Cunningham v Seveny, 2017 ABCA 4Calculating a Business Owner’s Income to Determine Support
- Rylan Alston
- 3 days ago
- 5 min read
Family law matters can become significantly more complex when one party operates a corporation, as there are various ways to allocate and report income. These methods can make it difficult for another party to ascertain the precise earnings generated through the business. The Alberta Court of Appeal addressed this issue in Cunningham v Seveny, 2017 ABCA 4 (the “Cunningham decision”).
What is a Corporation?
To provide context for this issue, a corporation is a distinct legal entity. In the eyes of the law, it possesses its own rights and is responsible for its own tax filings. Consequently, rather than owning a corporation, individuals typically control the entity or act as its agent. Legally, ownership is expressed through shares, which grant individuals specific rights regarding the corporation's governance and assets.
Because a corporation is its own legal person, the individuals controlling it are generally shielded from personal liability for its operations. This principle, often referred to as the corporate veil, ensures that a lawsuit against the corporation cannot target the personal assets of its directors or shareholders unless specific legal parameters are met to justify piercing this veil.
Private vs Public Corporation
While many people associate corporations and shares with large, publicly traded companies, where shares are bought and sold on a stock exchange, the vast majority of corporations are actually private businesses. In these cases, a single individual or a small group holds all the shares, and the public cannot purchase an interest in the entity. These private corporations function as financial tools used to limit personal liability.
This distinction is critical: although a private corporation is a separate legal entity, it remains under the near-absolute control of the shareholders. This duality allows an individual to exercise significant discretion over the corporation’s financial activities, which can lead to creative methods of allocating or reporting personal income.
Calculating Income in Family Law
This distinction is critical in family law, as an individual’s income is the primary factor in calculating child support, and determining entitlement and quantum of spousal support. When parties to a divorce are traditional employees, income calculation is generally straightforward; one typically relies on the T1 General tax return, where all sources of income are declared. Employees have very little control over how they are compensated or how that income is reported to the Canada Revenue Agency (CRA).
In contrast, the revenue of a private corporation, and specifically its surplus revenue, is managed by the individual who controls the entity. This surplus can be reported to the CRA using various accounting strategies that, while compliant with the Income Tax Act, may not reflect the individual's actual financial resources.
As explained in paragraph 31 of the Cunningham decision, family law is not strictly concerned with what is correctly reported for tax purposes. Instead, the focus is on the actual or potential income an individual can access through their control of a corporation. While tax returns are a starting point, they are only determinative in a family law context if they reflect a person's true cash flow. Essentially, family law income and taxable income only intersect when their underlying goals align.
The Federal Child Support Guidelines specifically acknowledge this discrepancy. Sections 18 through 21 empower the Court to find that the income reported by a self-employed individual does not accurately reflect their true earning potential, allowing the Court to impute income to that person accordingly.
Cunningham Decision
In the Cunningham decision, the Alberta Court of Appeal addressed the inherent difficulty of calculating income for individuals who are self-employed or in control of a corporation.
Initially, the lower court, or Chambers Judge, determined that a self-employed individual’s income calculations should be presumed correct. This effectively placed the burden on the opposing party to prove why those calculations were inaccurate. This approach was problematic; as previously noted, a self-employed individual has the ability to report income creatively, while the other party often lacks a comprehensive understanding of the corporation’s internal finances.
Consequently, the non-controlling party was placed in the nearly impossible position of trying to disprove financial figures for a private entity they did not understand and could not access. To resolve this imbalance of knowledge and power, the Alberta Court of Appeal established a new standard for transparency: Cunningham Disclosure.
What is Cunningham Disclosure
As noted in paragraph 20 of the Cunningham decision, the self-employed individual argued they had fulfilled their financial disclosure requirements by strictly adhering to the rote requirements set out in the legislation. However, the Court rejected this narrow view, ruling that financial disclosure requirements must be interpreted broadly.
This broad interpretation mandates that a self-employed individual must provide the disclosure necessary to ensure the other party fully understands how income is being generated through the corporation. Paragraph 23 of the decision clarifies that this obligation includes not only “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 support obligations.
In effect, the Court shifted the burden of proof: the self-employed individual must now provide sufficient documentation and explanation to demonstrate that their income calculation is accurate. If the Court is not satisfied that the individual has met this evidentiary burden, it may infer a higher income and impute accordingly.
Ultimately, the Cunningham decision establishes a presumption that the self-employed party bears the responsibility of proving their reported income is accurate. The onus is no longer on the other party to disprove the self-employed individual’s figures.
Limitations of Cunningham Disclosure
It is important to note that corporate ownership or self-employment does not automatically imply absolute control over an entity. As explained in paragraph 34 of the Cunningham decision, this analysis is context specific. Enhanced disclosure is only mandated when there are legitimate concerns that an individual may be manipulating or obscuring their income.
For instance, if an individual holds a minority interest in a corporation but lacks control over financial reporting or corporate expenditures, it may be unreasonable to impose the more overbearing requirements of Cunningham disclosure. Essentially, these requirements do not justify a fishing expedition; the scope of disclosure must be directly proportional to the level of control the individual exercises over the private corporation.
This is a critical distinction, as the high threshold for financial disclosure can lead to significant delays and substantial administrative costs for the shareholder. The Cunningham requirement, designed to address genuine concerns regarding control and transparency, should not be weaponized to strategically disadvantage an opposing party. Cunningham disclosure is intended as a shield to ensure accurate support calculations, not as a sword to unjustly impede the legal process or cause financial harm.
If a party is found to be utilizing these disclosure requirements in bad faith, the matter should be addressed by the Court, and costs should be awarded to compensate the wronged party for their resulting financial loss.
Conclusion
In conclusion, Cunningham disclosure is a vital tool for addressing the complex financial scenarios that arise when a party’s control over a corporation makes determining their actual income challenging. However, this requirement must be applied proportionately and should not be used to unjustly penalize a shareholder or cause undue legal delays.
Whether you operate a corporation and feel these disclosure requirements are being applied unfairly, or you are separating from a self-employed individual and facing financial non-disclosure, Stokes Law LLP is here to ensure your rights are protected. We are committed to ensuring that income is accurately determined and that support is allocated fairly and justly.
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