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Family Company Financial Disclosure Lawyers

Family Company Financial Disclosure Lawyers help people obtain and provide fair financial disclosure in cases involving, companies, trusts, professional practices, proprietorships and partnerships. Peter Graburn, our managing lawyer in Calgary sets out the rules in today’s blog.

As anyone who has gone through a separation and divorce will know, there are a number of basic “pillars” (principles) of family law, including:

  • equity and fairness;
  • best interests of the child, and;
  • duty to disclose full financial information.

Our Family Company Financial Disclosure Lawyers know that different types of disclosure are needed when one spouse has a company, or is a self employed professional or entrepreneur.

Vancouver Family Company Financial Disclosure Lawyers 604 602 9000

The Supreme Court of Canada has repeatedly emphasized the importance of the duty to disclose financial information in separation and divorce, from the early case of Rick v. Brandsema (in regard to Separation Agreements), to the more recent cases of Michel and Collucci regarding retroactive child support. For some (ie. regular T4 salaried employees), full financial disclosure may be relatively straightforward. But for those who are self-employed or own a company, financial disclosure can be more complicated.

Furthermore, under ss. 18 and 19 of the Federal Child Support Guidelines, the Court may impute (impose) a higher income than disclosed by the payor parent where they unreasonably deduct expenses from their income (ie. personal expenses), or their corporate income does not fairly reflect all the money available to them to pay child support.

Our lawyers have set records for child and spousal support after analyzing company and professional practice incomes. In our BC success in Fan v. Zhang  our client sought spousal and child support and we proved the husband had not been forthcoming with disclosure.  The court found the husband and his company had clearly failed to make full and frank financial disclosure. We won an Order appointing a forensic accountant to analyze the real income and value of a family company and we also successfully obtained a far higher income ( and spousal and child support) imputed for the husband than the husband said he earned.

Family Company Financial Disclosure Lawyers
Peter Graburn senior Calgary family lawyer MacLean Law

Calgary Family Company Financial Disclosure Lawyers 403 444 5503

So what are your financial disclosure obligations, particularly if you are self-employed or have a company? In a previous article  Calgary Alberta Family lawyers Financial Disclosure I indicated the main financial disclosure documents include (but are not limited to):

  • 3 years’ Income Tax Returns;
  • 3 months’ pay statements;
  • 3 years’ Notices of Assessment and Reassessment;
  • 6 months’ bank and credits card statements, etc.

But if you own a company, you are also required to produce:

  • 3 years’ Financial Statements;
  • a statement of all salaries, wages, management fees or other payments or benefits received from the company in the past 3 years, and;
  • a record of shareholders loans over the past 12 months.

In my previous article, I indicated that in the 2017 case of Cunningham v. Seveny (2017 ABCA 4, at para 23), the Alberta Court of Appeal (in reinforcing the duty to disclose financial information, at least in regard to income for child support purposes), set out the general principle that those who earned income through self-employment or closely-held corporations not only had to produce details of that income (ie. statements of all payments and benefits to that person), but also had an obligation to provide a sufficient and comprehensive explanation for all expense deductions from income sufficient to allow the other party (and ultimately the Court) to determine the reasonableness of those deductions (ie. vehicles, computers, cellphones, travel and entertainment expenses, etc.).

Family Corporate Financial Disclosure

Wow! So how do you satisfy this obligation to the other party, particularly in high conflict family law matters, where the other party may never be satisfied with the amount of financial disclosure provided? (For more information on High Conflict family law, see: Managing High Conflict Family Law . Fortunately, a number of Alberta cases have indicated what specific documents are required to satisfy this obligation.

In the 2016 case of Sweezey v. Sweezey (2016 ABQB 131), Alberta Court of King’s Bench Justice Yungwirth outlined what would be required in the statement of benefits received from the company, stating (at para. 48):

“As a general rule, the shareholder should provide at least the following:

  1.    a brief explanation concerning each payment category, including:
  2.    the nature of the payment/expense;
  3.    how it was calculated;
  4.    why it was a reasonable corporate expenditure;
  5. whether any amounts paid or owing in relation to that category   provided or resulted in a personal benefit to the shareholder or other non-arm’s length person (common examples of such expense categories in closely held corporations are vehicle, travel, promotion, phone, and insurance).
  6. this would include an explanation for what portion of the total expense formed the personal or non-   arm’s length benefit;
  7. how this was calculated;
  8. a description of any services performed for the corporation by a non-arm’s length person (such as a new partner/spouse of the shareholder), and information regarding whether the salary s/he was paid for the services was commensurate with the market value of the services; and
  9.  documentation to support all of the above explanations, such as invoices and receipts regarding non-arm’s length payments.

Subsequently, in the 2017 case of Zdyb v. Zdyb (2017 ABQB 44), Alberta Court of King’s Bench Justice Graesser, in noting the specific examples of corporate financial disclosure set out in Sweezey, stated (at para’s 46-48):

I conclude that the Cunningham disclosure is now required when a child support order is sought … It is unclear from Cunningham or either of the Guidelines how this disclosure obligation will be satisfied …

In cases of a closely held operation, such as a sole proprietorship (incorporated or not) or where the parent is a majority shareholder, or where the shareholder and another non-arms-length party control the finances, detailed breakdowns of expenses are now required, together with evidence as to the amount or percentage of personal benefit from any of the expenses. It is now not sufficient to rely only on financial statement line items unless there is obviously no possibility of a personal benefit being derived from such an area of expense. A letter or advice from the corporation’s accountant that expenses have been treated in accordance with Canada Revenue Agency requirements and generally accepted accounting principles will not suffice as proper family corporate financial disclosure.

Key Takeaway

While the Court of Appeal admonishes parties to avoid a time- and expense-wasting exercise, I fear that such an exercise is virtually mandated where one of the parties has more than T4 income (emphasis added).

As indicated above, financial disclosure (for child and spousal support purposes) in family law matters is usually pretty straightforward, at least for regular T4 salaried employees. Here, it is usually up to the support recipient to quantify and challenge personal benefits received by the support payor.

But for support payors who are self-employed and particularly if through a corporation, things are different.  In this situation, the onus shifts to the support payor to establish that corporate payments or benefits are reasonable. To meet this obligation, the support payor must provide a detailed breakdown of expenses, and an explanation (with evidence) as to the amount or percentage of personal benefit from any of those expenses. In the end, this analysis usually comes down to a question as to whether the business necessity of the expense outweighs the necessity to use that money for child support purposes.

Full and detailed financial disclosure is a fundamental principal in separation and divorce to ensure transparency as part of a meaningful and (hopefully) lasting settlement. Support payors who are self-employed, or who earn their incomes through a company, have a higher disclosure obligation than others to ensure equity and fairness in this process.

If you have specific questions on making or obtaining disclosure from a self employed spouse, or concerning family corporate financial disclosure, call our Family Company Financial Disclosure Lawyers today. 1 877 602 9900