Understanding Corporate Financial Disclosure During Separation

When separating from your partner, addressing issues like property division, child support, and spousal support often involves navigating complex financial matters. For individuals whose income is primarily derived from a corporation, the disclosure requirements are often quite strict. In these cases, parties must provide detailed and comprehensive financial information about their corporations to ensure fair outcomes in family law proceedings.

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Why Is Corporate Financial Disclosure Important?

Financial disclosure is a requirement imposed by the court in family law proceedings. Courts rely on complete and accurate financial information to determine appropriate support arrangements. For individuals who are self-employed or those who are shareholders or directors of corporations, the obligation to disclose extends beyond personal income to include corporate financial details.

Key Legal Framework for Corporate Disclosure

Alberta Child Support Guidelines

The Alberta Child Support Guidelines, particularly sections 16, 18, and 21, outline mandatory disclosure requirements for self-employed parents or those who own corporations. These provisions ensure that income reported for child support purposes reflects the actual financial resources available to the payor.

• Section 16: Income determination begins with total income as reported on the T1 tax return but may go beyond this figure.

• Section 18: Courts may deviate from reported income if it does not fairly reflect all funds available for child support. This includes considering pre-tax corporate income and payments to non-arm’s-length parties.

• Section 21: Specifies detailed disclosure requirements, including financial statements and breakdowns of payments to related parties.

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Case Law Insights

Cunningham v. Seveny, 2017 ABCA 4 

In this case, the court emphasized that disclosure obligations are integral to fulfilling child support obligations. The father, a corporate director, failed to provide sufficient evidence to justify substantial deductions, such as personal use of corporate vehicles and travel expenses. The court ruled that permissible deductions for tax purposes may be deemed unreasonable for child support calculations. The father was ordered to produce additional disclosure, allowing the court to assess his actual income.

RAO v. SDO, 2023 ABKB 316 

The court drew an adverse inference against a father who failed to provide general ledgers for his corporation. The absence of this critical documentation hindered the court’s ability to verify the reasonableness of business expenses. Consequently, the court relied on the mother’s expert report to determine the father’s income.

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What Disclosure Is Required?

Parties deriving income from corporations must provide detailed financial information to facilitate transparency. Key requirements include:}

1. Corporate Financial Statements

   • For the three most recent taxation years.

2. Breakdowns of Payments to Related Parties

   • Salaries, wages, and management fees.

   • Any benefits provided to related parties.

3. Explanations for Expenses

   • Nature and calculation of each expense.

   • Reasonableness of the expense as a corporate expenditure.

   • Identification of personal benefits derived from corporate expenses.

4. General Ledgers

   • Detailed records of transactions to verify expenses.

5. Supporting Documentation

   • Invoices, receipts, and contracts related to claimed expenses.

   
   

How Courts Evaluate Income from Corporations

Courts assess whether corporate deductions are justified and distinguish between legitimate business expenses and personal benefits. If expenses are deemed unreasonable, they may be added back to the payor’s income for support calculations. The burden of proof lies with the disclosing party to demonstrate the validity of these deductions.

Consequences of Non-Disclosure

Failing to meet disclosure obligations can result in:

• Adverse inferences by the court.

• Increased income imputation.

• Legal and financial penalties.

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Conclusion

Corporate financial disclosure is a critical aspect of family law proceedings for individuals whose income is tied to a corporation. Providing complete and accurate information ensures fair support determinations for you and your child. If you require guidance on disclosure obligations or need assistance navigating these complexities, please contact our team at Stokes Law for a consultation.

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