September 5, 2017

The calculation of surplus income is often misunderstood even by insolvency professionals, the concept behind is even more mysterious.

The notion that people these days have surplus income suggests that they are living very simple lives or making lots of money, neither of which are the case for most Canadians. Average family incomes, adjusted for inflation and contemplating the number of contributors have decreased steadily and dramatically over the last fifty years.

Politicians often tout how low income taxes are, but when combined with other forms of taxation Canadians are amongst the highest tax payers in the world. Taxes, income and otherwise, have a tremendous impact on money available to families. A recent media report suggested that Canadians have now passed the “tipping point” where more than half of all income earned goes to the government in some form of taxation.

So called surplus income is supposed to be the money that families earn above the LICO (Low Income Cut Off) – which seems to be the sneaky, political, way of say “poverty line”. The LICO was first developed in the 1950s to obtain information about the social fabric of Canada and how well people were living. It should go without say, but is worth repeating, that lifestyles have changed significantly since the 1950s.

In the 1950s people grew their own vegetables, many didn’t drive, not everyone had a TV or telephone, fridges were still luxury items and the internet, computers, cell phones and multifarious insurance requirements (amongst other regulatory overflows) were nonexistent.

Yet, the LICO was predicated on the average cost of living in 1959 with annual updates based on the Consumer Price Index, which itself is a faulty instrument that fails to contemplate many everyday expenditures faced by Canadian Families.
Statistics Canada tells us:

Today, Statistics Canada continues to use precisely this approach to construct LICOs, with the exception that cut-offs now vary by 7 family sizes and 5 different populations of the area of residence. This additional variability is intended to capture differences in the cost of living amongst community sizes.

This lackadaisical approach, of using an antiquated method to calculating living costs, virtually ignores many expenses faced by today’s families and fails, as many other financial models (such as Debt Service Ratios) do, to contemplate the impact of taxation on available funds.

Nonetheless, for Bankruptcy & Insolvency purposes the LICO provides the foundation for determining the amount of funds to paid during a bankruptcy as well as a formula to assist in calculating the amount of money that ought to be paid under a proposal. This foundation is carried over to the Superintendent of Bankruptcy’s Standards, and subsequent guidelines and examples contained in a Directive to Trustees to assist them in their calculations.

But it is important to remember the LICO is only an assistive framework and not entirely regulatory, and the Courts have observed that Section 68.(3) of the Bankruptcy and Insolvency Act directs the Licensed Insolvency Trustee to “calculate” surplus income payable “having regard to the applicable standards” not based entirely on the standards.

If the bankrupt disagrees with the Trustee’s calculation of surplus s/he may request mediation with the Office of the Superintendent of Bankruptcy to resolve the discrepancy. The bankrupt can also apply for a variance through the courts.

While it is true that debtors generally, and bankrupts’ specifically, ought to be contributing to some extent to the losses incurred by their lenders it is also true that the Bankruptcy & Insolvency Act is meant to be rehabilitative and not punitive. At times the payment of surplus income calculated without regard to real living costs can not only defeat the purpose of the Act but also plunge the bankrupt right back into debt before the presenting issue has been adequately resolved.

Consider how the government treats the poorest members of society – single welfare recipients are paid a mere $630 per month plus bus tickets and medicines. It is no wonder people get stuck on the system even the most frugal and budget conscious amongst us would simply not be able to live on such a frugal income.

Even the Federal Government’s own LICO for a single person exceeds welfare payments by almost 300%. The LICO itself, as noted above, is seriously flawed and can lead some people into deeper poverty as they struggle with non-existent surplus income payments.