual projects; and

• the cost of the reorganization in money and management time maybe considerable.Essentially, the problem with reducing the number of separate corpora-tions is that the existing structure was set up for good business reasons;these reasons are the non-tax costs of the strategy.

Why Study Non-Tax Costs?Non-tax costs are of interest to both tax practitioners and tax policymakers. For tax practitioners, it is a question of the division of effortbetween the planner and the client. Sometimes the non-tax costs involvedin a tax-planning strategy are obvious to both practitioners and their cli-ents. In that case, little may be gained by examining them in detail. Forexample, when there was a tax advantage in Canada to marrying in De-cember,15 tax practitioners could leave it to their clients to assess thenon-tax costs of changing their marriage date. In other situations, non-taxcosts may not be obvious to the client; it is then important for the taxpractitioner to identify and discuss these issues with the client. For exam-ple, there are numerous non-tax problems associated with estate freezes.16

Thirty-Sixth Tax Conference, 1984 Conference Report (Toronto: Canadian Tax Founda-tion, 1985), 737-54, at 750-51; and Canada, Department of Finance, A Corporate LossTransfer System for Canada (Ottawa: the department, May 1985), 5-7.

15 Gelardi, supra footnote 9.16 For example, the children may have legally enforceable rights even if the parent has

retained control of the corporation: Brian Nichols, “The Frosty Estate Freeze” (November1995), Legal eeze 1-5.

14 Continued . . .


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Worse yet, the non-tax costs may be obvious to the client but not to thepractitioner, in which case the practitioner can lose the client’s confi-dence by making unacceptable tax-planning recommendations. Therefore,a key advantage of expanding research on tax planning to include non-taxcosts and benefits of the suggested tax-planning strategies is that thismore comprehensive approach provides a better basis for sound businessand personal decision making.

One way to conceptualize the effect of including non-tax costs in taxplanning is to think of the transition from a tax technician to a tax adviserin a law or accounting firm. Through education and training, a firm willseek to develop a tax technician—a person who is competent at technicalresearch—into a tax adviser—a person who can integrate this researchwith client and other factors in order to arrive at an effective tax plan foreach client. This process may be thought of, as illustrated in figure 1, asa process of moving from narrow technical knowledge to broad technicalknowledge and of moving from shallow knowledge of the client to deepclient knowledge. Understanding of non-tax costs could come either fromthe broadening of technical knowledge to include non-tax matters or from thedeepening of client knowledge to include client objectives and concerns.17

The identification of non-tax costs may also point the way to adjust-ments in the tax-planning strategy that can reduce these costs whilemaintaining the tax benefits. For example, a study of limited partnershipsin US oil and gas exploration found that structuring the deals to achievethe greatest tax savings created a problem in that the general partner wasoften motivated to take actions that harmed the limited partners. How-ever, it was found that this problem was much smaller in exploratorydrilling than in development drilling. Consequently, if the most tax-advantageous structure was used for exploratory drilling only, the taxbenefits could be achieved with lower non-tax costs.18 Later work con-firmed that the same reasoning applied to the industry in Canada.19

One problem in taking non-tax costs into account in tax planning isthat while it may be possible to identify the non-tax impacts, it is oftenimpossible to quantify them. This makes it difficult to compare them withthe more easily quantifiable tax impacts. However, that does not meanthat non-tax impacts should be ignored; rather, it is ultimately a questionof client preferences as to how to balance the tax and non-tax considera-tions. Practitioners may need to consult their clients on the appropriateweight to be given these different considerations.

17 We are indebted to Jim Barnett for suggesting this diagram.18 Mark A. Wolfson, “Empirical Evidence of Incentive Problems and Their Mitigation

in Oil and Gas Tax Shelter Programs,” in John Pratt and Richard Zeckhauser, eds., Princi-pals and Agents: The Structure of Business (Cambridge, Mass.: Harvard Business SchoolPress, 1985), 101-25.

19 Jacques Schnabel and Philip Chang, “Agency Problems in Canadian Oil and GasLimited Partnerships” (November 1989), 23 CGA Magazine 45-49.


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In summary, tax planners might benefit if articles recommending tax-planning strategies discussed the possible non-tax costs, the types oftaxpayers for whom these non-tax costs might be most important, andwhether the tax-planning strategy could be altered to reduce them.

Non-tax costs are important to tax policy makers because of their in-fluence on the impact of the tax system on the economy. In particular,non-tax costs can be an impediment to the effectiveness of tax incentives.For example, although the government has tried to increase retirementincomes through the RRSP program and has certainly achieved some suc-cess in that effort, retirement incomes are not likely to increase as muchas might be hoped because of the difficulty individuals experience insaving the permitted amounts.20 The creation of an indefinite carryforwardresponds to this problem of non-tax costs by allowing taxpayers to catchup on contributions in later years.

Non-tax costs can also affect the economy by reducing tax avoidance21

and thereby decreasing both revenue losses and the erosion of taxprogressivity.22 For example, the 1959 Dunkelman case23 held that a

Target

Shallow Deep

Narrow

Broad

Knowledge of the client

Technicalknowledge

Figure 1 Goals of Tax Education and Training

20 In particular: only one-third of people with non-zero RRSP contribution limits actu-ally put money into RRSPs in any given year (Bruce Cohen, “Pay Attention toCarry-Forward Calculation,” The Financial Post, February 23, 1996); only about 11 per-cent make the maximum contributions (Robert Gibbens, “Take Maximum Advantage ofContribution Room—RRSPs,” The Financial Post, February 23, 1996); and total RRSPcontributions deducted in 1995 were just 13 percent of the $153 billion of available contri-bution room (Bruce Cohen, “RRSP Contributions Up Again,” The Financial Post, October22, 1996).

21 Scholes and Wolfson, supra footnote 1, at 104.22 Brooks and Head, supra footnote 7, at 71.23 Dunkelman v. MNR, 59 DTC 1242 (Ex. Ct.).


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taxpayer could circumvent the attribution rules in the Income Tax Act24

by the use of interest-free loans. Nevertheless, for many years the gov-ernment did not feel a need to amend the Act to restrict such strategiesbecause non-tax costs (primarily professional fees) limited the amount oftax avoidance. It was only when tax advisers lowered these costs throughthe use of boilerplate loan agreements in the mid-1980s that the govern-ment was compelled to act to protect its revenue base and to preserverespect for the tax system.

Tax policy makers can particularly benefit from empirical research thatquantifies the importance of the non-tax costs of particular tax-planningstrategies and predicts which types of taxpayers will use which strategies.This information can then be used in conjunction with data sets of per-sonal and corporate tax returns or similar data to project the revenueeffects of changes in tax law. US experience with estimating the rev-enue effects of changes in tax laws concerning capital gains shows thatthe conclusions can be very sensitive to assumptions about tax-planningbehaviour.25 This article performs such an exercise in the area of taxplanning related to child support.

THE NEW CHILD SUPPORT REGIMETax RulesIncome tax amendments stemming from the 1996 federal budget replacethe previous system of a tax deduction for the payer of child support andan income inclusion for the recipient of child support with a new systemthat provides no tax recognition. This change does not apply to spousalsupport.26 It also generally does not apply to child support awards madebefore May 1, 1997.27

The process of defining the amount that is deductible to the payer andincludible to the recipient begins with the definitions in subsection 56.1(4)of the Act.28 A “support amount” is essentially any payment of child or

24 RSC 1985, c. 1 (5th Supp.), as amended (herein referred to as “the Act”). Unlessotherwise stated, statutory references in this article are to the Act.

25 Michael D. Bopp, “The Roles of Revenue Estimation and Scoring in the FederalBudget Process” (September 21, 1992), 56 Tax Notes 1629-52.

26 However, awards made after April 1997 that include an element of spousal supporthave to be registered with Revenue Canada using form T1158.

27 Bill C-92, An Act To Amend the Income Tax Act, the Income Tax Application Rulesand Another Act Related to the Income Tax Act; SC 1997, c. 25; given royal assent onApril 25, 1997. For further commentary, see Nicholas Bala, “Tax Changes and the NewChild Support Regime,” in Child Support Guidelines Reference Manual (Ottawa: Depart-ment of Justice, forthcoming); James C. MacDonald and Ann Wilton, Child SupportGuidelines in Divorce Proceedings: A Manual (Toronto: Carswell, 1997); and Law Societyof Upper Canada, Child Support Guidelines: A Fresh Look, proceedings of a conferenceheld in Toronto on June 4, 1997 (Toronto: LSUC, 1997).

28 Subsection 60.1(4) provides that the definitions in subsection 56.1(4) also apply forthe purpose of the rules for the payer in sections 60 and 60.1.


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spousal support that satisfies the existing criteria for deduction and inclu-sion, such as the requirement that there be a written agreement or a courtorder and that the payment be periodic. Further, a “child support amount”is defined as a support amount that is not identified as being “solely” forthe support of a spouse or former spouse or the parent of the payer’schild. Thus, there is a presumption that any support amount is child sup-port. If the written agreement or court order specifies a global amount ofsupport without separately identifying the amount that relates to the child,the entire amount will be treated as child support.

Paragraphs 56(1)(b) and 60(c) provide no deduction or inclusion forchild support payments required to be made on or after the “commence-ment day” of the agreement or order. According to the definition of“commencement day” in subsection 56.1(4), a commencement day existsfor an agreement or order made before May 1997 only in very limitedcircumstances:

• the payer and recipient file a joint irrevocable election with RevenueCanada (form T1157) specifying a commencement day that is on or afterMay 1, 1997;

• the order or agreement is varied, or a subsequent agreement or orderis made, on or after May 1, 1997 (in which case the commencement day isthe day on which the first of the new payments is required to be made); or

• the order or agreement specifies a day on or after May 1, 1997 onwhich the new rules are to begin to apply (in which case that day is thecommencement day).

In the latter two cases, Revenue Canada requires the filing of form T1158,“Registration of Family Support Payments.”

Thus, a child support agreement or order made before May 1997 willgenerally not have a commencement day and hence will continue to re-ceive the deduction-inclusion treatment indefinitely. On the other hand,an agreement or order made after April 1997 will generally have a com-mencement day—the day it is made—and therefore all payments under itwill be non-deductible to the payer and non-taxable to the recipient.

Under limited circumstances, an award made before the end of 1998for which payments have started before May 1997 may still be eligiblefor deduction-inclusion treatment. In particular, where an agreement ororder made in a taxation year provides that an amount paid and receivedin the year or in the preceding year is paid and received under that orderor agreement, the order or agreement is deemed to have been made at thetime the first such amount was paid and received. However, this priorpayments rule does not apply if the amount of the payment changes afterApril 1997; hence, this provision cannot be used to extend the deadlinefor the renegotiation strategy beyond April 1997.29

29 Subsections 56.1(3) and 60.1(3).


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Family Law RulesCourts and spouses are to be given guidance in setting the levels of childsupport awards through new family law rules. Effective May 1, 1997,new section 15.1 of the Divorce Act30 provides that a court making anorder for child support shall do so in accordance with regulations underthat Act, the federal child support guidelines.31 This rule applies to neworders and, as discussed in more detail below, to variations of existingawards. If a province enacts its own guidelines, as Quebec has done, thesewill replace the federal guidelines where both parties reside in the province.32

Generally, the federal guidelines will not apply in the case of separa-tion or where the parents were not married because these situations aregoverned by provincial or territorial family law. If the guidelines are tocover awards in these situations, amendments to provincial family lawlegislation will be required. At the time of writing, only Ontario hasintroduced such amendments,33 but other provinces are expected to followshortly.

The federal child support tables, which are part of the guidelines, setout standard monthly amounts of child support that vary by the payer’sincome, the number of children, and the payer’s province or territory ofresidence.34 These amounts are specified by the bracket approach madefamiliar from personal income tax, except that instead of three bracketsthere are approximately 145 for each combination of province and numberof children. The bracket dividing points are generally at whole thousandsof dollars of income, with the top bracket beginning at $150,000.

The measure of the income of the payer is the payer’s “Total Income”in the T1 General form issued by Revenue Canada.35 Schedule III of theguidelines specifies a number of adjustments to that amount, such asreplacing the grossed-up amount of dividends with the actual cash amount,including the total amount of capital gains instead of just the taxable

30 Bill C-41, An Act To Amend the Divorce Act, the Family Orders and AgreementsEnforcement Act, the Garnishment, Attachment and Pension Diversion Act and the CanadaShipping Act; SC 1997, c. 1; given royal assent February 19, 1997; section 2.

31 PC 1997-469, SOR/97-175 (1997), vol. 131, no. 8 Canada Gazette Part II 1031-1124 (herein referred to as “the guidelines”). These guidelines are available on the Internetat http://canada.justice.gc.ca/Orientations/Pensions/Child/index_en.html.

32 Bill C-41, supra footnote 30, section 1(4), adding section 2(5) to the Divorce Act,RSC 1985, c. 3 (2d Supp.), as amended.

33 Bill 128, An Act To Amend the Family Law Act To Provide for Child SupportGuidelines and To Promote Uniformity Between Orders for the Support of Children Underthe Divorce Act (Canada) and Orders for the Support of Children Under the Family LawAct (Uniform Federal and Provincial Child Support Guidelines Act), first reading May 1,1997. The federal guidelines will not apply in the situations referred to until this billcomes into force.

34 Guidelines, supra footnote 31, section 3(1). The table is provided in schedule I to theguidelines.

35 Guidelines, supra footnote 31, section 16.


(1997), Vol. 45, No. 3 / no 3

portion, and deducting the amount of interest expense deductible underthe Income Tax Act.

Courts are allowed to vary the child support award from the amountspecified in the tables in three situations. First, for amounts of payer’sincome above $150,000, some judicial discretion is allowed.36 Second,the award can be increased by “add-ons” if there are expenses for work-related child care, medical and dental premiums for the child, health-relatedexpenses that exceed insurance reimbursement by at least $100 annuallyper illness or event, expenses for post-secondary education, or extraordi-nary (high?) expenses for the child’s extracurricular activities orelementary, secondary, or special-needs education. These expenses mustbe necessary in relation to the best interests of the child and reasonable inthe light of the spouses’ means and pattern of spending before the separa-tion. Expenses must be measured net of any subsidy, benefit, or incometax deduction or credit relating to the expense. If such expenses exist, theshare of these expenses (net of the child’s contribution, if any) equal tothe payer’s share of the total income of the two parties may be added tothe amount from the tables.37 Third, the award can be increased or de-creased if the child or either parent would otherwise suffer undue hardship;for instance, a parent may have an exceptional level of debt or unusuallyhigh access costs, or may support other children. A court shall not applythis provision if the household of the spouse pleading undue hardship hasa higher standard of living than the household of the other spouse, and forthis purpose an objective test is offered.38

Tax-Planning Strategies for Existing AwardsAs discussed above, an award that is in existence at the end of April 1997(herein referred to as an “existing award”) will become subject to boththe new family law rules and the new tax rules if it is varied after thattime. On the other hand, if there is no such variation and the parties donot file a joint election with Revenue Canada to be taxed under the newrules or provide a clause to that effect in the award, the old rules willcontinue. Thus, the conditions under which a variation may be obtainedare important.

Under section 17(4) of the Divorce Act, a change in circumstancesentitles a person to a variation of the child support amount. For a court-ordered child support amount, paragraph 14(c) of the guidelines providesthat the coming into force of the Divorce Act amendments authorizing theguidelines, which occurred on May 1, 1997, is deemed to be such achange in circumstances. The entitlement to a variation is only slightlyless absolute for child support paid under an agreement. Paragraph 14(b)of the guidelines relates to the situation where the amount of child support

36 Ibid., section 4.37 Ibid., section 7.38 Ibid., section 10.


(1997), Vol. 45, No. 3 / no 3

does not include a determination made in accordance with the federalchild support tables, which would be the case for any existing agreement.This paragraph provides that a change in circumstances is any change inthe condition, means, needs, or other circumstances of either spouse or ofany child who is entitled to support. Since no threshold is provided, itappears that even a minor change in any of these factors would be suffi-cient. Thus, for an existing child support award, either party is entitled toa variation as an automatic or almost-automatic right. In other words, thetransitional rules allow persons with existing awards to choose betweenthe old tax and family law regime and the new regime.

Section 17(6.2) of the Divorce Act provides one qualification to theabove analysis: deviations from the guidelines are allowed if “specialprovisions have otherwise been made for the benefit of a child” andapplication of the guidelines “would result in an amount of child supportthat is inequitable given those special provisions.” This might apply, forexample, if the payer has gone beyond the asset equalization provisionsof family law and allowed the child (and the recipient) to occupy thematrimonial home. If the courts put a broad application on these words,the right to a variation might not be quite so automatic.

In summary, the legislation stemming from the 1996 budget createstwo new tax-planning strategies for parties with existing child supportawards. First, either of the parties could seek a variation on or after May1, 1997 and thereby come under both the new family law rules and thenew tax rules.39 Second, the parties could choose to avoid such a varia-tion by renegotiating their child support award before May 1, 1997 tocreate a new child support amount that would continue to be subject tothe inclusion-deduction tax regime indefinitely. This would be advanta-geous if a variation would otherwise occur and there was a “tax subsidy”created by the payer’s having a higher marginal tax rate applicable to thechild support than that of the recipient, and the benefit could be shared inorder to make both parties better off relative to the situation in which avariation was obtained.40

DATA ON PAYERS AND RECIPIENTSMatched Payer-Recipient DataTo predict how many payers and recipients will use these two new strat-egies, it is necessary to have data on the characteristics of payers andrecipients. A survey was conducted for the Department of Justice in Ot-tawa of court orders issued between September 1991 and May 1992 in sixprovinces and territories: Alberta, British Columbia, New Brunswick,

39 A way to have the new tax rules apply without seeking a variation is for the payerand the recipient to file the joint election (form T1157) with Revenue Canada. This couldbe useful where the current payment is close to the guideline amount and the party whowill lose by this election is willing.

40 For more details, see Feltham and Macnaughton, supra footnote 2, at 1287.


(1997), Vol. 45, No. 3 / no 3

Ontario, Northwest Territories, and Yukon. The resulting information wascollected and released publicly as the child support award database.41 Thedatabase uses a relatively large sample of 708 separated or divorced cou-ples and contains complete information on the amount of child support,the incomes of both parents, and the number and age of the children.

The Department of Justice database is superior to the T1 personal in-come tax model used by the Department of Finance in that it links thepayers of child support payments to their recipients.42 In other words, oneknows for each award both the income of the payer and the income of therecipient. This is essential for this study because the benefits of each tax-planning strategy depend on both parties’ incomes. For example, inconsidering whether to seek a variation, a recipient needs to know thepayer’s income in order to determine the amount that would be awardedunder the federal child support guidelines. Also, to determine whether ornot renegotiating is beneficial to both parties, one needs to know therelative tax rates of the payer and the recipient on the support payment.

There is anecdotal information that amounts of child support orderedby courts have risen significantly since the survey was conducted in 1991-1992.43 However, for this study, one wants a representative sample of thepopulation of existing awards, since this is the group that is eligible to berenegotiated or varied. From our survey of family law practitioners (dis-cussed below), we find that the average length of time that an award is ineffect is 5.9 years. Thus, the 5-year age of the survey data is almost idealfor this purpose.

Recipients’ incomes tend to be quite low; in the Department of Justicedatabase, 45 percent have less than $15,000 of income other than childsupport and only 1 percent have non-support income over $50,000. Therest of the income distribution is as follows: $15,000-$20,000, 17 per-cent; $20,000-$25,000, 13 percent; $25,000-$30,000, 8 percent; and$30,000-$50,000, 15 percent. The mean income is $19,590, and the me-dian is $16,200.

Payers’ non-support incomes tend to be higher. Only 14 percent ofincomes are below $15,000, while 10 percent are over $50,000. The restof the income distribution is as follows: $15,000-$20,000, 15 percent;$20,000-$25,000, 18 percent; $25,000-$30,000, 10 percent; and $30,000-$50,000, 34 percent. The mean income is $31,193, and the median is$25,992.

41 Daniel Stripinis, Study on the Levels of Child Support Awards in Selected Sites inCanada, Department of Justice Technical Report TR1994-6e (Ottawa: the department, 1994).

42 The T1 model is described in Anil Gupta and Vishnu Kapur, “Microsimulation Mod-elling Experience at the Canadian Department of Finance,” in Ann Harding, ed.,Microsimulation and Public Policy (Amsterdam: Elsevier, 1996), 47-67.

43 Bala, supra footnote 27, at note 1.


(1997), Vol. 45, No. 3 / no 3

A potential problem with the survey is that, in comparison with the T1personal income tax model, low-income payers are somewhat over-represented, although the distribution of recipients’ incomes seems aboutright. The reason may be that the survey covers only court orders, whilehigh-income payers tend to prefer agreements so as to avoid publicity.The Department of Finance has constructed adjustment factors that in-crease payers’ incomes to offset this effect, but it is not clear whether ornot the analysis is improved as a result.44 We chose not to use theseadjustment factors in this study.

Number of Child Support AwardsOur models forecast the percentage of existing child support awards thatwill be renegotiated before May 1, 1997 or varied after April 30, 1997. Toconvert this percentage to a number, it is necessary first to know thenumber of existing awards. This figure is more slippery than one wouldat first expect. From taxation sources, the number of child and spousalsupport cases for 1997 in Canada is estimated as 415,077. (This is aprojection of the number of payers who will take a deduction in 1997; weuse the payer figure because it is more representative.) The Departmentof Finance estimates that 85 percent of these cases, approximately 353,000,represent payers of child support.45

It must be recognized that this figure will generally understate the truenumber. First, where the payer’s tax rate on the support is less than therecipient’s, there is an incentive for the parties to agree to a paymentwithout income deduction and inclusion. Second, some payers would notfile a personal income tax return (for instance, because they would nothave tax payable after paying child support). Finance’s figure could, ofcourse, overestimate the amount to the extent that there is tax evasion(the taking of a deduction for amounts not paid), although this appears tobe of lesser importance.

We have attempted to calculate roughly the extent to which these num-bers understate the total number of cases. On the basis of discussionswith officials of the Department of Finance and Revenue Canada, wepresume that the Finance estimate of payers understates the number ofawards by 10 percent. That is, we use a figure of 388,000 as the numberof awards in Canada for 1997. For Ontario alone, we estimate the numberof awards to be 152,000.

Data on Non-Tax CostsThe non-tax costs of the two tax-planning strategies fall into three cat-egories: social assistance, legal costs, and non-monetary costs.

44 Nathalie Martel, “Submission to the Tax Court of Canada re Irene Fisher v. HerMajesty the Queen” (Department of Finance, 1993). See Feltham and Macnaughton, suprafootnote 2, at 1285, footnote 34.

45 The 85 percent figure was derived from the T1 database as the number of recipients withchildren under 18 divided by the total number of recipients of child and spousal support.


(1997), Vol. 45, No. 3 / no 3

Lack of knowledge also may be an issue, since there is a misconcep-tion in some quarters that the new tax and family law rules do not applyto existing awards.46 However, that may be only a temporary problem. Inour survey of family lawyers (discussed below), we asked respondentswhether they would inform previous clients about the new law and itsimplications: 13 of 20 stated that they would, 5 stated that they wouldnot, and 2 said that they did not know. Four of the 5 who stated that theywould not inform past clients believed that to do so may constitutesolicitation and hence may be unethical. Of course, even those who try toinform past clients may be unsuccessful because the clients may have moved.

Social AssistanceFor payers and recipients on social assistance, any change in the amountof child support paid or received may be fully offset by changes in socialassistance payments.47 This imposes a high non-tax cost that completelyeliminates the financial benefit of varying or renegotiating the award.

Identifying the population in our database who receive social assist-ance is impossible. However, the Ontario Ministry of Community andSocial Services estimates that approximately 75,000 child support awardsin this province involve people receiving social assistance. Using theglobal figure for Ontario of 152,000 awards, approximately 50 percent ofall cases involve social assistance.48 Since this approximately matches thepercentage of recipients in our database who have incomes below $15,000,we assumed that all recipients with incomes before child support of$15,000 or less are on social assistance. Since these parties have ex-tremely high non-tax costs of variation or renegotiation, we assumed thatnone of them would use these strategies. The income data shown aboveindicate that recipients generally have lower incomes than payers, andhence this social assistance effect is largely restricted to recipients.

Legal CostsTo determine legal costs, a telephone survey of family law practitionerswas conducted by one of the authors (Glenn Feltham, who has legaltraining), on January 30 and 31, 1997. Pretesting of questions occurredearlier in the week.

Twenty family law practitioners completed the survey, which was spon-sored by the Ontario Ministry of the Attorney General. The survey took

46 For example: “New rules on the setting of support payments, which come into effectMay 1 but don’t apply to existing situations, may offer relief in future to separated womenand their children”: Eric Beauchesne, “Separation Costly for Women” The (Kitchener)Record, April 10, 1997.

47 See the Ontario Family Benefits Act, RSO 1990, c. F.2, as amended, and similarstatutes in other jurisdictions.

48 It has been estimated that 37 percent of all income of lone mothers under 35 comesfrom social assistance: Martin Dooley, “Lone-Mother Families and Social Assistance Policy,”in M. Dooley, R. Finnie, S. Phipps, and N. Naylor eds., Family Matters: New Policies forDivorce, Lone Mothers and Child Poverty (Toronto: C.D. Howe Institute, 1995), 35-104, at 49.


(1997), Vol. 45, No. 3 / no 3

approximately 30 minutes of each practitioner’s time. No one who wascontacted refused to complete the survey; therefore, a non-response biasdoes not exist.

The family law practitioners were drawn about equally from three lists:the Canadian Bar Association of Ontario Family Section; the family lawspecialists of Ontario certified by the Law Society of Upper Canada; andthe Advocates’ Society Family Law Subcommittee. Of the 20 respond-ents, 10 were from the Metropolitan Toronto area and 10 were drawnfrom other parts of the province, including every geographic region inOntario. The degree of error introduced by the use of these Ontario fig-ures for projections for Canada as a whole is unknown. We attempted tocontact every person on the three lists, but some were unavailable at thetime the survey was conducted.

The respondents’ average payer client earns $60,650 annually (ques-tion 15) and average recipient client earns $23,850 (question 16). Althoughthese figures are significantly higher than the average incomes of payersand respondents in the Department of Justice database, they are skewedupward by a few practitioners. Also, many of the parties in the databasemay not have been represented. The self-representation issue is discussedfurther below.

The survey was restricted to family law specialists because it wasunlikely that other practitioners would have devoted much thought to therelevant issues at the time the survey was conducted (although one mayexpect that generalist practitioners will have studied the issues beforeMay 1, 1997). It was necessary to survey persons who understood theproposed rules and the basic implications of these rules. On average, 92percent of the caseload of the practitioners surveyed related to family lawpractice (question 11).

The survey questions are presented in the appendix to this article, andthe individual responses are presented in table 1. From the survey data,the average cost of a variation of an award without consent of the otherparty (question 1) is $3,059. With consent, the average cost of varying anagreement is $1,330 for an agreement (question 2) and $1,526 for a courtorder (question 3). The average estimate of the probability of consent(question 4) is 63 percent. Thus, if we assume that 50 percent of awardsare agreements and 50 percent are orders, the expected cost of a variationis $2,032 [(100% − 63%) × $3,059 + 63% × (0.50 × $1,526 + 0.50 × $1,330)].If the parties attempt renegotiation before May 1, 1997, the average costis $1,373 (question 8). We assume that all of the costs are borne by theparty initiating the renegotiation or variation.

The individual survey responses in table 1 provide information on thevariation of the price of legal services, which should be interesting tolegal scholars, particularly in the light of the paucity of available data.49

49 “We have only the sketchiest notion of who pays which lawyers how much to dowhat kind of work”: H.W. Arthurs, “Lawyering in Canada in the 21st Century” (1996), 15Windsor Yearbook of Access to Justice 202-25, at 203.


(1997), Vol. 45, No. 3 / no 3

Tab

le 1

Res

ults

of

Tel

epho

ne S

urve

y

Que

stio

na

Res

pond

ent

12

34

56

78

910

1112

1314

1516

17

1 .

. . .

. .$3

,000

$2,5

00$2

,500

73

55

$2,5

007

210

0M

ay7

5$9

9,00

0$3

5,00

0no

2 .

. . .

. .3,

000

1,00

01,

000

51

67

1,00

07

660

May

610

45,0

0020

,000

yes

3 .

. . .

. .3,

000

1,00

01,

300

32

77

1,00

05

110

0S

ept.

65

80,0

0020

,000

yes

4 .

. . .

. .4,

500

750

875

72

55

750

50

80M

ay6

160

,000

30,0

00ye

s5

. . .

. . .

1,50

040

050

05

37

71,

000

52

100

Nov

.6

530

,000

22,0

00ye

s6

. . .

. . .

5,00

01,

000

1,00

08

27

61,

000

87

100

May

65

99,0

0035

,000

yes

7 .

. . .

. .6,

000

4,00

05,

000

53

78

7,00

06

970

May

55

80,0

0025

,000

yes

8 .

. . .

. .3,

500

2,00

02,

000

42

66

2,00

03

310

0M

ay5

1050

,000

20,0

00no

9 .

. . .

. .5,

000

2,25

02,

800

63

55

2,75

05

510

0N

ov.

710

80,0

0040

,000

yes

10 .

. . .

. .2,

750

550

1,50

08

25

555

05

175

May

65

60,0

0030

,000

yes

11 .

. . .

. .97

540

050

08

32

240

05

210

0fe

w4

180

,000

10,0

00ye

s12

. . .

. . .

1,20

040

050

05

34

435

05

290

Feb

. ’98

45

40,0

0025

,000

yes

13 .

. . .

. .2,

500

500

1,00

07

12

150

05

110

0F

eb. ’

987

340

,000

10,0

00no

14 .

. . .

. .1,

250

700

800

82

77

750

53

80N

ov.

58

50,0

0015

,000

yes

15 .

. . .

. .5,

250

500

600

74

88

750

64

100

May

55

60,0

0035

,000

no16

. . .

. . .

2,75

01,

500

1,50

09

35

51,

500

93

100

May

710

50,0

0025

,000

na17

. . .

. . .

1,50

040

040

05

27

740

05

010

0N

ov.

75

55,0

0020

,000

yes

18 .

. . .

. .2,

500

750

750

82

55

1,50

05

210

0M

ay7

375

,000

25,0

00na

19 .

. . .

. .5,

000

1,00

01,

000

63

33

1,00

05

110

0M

ay6

530

,000

15,0

00ye

s20

. . .

. . .

1,00

05,

000

5,00

05

34

875

05

280

May

’98

63

50,0

0020

,000

noA

vg.

. . .

.$3

,059

$1,3

30$1

,526

6.30

2.45

5.35

5.55

$1,3

735.

552.

8092

%5.

905.

50$6

0,65

0$2

3,85

0

aA

nsw

e rs

to q

uest

ions

4,

6, 7

, 9,

and

10

a re

rate

s ou

t of

eve

ry 1

0 pe

ople

and

mus

t be

mul

tipl

ied

by 1

0 to

de t

e rm

ine

the

a nsw

e r a

s a

perc

e nta

ge.


(1997), Vol. 45, No. 3 / no 3

One empirical regularity is that prices in Metropolitan Toronto are about20 percent above the provincial average. There also seems to be a fairdegree of variation among practitioners. However, these are estimates andare not likely to be flat-fee prices. They would not be contingency feessince in family law such fees are impractical and violate professionalstandards rules.

The above legal costs are incurred over a short period of time, whereasthe benefits are spread over a period of years. Therefore, to compare thetwo amounts, it is important to understand the time period over whichparties need to recover their costs—the payback period. Practitioners de-fined the payback period, on average, as 2.45 years (question 5). This issurprising in view of the information reported by practitioners that theaverage award would last 5.9 years (question 13).50 Apparently, the par-ties have a rather high discount rate.51

The payback period can be used to put the costs of variation andrenegotiation on a per-month basis. Thus, the monthly cost of a variationis $69.10 [$2,032/(2.45 × 12 months)]. Similarly, the monthly cost ofrenegotiation is $46.68 [$1,373/(2.45 × 12)].

The above calculations of legal costs relate to amounts paid to a law-yer. However, if a party represents himself or herself in court, costs of adifferent type are incurred: the costs of losing one or more days’ pay toappear in court; the costs of enduring the hassle of representing oneself inthe court process; and the “cost” related to increased uncertainty aboutthe outcome of the process. We assume arbitrarily that unrepresentedparties have costs of 25 percent of the amount that represented partieswould pay to lawyers. Therefore, the cost of a variation for an unrepre-sented party is assumed to be $508 ($2,032 × 25%), or $17.28 per month.

Projections supplied to us by the Ontario Ministry of the AttorneyGeneral indicate that for 1996-97, 60.3 percent of the applicants in On-tario Court (Provincial Division) for matters concerning the Ontario FamilyLaw Act and the Children’s Law Reform Act would be unrepresented. Itappears that representing oneself is far more common for parties withlower incomes. From the Department of Justice database, we calculatethat approximately 58 percent of parties to child support awards have pre-support incomes below $25,000. Since this is close to the percentage whoare unrepresented, we assume that all parties with incomes below $25,000will be unrepresented.52

50 Even this figure may be somewhat low, given the respondents’ estimate that only 5.5percent of awards are varied or lapse in each year.

51 In retrospect, it would have been better if the survey had asked for separate paybackperiods for payers and recipients since recipients face greater risks, such as the risk ofnon-payment.

52 Since we assume that the costs of going to court without representation are just one-quarter of the costs of hiring a lawyer, it can be said that nobody would choose the latter

(The footnote is continued on the next page.)


(1997), Vol. 45, No. 3 / no 3

Compared with variation, renegotiation is a relatively sophisticatedtax-planning strategy with a number of pitfalls.53 Therefore, we assumethat unrepresented parties lack information about the benefits of renego-tiation and will never initiate one. However, we assume that anunrepresented party may agree to renegotiation if it is proposed by theother party since this step requires much less information.

Non-Monetary CostsLegal costs and social assistance effects are both monetary considera-tions. Our respondents suggested that their clients had a number ofnon-monetary reasons for not proceeding with renegotiation or a varia-tion. Some of these are connected to emotional issues surrounding therelationship: “general concern about opening agreement”; “want stabil-ity”; “getting along fine—may not need the extra few bucks”; “don’twant to because the relationship is abusive”; “we hate each other”; “don’twant to bring up history”; “leave well enough alone”; “content with thestatus quo—don’t want new wounds”; and “just like the way things are.”Other reasons discussed are that a recipient may be reluctant to seek avariation where the absolute amount of the award will be smaller, eventhough the after-tax amount may be significantly higher. Also, some re-cipients and payers may not be willing to “open up” their award becauseof a concern that custody, visitation rights, or the level of spousal supportmay then come into issue.

We attempted to quantify non-monetary costs by asking practitionersabout the probability that a financially profitable strategy would be pur-sued by the client. The average responses were as follows:

• a payer who would benefit financially from a variation will seek itonly 56 percent of the time (question 7);

• a recipient who would benefit financially from a variation will seekit only 54 percent of the time (question 6); and

• a payer or recipient who would benefit financially from renegotia-tion will seek it only 28 percent of the time (question 10).

Clearly, both of these tax-planning ideas involve high non-monetary costs.Fully 44 to 46 percent of the parties will not seek a financially profitablevariation, and a similar percentage (44 percent) will not initiate a finan-cially profitable renegotiation.

Renegotiation suffers from a second problem in that, unlike a varia-tion, it requires the consent of the other party. This consent is expected tobe forthcoming with a 56 percent probability (question 9). The fact that

option in our model. However, we are restricting this option to people with incomes below$25,000, for whom it would be uncommon that a variation or renegotiation would befinancially worthwhile if a lawyer had to be hired.

53 See Feltham and Macnaughton, supra footnote 2, at 1289-90.

52 Continued . . .


(1997), Vol. 45, No. 3 / no 3

the other party refuses 44 percent of the time is also evidence of non-monetary costs since in the model renegotiation is always worthwhile tonon-initiating parties whenever it is offered by the other party.54

Another aspect of non-monetary costs is the required annual disclosureof payers’ tax returns and other financial information under section 25 ofthe guidelines. This would be an incentive for recipients to come underthe new family law regime and a disincentive for payers. Although thisfactor has generated a great deal of attention, the very small differencebetween the probabilities that payers and recipients would initiate finan-cially profitable variations suggests that it may not be important in decisionmaking.

MODELLING TAXPAYER BEHAVIOURWithout Considering Non-Tax CostsLet us turn to modelling taxpayer behaviour using the Department ofJustice database. As a benchmark, let us consider the behaviour of payersand recipients if there were no non-tax costs to consider. In this “costless”model, the payer and the recipient make decisions solely on the basis ofwhich alternative provides the higher after-tax income. This model isbased on the tax-planning analysis in our previous article, and the nota-tion used for the variables is the same.55

Two key variables are used in our previous article. For the payer, thenew variable is the amount of the tax-deductible monthly support pay-ment that leaves him or her with exactly the same after-tax income aspaying the non-deductible guideline amount. In other words, the payerfinds that paying this amount under the old regime is equivalent to mov-ing to the new regime. For a convenient abbreviation, let us call thisamount GP (Guideline-equivalent amount for the Payer). Similarly, thenew variable for the recipient is the amount of the taxable monthly sup-port payment that leaves him or her with exactly the same after-tax incomeas receiving the non-taxable guideline amount. In other words, the recipi-ent finds that receiving this amount under the old regime is equivalent tomoving to the new regime. For a convenient abbreviation, let us call thisamount GR (Guideline-equivalent amount for the Recipient).

The appropriate strategies after April 30, 1997 are straightforward. Therecipient should take action to move to the new regime if doing so pro-vides him or her with more after-tax income—that is, if the recipient’sguideline-equivalent amount GR is greater than the current monthly pay-ment. The payer should move to the new regime if there is a profit fromdoing so—that is, if the payer’s guideline-equivalent amount GP is lessthan the current monthly payment. Either party may bring the new regimeinto effect through seeking a variation of the child support award.

54 This is guaranteed by the requirement that there be a subsidy to initiate a renegotia-tion and the assumption that non-initiating parties do not incur legal costs.

55 Supra footnote 2, at 1273-89.


(1997), Vol. 45, No. 3 / no 3

Before May 1, 1997, there was an additional strategy: the two partiescould renegotiate their child support award. Renegotiating child supportwas worthwhile only if both parties preferred the renegotiated amount tothe guideline amount. This implies that the minimum child support pay-ment that the recipient was willing to accept to give up receipt of theguideline amount (GR ) was less than the maximum child support paymentthe payer was willing to pay in lieu of paying the guideline amount (GP ).In other words, there must have existed a “negotiation range” (an intervalbetween GR and GP ).56

A second test that must have been met for renegotiation to have beenworthwhile is that at least one party must have preferred the guidelineamount to the current payment. Otherwise, there would be no “threat”that one of the parties would attempt to invoke the guideline amount byseeking a variation after April 1997.

Assuming that the two tests were satisfied for a particular award andhence renegotiation was profitable for both parties, there remained anissue of what amount in the negotiation range would have been selected.The most likely result was to choose the amount that would split thesubsidy equally. In other words, one would expect the parties to choosethe payment that makes the payer’s gain in lowering the payment fromGP equal to the recipient’s gain in raising the payment from GR. This maybe called the amount N (for New amount).

In summary, the costless model predicts as follows:

• Renegotiate before May 1, 1997 if there is a subsidy and the currentpayment is either less than GR (the minimum child support payment thatthe recipient is willing to accept to give up receipt of the guideline amount)or greater than GP (the maximum child support payment the payer iswilling to pay in lieu of paying the guideline amount).

• The payer seeks a variation after April 30, 1997 if there is no rene-gotiation and the current payment is greater than GP.

• The recipient seeks a variation after May 1, 1997 if there is norenegotiation and the current payment is less than GR.

This strategy is implemented for each of the 708 awards in the Depart-ment of Justice database by calculating the amounts GP, GR, and N using

56 This is an application of the Scholes-Wolfson (supra footnote 1, at 3) approach toresolving tax-oriented negotiation problems involving two or more parties. The key to thisapproach is, first, to determine the amounts of the variable at issue (in this case, the childsupport payment) which hold each party indifferent and, second, to determine whether theother party can be made better off (that is, if a negotiating range exists). For Canadianexamples, see Glenn Feltham and Alan Macnaughton, “The Best of Both Worlds” (March1997), 31 CGA Magazine 54-55; and Macnaughton and Mawani, supra footnote 12, at 42-43. An excellent paper that implicitly uses this approach is Wallace M. Howick, “AssetsVersus Shares: An Approach to the Alternatives,” in Selected Income Tax and Goods andServices Tax Aspects of the Purchase and Sale of a Business, 1990 Corporate ManagementTax Conference (Toronto: Canadian Tax Foundation, 1991), 1:1-35.


(1997), Vol. 45, No. 3 / no 3

the computer program presented in our previous article.57 We would haveliked to modify the program to include the 1997 budget proposals relatingto child tax benefit payments for the period beginning after June 1998,since income earned during 1997 affects the child tax benefit for thisperiod. However, the proposals lack sufficient detail for this inclusion tohave been made.

A number of tax-related assumptions are employed in this computerprogram: there are no provincial tax credits other than the low-income taxreduction, and no federal tax credits other than the basic credit and theequivalent-to-married credit; neither the payer nor the recipient is in arelationship with a person that would affect the goods and services tax(GST) credit and the child tax benefit; and the payer’s income level forthe purposes of the federal child support tables is assumed to be the sameas the payer’s income for tax purposes, which is also assumed to be equalto taxable income.58

It is assumed that the guideline amount is exactly the amount specifiedin the federal child support tables—that is, the undue hardship test doesnot apply and there are no add-ons. The absence of add-ons is in partforced on us by lack of data (these amounts cannot be determined throughthe Department of Justice database). In addition, there is significant un-certainty as to whether the add-ons will be routinely included in childsupport awards, and a recipient may be reluctant to apply for add-onssince such an application would require disclosure of his or her tax re-turns and other income data.

With Non-Tax CostsAn alternative model of taxpayer behaviour is one that considers non-taxcosts. We may call this the “realistic” model.59 There are three modifica-tions from the costless model.

The first modification is to allow for some payers and recipients ofchild support to be receiving social assistance. As noted above, we as-sume that all recipients with incomes before child support of $15,000 orless are on social assistance. Since any change in child support payments

57 Supra footnote 2, at 1293-95. A more elaborate version appears in Glenn Felthamand Alan Macnaughton, “Renegotiate Now or Seek a Variation Later? The New ChildSupport Rules and Existing Awards” (April 1997), 14 Canadian Family Law Quarterly389-428. The program is available on the Internet at http://www.arts.uwaterloo.ca:80/ACCT/people/macnau.htm.

58 This last assumption is required because we have no information on the amounts ofindividual income components, such as dividends and capital gains, and thus we cannotmake the adjustments called for in schedule III of the guidelines. The errors introducedshould be minor since relatively few payers and recipients would have a substantial amountof property income and capital gains.

59 The realistic model is implemented for the 708-award Department of Justice data-base using the computer program from our previous article, supra footnote 2, at 1293-95,with the assumptions noted above.


(1997), Vol. 45, No. 3 / no 3

or receipts would be fully offset by the change in social assistance, weassume that no one on social assistance would seek a variation, initiate arenegotiation, or agree to a renegotiation proposed by the other party.60

The second and third modifications relate to people who are not onsocial assistance. The second modification is to allow for the legal costsof renegotiating or seeking a variation. The realistic model assumes thatthese costs create a threshold that the benefits must exceed in order for arenegotiation or variation to be financially worthwhile.

The third modification is to allow for non-monetary costs. The effectof this modification is that tax-planning strategies that are financiallyworthwhile may still not be employed. These non-monetary costs interactwith the legal costs in a complex way in determining the proportion ofpayers and recipients who will undertake either of the two tax-planningstrategies.

VariationLet us consider the impact of the second and third modifications on thevariation strategy. For a payer who is not on social assistance, the benefitof a variation is the after-tax cost of the current payment (call this CP )less the guideline amount (call this G ). If this benefit exceeds the legalcosts (as calculated above, $69.10 per month if a lawyer is involved and$17.28 if the party is unrepresented),61 it is financially worthwhile for thepayer to seek a variation.

Because of non-monetary costs, a variation that is financially worthwhilewill not always be sought. On the basis of the data from the survey offamily law practitioners, this will occur with a probability of 56 percent.

The situation of a recipient who is not on social assistance is similar.The benefit of a variation for a recipient is the guideline amount G lessthe recipient’s after-tax amount retained from the current payment (callthis CR ). If this difference exceeds the legal costs, which are assumed tobe the same for both payers and recipients, a recipient will find a varia-tion to be financially worthwhile. On the basis of the data from the surveyof family law practitioners, such a financially worthwhile variation willbe sought by a recipient with a probability of 54 percent. Again, thisreflects non-monetary costs.

A variation will not occur if the motivation to seek a variation hasbeen removed by a renegotiation before May 1, 1997.

60 A party on social assistance might seek a variation to spite the other party or to getoff social assistance. However, in view of the legal and non-monetary costs involved, thisis likely to be uncommon.

61 As described above, the amount $69.10 averages the cost with consent and the costwithout consent. The assumption is that once a party decides to seek a variation, he or sheis committed and will proceed even if the other party fails to consent and thereby raisesthe actual cost. This assumption reflects the emotional cost involved in child supportissues. In a less emotionally charged legal situation, it might be more realistic to envision atwo-step process in which a party first asks for consent and then decides whether to proceed.


(1997), Vol. 45, No. 3 / no 3

In summary, the realistic model predicts as follows with respect to variations:

• A payer-initiated variation after April 30, 1997 occurs with a prob-ability of 56 percent if there is no renegotiation, the payer is not on socialassistance, and the difference between CP and G is greater than the legalcosts ($69.10 if represented by a lawyer, $17.28 if unrepresented); other-wise, the probability is zero.

• A recipient-initiated variation after April 30, 1997 occurs with aprobability of 54 percent if there is no renegotiation, the recipient is noton social assistance, and the difference between G and CR is greater thanthe legal costs ($69.10 if represented by a lawyer, $17.28 if unrepre-sented); otherwise, the probability is zero.

RenegotiationBefore May 1, 1997, either the payer or the recipient could take theinitiative and attempt to renegotiate. It is assumed that only the party whofinds a variation to be financially worthwhile would initiate a renegotia-tion.62 The benefits of renegotiation are the share of the government subsidyand the reduction in legal costs. Since a renegotiation eliminates the needfor a variation, the renegotiation legal costs of $44.68 are substituted forthe variation legal costs of $69.10.

For a payer, the benefits of renegotiation are the after-tax cost of thecurrent payment (CP ) less the after-tax cost of the new, renegotiated pay-ment (call this NP ). However, these benefits will be achieved only if theother party agrees to the renegotiation. From the survey of family lawpractitioners, the probability of success is 56 percent. Thus, the expectedbenefits of renegotiation are 56 percent of the difference between CP and NP.

For a recipient, the benefits of renegotiation are the after-tax receiptfrom the new, renegotiated payment (call this NR ) less the after-tax re-ceipt from the current payment (CR ). Applying the 56 percent probabilityof agreement by the other party, the expected benefits of renegotiation are56 percent of the difference between NR and CR.

The expected benefits of renegotiation must be compared with thecosts. As calculated above, the costs of attempting to renegotiate are$46.68 per month for either a payer or a recipient.63 If the expectedbenefits exceed the legal costs, renegotiation will be financially worthwhile.

The probability that a renegotiation that is financially worthwhile willbe achieved is the product of the probability that it will be sought (56

62 If it is the other party who finds a variation to be financially worthwhile, the maxi-mum benefit of a renegotiation is low (one-half of the government subsidy). Also, onemust take into account in the costs the possibility that the other party might not followthrough and seek the variation; as a result of agreement to a renegotiation, a loss is beingtaken which might otherwise be avoided.

63 These are the costs of a lawyer. As noted above, it is assumed that unrepresentedparties will not attempt to renegotiate. We assume that all parties with incomes below$25,000 will be unrepresented.


(1997), Vol. 45, No. 3 / no 3

percent) and the probability that the other party will agree (28 percent).Thus, a financially worthwhile renegotiation will be achieved with a prob-ability of 16 percent (56% × 28%).

In summary, the realistic model predicts as follows with respect torenegotiations:

• A payer-initiated renegotiation occurs with a probability of 16 per-cent if there is a subsidy, the payer is represented by a lawyer, neither therecipient nor the payer is on social assistance, a variation is financiallyworthwhile to the payer, and 56 percent of the difference between CP andNP exceeds the legal costs of $46.68; otherwise, the probability is zero.

• A recipient-initiated renegotiation occurs with a probability of 16percent if there is a subsidy, the recipient is represented by a lawyer,neither the recipient nor the payer is on social assistance, a variation isfinancially worthwhile to the recipient, and 56 percent of the differencebetween NR and CR exceeds the legal costs of $46.68; otherwise, theprobability is zero.

RESULTSAggregate PredictionsAs shown in table 2, the realistic model predicts that only a minuscule0.3 percent of existing awards were renegotiated before May 1, 1997. Itfurther predicts that 28.9 percent of existing awards will be varied afterApril 1997. Thus, about 29 percent of all awards are expected to be eitherrenegotiated or varied. The remaining 71 percent of existing child supportawards will not be affected by the new rules.

As shown in our previous article, it is mostly recipients who gain fromthe new rules.64 Therefore, it is not surprising that renegotiations andvariations seem to be driven by actions of recipients rather than payers:92 percent of the renegotiations and 77 percent of the variations areexpected to be initiated by recipients.

It is estimated above that roughly 388,000 child support awards arecurrently in place. Thus, in terms of actual numbers of awards renegoti-ated or varied, we predict that about 11,000 awards were renegotiatedbefore May 1, 1997 and 112,000 awards will be varied on or after thatdate. The number of variations should be of concern to court administra-tors since this is many times the number of variations that are sought in atypical year. Thus, there is great potential for the courts to experiencebacklogs as a result of variation applications.

The survey of family law practitioners contains some information thatmay help in predicting the timing of these variations. Almost all practi-tioners thought that most of the variations would be sought in the firstyear; 11 of the 20 respondents (question 12) thought that the major peakwould occur immediately, in May 1997, while 8 others put the peak at

64 Supra footnote 2, at 1285-86.


(1997), Vol. 45, No. 3 / no 3

some other point in the year, the majority between 6 and 9 months afterthe implementation date.

Revenue EffectsIn principle, renegotiations and variations could either increase or decreasethe tax revenue received by federal and provincial governments. Renego-tiations decrease tax revenue because there must be a tax subsidy in orderfor a renegotiation to be possible, and renegotiations tend to increase thelevel of payments and thereby increase the amount of that subsidy. Varia-tions increase tax revenue if there is a tax subsidy (that is, the payer’s taxrate on the current payment is higher than the recipient’s) because thevariation moves the award outside the deduction-inclusion system andthereby eliminates that subsidy. On the other hand, varying an award thatinvolves a tax penalty (that is, the recipient’s tax rate on the current pay-ment is higher than the payer’s) decreases tax revenue because the variationremoves that penalty. As reported in our previous article, 47 percent ofawards involve a tax subsidy and 53 percent involve a tax penalty.65

Our data suggest that these tax-planning efforts will decrease tax rev-enue. This is not due to renegotiations, since they appear to be veryuncommon (0.3 percent), but rather due to the fact that a large number ofvariations are in tax-penalty situations. Of the predicted 29 percent ofawards that will be varied, 79 percent are in tax-penalty situations andonly 21 percent are in subsidy situations. The result is that variationscause the subsidy to increase by a huge 108 percent. Of course, this willreverse eventually as a result of the natural attrition of awards, as childrenleave the period of support and variations are made owing to changes incircumstances.

The 1996 budget does not anticipate such a temporary bulge in the taxsubsidy. Instead, the budget documents state that the $410 million ($240

Table 2 Percentage of Existing Awards That Are PredictedTo Be Renegotiated or Varied

Renegotiation Variation Renegotiation orbefore May 1997 after April 1997 variation

Costless modelPayer . . . . . . . . . . . . . . . . . . . . . 10.6 13.6 24.2Recipient . . . . . . . . . . . . . . . . . . 31.1 43.4 74.5Either partya . . . . . . . . . . . . . . . 41.7 53 94.7

Realistic modelPayer . . . . . . . . . . . . . . . . . . . . . 0 6.8 6.8Recipient . . . . . . . . . . . . . . . . . . 0.3 22.2 22.5Either party . . . . . . . . . . . . . . . . 0.3 28.9 29.2

a For variations, the numbers for either party are less than the sum of the payer andrecipient figures since both parties wish to vary some awards in which there is a taxpenalty.

65 Ibid., at 1291.


(1997), Vol. 45, No. 3 / no 3

million federal) total cost of the deduction-inclusion system for the 1996-97fiscal year “will gradually reduce . . . as more child support orders andagreements fall under the new tax rules.”66 Steadily increasing revenuegains are expected: “The new tax rules for child support are anticipated toproduce revenue gains for the federal government of about $15 millionfor the first year, $65 million in the second year, and $120 million in thethird year.”67

Effect of Non-Tax CostsIn order to assess the effect of non-tax costs in the above predictions ofrenegotiation and variation activity, it is helpful to compare the predic-tions of the realistic model with the predictions of the costless model.The latter model does not consider any of the non-tax costs associatedwith social assistance, legal costs, and non-monetary issues.

The costless model predicts that 42 percent of all child support awardsin Canada would have been renegotiated before May 1, 1997. It furtherpredicts that a further 53 percent would be varied after April 1997. Thus,a total of 95 percent of all awards would be either renegotiated or varied.

A comparison of the predictions of the costless and realistic modelsshows that the big difference is in renegotiations. The introduction ofnon-tax costs almost wipes out renegotiations altogether: the predictedpercentage falls from 42 percent to 0.3 percent. In order to sort out thecontributions of the three non-tax costs—social assistance, legal costs,and non-monetary costs—table 3 compares the results for these two mod-els with the results for six other models in which only one or two types ofnon-tax costs are present. For example, in the legal-costs-only model,there are no non-monetary costs and it is assumed that none of the payersor recipients are receiving social assistance. In other models, just two ofthe non-tax costs are present, such as legal costs and non-monetary costs.

Legal costs seem to be the biggest cause of the drop in renegotiations.Adding legal costs to the costless model reduces the rate of renegotia-tions initiated by one party or the other from 42 percent to 3 percent. Inpart, this reduction is due to the lawyers’ fees involved, and in part it isdue to the assumption that child support payers and recipients who do nothave a lawyer lack the information required to pursue the renegotiationstrategy. However, introducing either of the other two types of non-taxcosts reduces the rate of renegotiations by over four-fifths, from 42 per-cent to 7 percent or less. Therefore, it is evident that the high rate ofrenegotiation predicted by the costless model is a fragile result that couldoccur only if non-tax costs were entirely absent. The different types ofnon-tax costs also combine with each other; introducing any two types ofnon-tax costs reduces the renegotiation rate further, to 2 percent or less.

66 Canada, Department of Finance, 1996 Budget, The New Child Support Package,March 6, 1996, 9.

67 Ibid.


(1997), Vol. 45, No. 3 / no 3

Tab

le 3

Rel

ativ

e C

ontr

ibut

ion

of t

he T

hree

Non

-Tax

Cos

ts

Pro

babi

lity

of

vari

atio

nP

roba

bili

ty o

fP

roba

bili

ty o

fof

non

-ren

egot

iate

dre

nego

tiat

ion

(%)

vari

atio

n (%

)aw

ards

(%

)

Non

-tax

cos

ts in

clud

ed in

dec

isio

n m

odel

Pay

erR

ecip

.E

ithe

r pa

rty

Pay

erR

ecip

.E

ithe

r pa

rty

Pay

erR

ecip

.E

ithe

r pa

rty

Non

e (c

ostl

ess

mod

el)

. . .

. . .

. . .

. . .

. . .

. . .

. . .

10.6

31.1

41.7

13.6

43.4

5315

.263

91L

egal

onl

y .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

1.3

1.7

317

.865

.182

.318

66.2

84.8

Non

-mon

etar

y on

ly .

. . .

. . .

. . .

. . .

. . .

. . .

. . .

.1.

74.

96.

612

.637

.649

.812

.839

.653

.3S

ocia

l ass

ista

nce

only

. . .

. . .

. . .

. . .

. . .

. . .

. . .

0.7

6.4

7.1

16.4

39.3

51.8

16.6

4255

.8L

egal

, non

-mon

etar

y on

ly .

. . .

. . .

. . .

. . .

. . .

. .0.

20.

30.

510

.635

.946

.410

.636

46.7

Leg

al, s

ocia

l ass

ista

nce

only

. . .

. . .

. . .

. . .

. . .

.0.

11.

71.

812

39.7

51.1

1240

.452

Non

-mon

etar

y, s

ocia

l ass

ista

nce

only

. . .

. . .

. . .

0.1

11.

19.

524

.133

.29.

524

.333

.6A

ll th

ree

(rea

list

ic m

odel

) .

. . .

. . .

. . .

. . .

. . .

. .0

0.3

0.3

6.6

22.2

28.9

6.6

22.3

29


(1997), Vol. 45, No. 3 / no 3

The effect of the different types of non-tax costs on variations is morecomplicated. The problem is that the introduction of non-tax costs affectsvariations both directly and indirectly. The indirect effect derives fromthe fact that awards that are renegotiated are not likely to be variedbecause, as discussed earlier, the scale of awards produced by the guide-lines has already been taken into account. This leads to some strangeresults; for example, introducing legal costs raises the probability of vari-ation from 53 percent in the costless model to 82 percent in thelegal-costs-only model. To eliminate this indirect effect, let us focus atten-tion on the three righthand columns of table 3, which report the percentageof awards that have not been renegotiated and are expected to be varied.

It is apparent from these three columns that legal costs have a muchsmaller effect on variations than on renegotiations. Whereas the costlessmodel predicts that 91 percent of awards that are not renegotiated will bevaried by one party or the other, introducing legal costs reduces this rateonly slightly to 85 percent. Much bigger reductions are found by intro-ducing social assistance only (to 56 percent) or non-monetary costs only(to 53 percent). Combining these two non-tax costs reduces the rate to 34percent. With all three costs included, the rate is 29 percent. Therefore, non-monetary costs and social assistance have the largest effect on variations.

Distributional Effects of Non-Tax CostsWhenever a legal change is introduced, the government must decidewhether to provide transitional rules to protect parties who made transac-tions or entered into commitments before the tax rules were changed. Inthe case of the child support reforms introduced with the 1996 budget, thetransitional rule chosen was basically to exempt existing child supportawards from the application of these new tax and family law rules unlesseither party sought a variation of the award after April 1997. This is arather unusual rule (although there may have been no alternative in thissituation). While most transitional rules provide that the existing tax treat-ment will not change unless the taxpayer takes some action, this ruleprovides that the existing tax treatment ends when either the taxpayer orthe other party to the award takes an action.

The effect of this rule is that non-tax costs experienced by one party toan award affect both parties. The party that would otherwise want to seeka variation cannot always be said to “lose” by the existence of these costssince some of them (such as non-monetary costs) reflect preferences ofthe taxpayer. However, the other party definitely “wins” because calcula-tions with the realistic model show that over 99 percent of variationsresult in a financial loss to that party.68 Therefore, the existence of non-tax costs may benefit a party that does not want a variation.69

68 Where there is a tax penalty, it is possible for both parties to desire to have an awardvaried. For an example, see award 4 in table 1 of our previous article, supra footnote 2, at 1273.

69 Renegotiations are different in that they benefit both parties.


(1997), Vol. 45, No. 3 / no 3

These variation-averse parties are disproportionately payers. Calcula-tions show that 80 percent of payers who are not on social assistancewould be worse off under the new regime, with the median effect beingan annual loss of $1,262. In contrast, only 16 percent of recipients whoare not on social assistance would be worse off under the new regime.70

Therefore, non-tax costs protect many payers from the adverse effects ofa variation. The most prominent situation probably involves a payer wherethe recipient is on social assistance. Since the recipient does not retainany of the money from an increased child support payment, there is nomotivation to seek a variation. Other situations would involve payerswhere the associated recipients experience legal costs or non-monetarycosts that make a variation not worthwhile.

CONCLUSIONNon-tax costs—the reason why taxpayers who could save taxes by ex-ecuting certain strategies choose not to do so—are a fruitful but neglectedtopic for research in all areas of tax planning. Tax planners might benefitif articles recommending tax-planning strategies discussed the associatednon-tax costs, the types of taxpayers for whom these non-tax costs mightbe most important, and whether the tax-planning strategy could be alteredto reduce them.

The two new tax-planning strategies for existing child support awardscreated by the 1996 budget proposals, renegotiation and variation, in-volve significant non-tax costs. For payers and recipients on socialassistance, any change in the amount of child support paid or receivedmay be fully offset by changes in social assistance payments. In addition,there may be significant legal costs or, for those who choose to representthemselves, significant costs in time, aggravation, and uncertainty aboutthe outcome. Finally, there may be non-monetary costs—“opening up”the award may be emotionally painful or there may be a concern thatcustody, visitation rights, or the level of spousal support may then comeinto issue.

The effect of these non-tax costs is to reduce the predicted rate ofrenegotiations to less than 1 percent and to lower the predicted rate ofvariations to 29 percent. Recipients, rather than payers, will generally bethe beneficiaries of these variations. Payers whose awards are not subjectto a variation, such as those where the associated recipient is on socialassistance or experiences high non-monetary costs of “opening up” theaward, will in effect benefit from the existence of the non-tax costs.

Court loads produced by this 29 percent rate of variations should besubstantial since this translates into a number that is many times thenumber of variations issued in a typical year. Tax revenue should initiallyfall because most of these variations arise in situations where the tax paid

70 Payers and recipients who are on social assistance have a zero gain or loss becauseof the social assistance rules referred to above.


(1997), Vol. 45, No. 3 / no 3

by the recipient on the prior award exceeded the tax saving from thededuction to the payer. In contrast, the Department of Finance has pre-dicted steadily increasing revenue gains from the first year onward.

Section 28 of the Divorce Act requires the federal government withinthe next five years to provide a comprehensive report to Parliament onthe operation of the child support guidelines. Perhaps this report willinclude the effect of the guidelines on existing awards. It would be inter-esting to know whether the rates of renegotiations and variations are aspredicted in this article, and the reasons for any differences observed.

APPENDIX—TELEPHONE SURVEYI would like to start with a scenario. Assume that a client asks you, afterMay 1 (the implementation date for the new child support legislation), toobtain a variation in their child support award—that is, to move to thenew guideline-based amount.

1) What is your best estimate of the total cost to your client, includinglegal fees and court costs, of obtaining the variation if it is without theagreement of the other party?

2) What is your best estimate of the total cost if you could obtain byconsent a variation of an agreement with the other party?

3) What is your best estimate of the total cost if you could obtain byconsent variance of an order—that is, a consent agreement which youtake before the court?

4) What is the chance that the other party would agree—that is, if 10of your “typical” clients sought a variation after May 1, how many ofthese 10 variations would be by consent?

5) What is the payback horizon for costs? That is, how many years ofbenefit would a client spread the costs over in determining whether toseek the variation?

Let’s now move to a second scenario. After May 1, you inform 10 of yourclients that receive child support that they can be made better off finan-cially if they obtain a variation—that is, after a variation the recipientwill have more money left after taking tax considerations and the cost ofthe variation into account.

6) How many recipients, of the 10, would you actually expect to seekthe variation? Why would the remaining recipients of child support notseek the variation—for example, the recipient may not want to “open up”the agreement for other reasons, or the absolute dollar amount may beless (although they will have more after tax)?

7) If these were 10 payers of child support (rather than recipients)who would be better off financially through obtaining a variation, howmany of these 10 would you actually expect to seek the variation? Whywould the remaining payers of child support not seek the variation?

Let’s move to another scenario. Assume that a client asks you, beforeMay 1 (that is, before the new legislation is implemented), to renegotiate


(1997), Vol. 45, No. 3 / no 3

his or her child support agreement to avoid a variation on or after May 1that would leave him or her in a worse position.

8) What is your best estimate of the total cost, including legal fees andcourt costs, of renegotiating the agreement?

9) What is the chance that negotiation would be successful—that is, if10 of your clients attempted to renegotiate prior to May 1, how many ofthese 10 would be successful?

10) Of 10 persons who can be made financially better off throughrenegotiation before May 1 (assume you have informed them of this fact),how many would you actually expect to try renegotiation?

I would like to close with a few questions about your practice.

11) What percent of your cases involve family law practice?

12) Do you have any impressions about when variations will besought—for example, immediately after May 1, or 6 months after May 1(when the dust settles)?

13) What is the average age of the child support agreements in placeat your firm?

14) Each year, what percent of your cases involving child supportawards are varied, or lapse?

15) If you were to describe a typical child support case which youhandle, what would the payer’s income be?

16) Again thinking about this typical case, what would the recipient’sincome be?

17) Have you, or will you, be directly informing your child supportclients of the changes to the child support rules?

18) What is your perception as to what will happen to the court loadafter May 1?

19) Finally, assuming that the court load in Ontario will increase afterMay 1, do you have any suggestions for the Courts Administration Divi-sion of the Ministry of the Attorney General of Ontario?

Documents

Child Support and the Non-Tax Costs of Tax-Planning Strategies - … · 2019-02-12 · (1997), Vol. 45, No. 3 / no 3 417 Child Support and the Non-Tax Costs of Tax-Planning Strategies