Lawyers from our office attended the King’s Bench Family Law Annual Town Hall Meeting hosted by the Judiciary and the Calgary Bar Association on January 18, 2017. At the meeting, the Judiciary highlighted an important case which speaks to the financial disclosure requirements for parents who are self-employed or who control corporations.
In cases where child support is payable, the Alberta Child Support Guidelines contains mandatory disclosure requirements, primarily in section 21.
Cunningham v Seveny, 2017 ABCA 4
In Cunningham v Seveny, the Mother asserted that the Father’s income for the purpose of calculating child support payable by him should be higher than as stated on line 150 – “total income” – of his income tax return. Pursuant to section 16 of the Guidelines, using line 150 may often be the starting place in determining a parent’s income; however, it is not the only relevant consideration.
Section 19(1)(g) of the Guidelines permits the Court to “impute” income to a payor parent where they unreasonably deduct expenses from their income, thereby artificially reducing the actual income available to them for the purpose of paying child support. To impute income is to deem the payor parent’s income to be higher than is set out in line 150 of their income tax return.
Unreasonably deducting expenses is just one of nine bases enunciated in the Guidelines for the imputation of income. Others can include where a parent has failed to provide adequate disclosure, is underemployed, or is subject to a different tax rate.
Section 18 of the Guidelines provides the Court with the authority to deviate from using line 150 income where a parent is a shareholder, director or officer of a corporation and the court is of the opinion that the amount of the parent’s annual income does not fairly reflect all the money available to that parent for the payment of child support.
In those cases, the Court can consider the pre-tax income of the corporation or look to the value of the services provided by the parent to the corporation.
In Cunningham v Seveny, the Court was asked to consider whether the Father’s income should be adjusted on the basis that unreasonable expenses were deducted from his income.
Citing the seminal case of DBS v SRG, 2005 ABCA 2:
“…the obligation to provide the proper amount of financial support for a child does not depend on the existence of a duty to disclose. It works the other way around. The duty to disclose is part of the obligation to pay support where the regime requires information about the payor’s income to determine the appropriate level of support.”
The Father had not provided any evidence to the Court as to why the substantial deductions claimed by him were reasonable. He had failed to provide information relating to the “salaries, wages, management fees, or other payment or benefits”, paid to non-arm’s length persons. The Court of Appeal held that this requirement must be interpreted broadly for child support purposes where a parent’s corporation or business undertaking is the primary vehicle through which he or she earns income.
“[Disclosure] includes not only a requirement to provide a statement of all payments or benefits, but also a sufficient explanation to facilitate the recipient’s assessment of the reasonableness of these payments or benefits in the context of determining income available for discharge of child support obligations.”
Some of the common expenses for which a corporate deduction is claimed may include:
- personal use of corporate vehicles;
- personal benefits associated with travel;
- entertainment; and,
- promotional expenses.
The Father in Cunningham v Seveny asserted that if the Mother wanted to claim that the expenses he deducted were unreasonable, then she had the obligation to hire an accountant to make this assessment. The Court of Appeal held that this was not the correct approach, and stated that the payor parent bears the obligation to provide relevant and material pre-trial disclosure.
The Court of Appeal was clear that where a parent who is self-employed or controls a corporation wishes to deduct business expenses from their income for the purpose of calculating applicable child support, they have the obligation of demonstrating that these deductions are reasonable.
“The content of the disclosure must be sufficient to allow meaningful review by the recipient parent, and must be sufficiently completed and comprehensive that, if called upon, a court can readily discharge its duty to decide what amount of the disclosing parent’s annual income fairly reflects income for child support purposes.
The issue is whether full deduction of an expense results in a fair representation of the actual disposable income of the party, and the court must balance the business necessity of an expense against the alternative of using that money for child support…”
Section 19(2) of the Guidelines is clear that is not sufficient that the deductions are permissible in the eyes of the Canada Revenue Agency.
Expenses may be legitimately deducted for the purpose of reducing income tax exposure; however, the framework for determining reasonableness in the context of the Guidelines is entirely distinct.
One of the central considerations in Cunningham v Seveny was with respect to the degree of control that the payor Father exercised as to the corporate deductions that were claimed as necessary.
The Court of Appeal ordered the Father to produce further and better disclosure, after which the Court would be better placed to determine his appropriate income for the purpose of paying child support.
If you would like more information about how your case may be impacted by the disclosure requirements in the Child Support Guidelines, or what disclosure may be expected, please feel free to contact one of our lawyers.
Alberta Child Support Guidelines
21(1) A parent who is applying for a child support order and whose income information is necessary to determine the amount of the order must include the following with the application:
where the parent is self-employed, for the 3 most recent taxation years:
(i) the financial statements of the parent’s business or professional practice, other than a partnership, and,
(ii) a statement showing a breakdown of all salaries, wages, management fees or other payments or benefits paid to, or on behalf of, persons or corporations with whom the parent does not deal at arm’s length;
where the parent is a partner in a partnership, confirmation of the parent’s income and draw from, and capital in, the partnership for its 3 most recent taxation years;
where the parent controls a corporation or has an interest of 1% or more in a privately held corporation, for its 3 most recent taxation years:
(i) the financial statements of the corporation and its subsidiaries, and,
(ii) a statement showing a breakdown of all salaries, wages, management fees or other payments or benefits paid to, or on behalf of, persons or corporations with whom the corporation, and every related corporation, does not deal at arm’s length.