Higher Standard For Corporate Disclosure in Family Law Cases

When parties get a divorce, they will need to address issues such as property division, child support, and spousal support where applicable. To resolve these issues, parties must provide full and accurate disclosure in their family law proceeding. The court knows that non-disclosure is an ongoing problem in many family law cases, so this obligation is highly important. If a party does not make full, complete, and accurate disclosure, the court can draw adverse inferences against them, impacting the outcome of court applications and trial. Therefore, parties to a family law case must be aware of their disclosure obligations, as failing to disclose can lead to harsh consequences. 

Sometimes, one or more parties may derive their income primarily from a corporation. If this is the case, that party will be subject to a higher standard for disclosure. In particular, they are required to provide financial information about the corporation, as the court can consider if all or part of the corporation’s pre-tax income should be included for the purposes of calculating support. 

This post will provide insights into what disclosure forms are required for parties who mainly derive their income from a corporation. We will discuss a case example, RAO v. SDO, 2023 ABKB 316, in which the court drew an adverse inference against a party for failing to provide general ledgers for his corporation, from which he received most of his income. This post will be an important resource for family law parties whose main source of income is from a corporation. 

How does the court determine one’s income if it mainly comes from a corporation?

The court must determine the payor’s income according to the Federal Child Support Guidelines to determine child support. Generally, the under s. 16 of the Guidelines, a party’s income is determined by their total income as set out in their T1 tax return filed with the Canada Revenue Agency. However, s. 18 of the Guidelines states that if the payor’s corporation or business is their primary source of income, then the court is not required to follow the default way of determining a party’s income (i.e. the total income reported in their tax return). The court may depart from the reported income amount if it does not fairly reflect all money available for paying child support.  

The court can decide to include all or part of the pre-tax income of a corporation. The following amounts would be added to the pre-tax income unless the party proves that the payments were reasonable in the circumstances:

1. Amounts received as salaries, wages, or management fees; and
2. Other payments or benefits to or on behalf of persons with whom the corporation does not deal at arm’s length (i.e. payments and benefits to related parties as opposed to third parties). 

The party must provide all financial information about the company that is within their control or possession. The party who is a shareholder, director, or officer of the company is responsible for demonstrating that the business expenses are legitimately for business purposes rather than for gaining personal benefit. Otherwise, the court can add back part or all of the expenses as part of their income for determining child support. 

What types of disclosure should be provided if a party’s income comes from a corporation?

At a minimum, a party whose primary source of income is from a corporation must provide the following disclosure:

1. Explanations about each of the following payment categories:
   1. The nature of the payment or expense;
   2. How the payment or expense was calculated; 
   3. Why the expense was a reasonable corporate expenditure; 
   4. Whether any of the amounts provided or resulted in a personal benefit to the shareholder or a related party, for instance, payments for a vehicle, travel, promotion, phone, etc.

In the last category regarding personal benefits, the party would also need to explain the following:

1. What portion of the expense formed the personal benefit or benefit for a related party;
2. How the expense was calculated;
3. A description of any services performed by the related party and whether the salary paid is comparable to the market rate.

The party would need to provide supporting documents for all of these explanations. Supporting documents would include invoices and receipts for payments to a related party. Also, as discussed in the case below, general ledgers must be provided so the court can assess the expenses. 

In many cases, there may be an expert valuation of a party’s Guideline income if their primary income source is from a corporation. Therefore, the party should provide their disclosure to the expert so that they can appropriately assess their Guideline income to be put before the court. 

Court draws adverse inference against party who failed to disclose general ledgers 

In the RAO case, the court drew an adverse inference against a party who failed to disclose the general ledgers of a corporation, which was his main source of income. 

The parties in the case were married for nine years and had two children together. The father was an electrician who was his company’s sole director and shareholder. Through the company, he contracted his services as an electrician. 

There were two expert reports regarding the father’s income. The expert retained by the mother testified that due to the lack of general ledgers, he could not verify the personal expenses flowing through the corporation properly. Given the information from the mother as a former bookkeeper of the company, as well as statistics and individuals working in the same industry, he concluded that the deducted business expenses were unreasonably high, given the nature of the company. 

The court concluded that due to a lack of general ledgers, there needed to be supporting documents to explain that the business deductions were reasonable. The court emphasized that it was the father’s responsibility to provide this information, which was within his control and could have been provided. Ultimately, the court drew an adverse inference against the father for failing to disclose the company’s general ledgers, which were highly relevant to the analysis. The court decided his income based on the report provided by the mother’s retained expert. 

Key Takeaways 

If a party is a sole shareholder or director of a corporation, there is a higher standard to provide adequate disclosure. Providing the corporation’s financial statements and tax returns may not be enough. The court may also require the corporation’s general ledgers to determine the party’s Guideline income. 

The Family Lawyers At Mincher Koeman in Calgary and Canmore Can Assist with Your Disclosure Obligations

Parties to a family law proceeding must make full and accurate ongoing disclosure. There can be significant consequences for failing to comply with disclosure obligations, so it is important to understand them from the outset. If you are seeking outstanding financial disclosure or require assistance with your disclosure obligations, you should speak with one of our family law lawyers at Mincher Koeman, who are experienced in assisting business professionals and entrepreneurs with disclosure issues in family law proceedings. Our Calgary family law lawyers are dedicated to finding the best resolution for you after your divorce.

To book a consultation, please get in touch with us online or by phone at 403-910-3000.