Challenging Expense Deductions
2017 Decision Clarifies the Law in Alberta
Corporate expense deductions such as vehicle, phone, travel, and meal expenses are often a point of contention when calculating the income of self-employed parents for the purposes of child support. According to sections 18-21 of the Federal Child Support Guidelines, if a parent derives a personal benefit from an expense deduction, a court can add an amount back to the parent’s pre-tax income when calculating child support, unless the parent is able to show that the deductions were reasonable in the circumstances. In the recent Alberta Court of Appeal decision in Cunningham v Seveny 2017 ABCA 4, Justice Schutz (with Paperny J.A. and Strekaf J.A. concurring) clarified the law regarding which party has the burden of proving that expense deductions made by a self-employed parent are reasonable.
In Cunningham v Seveny, Schutz J.A. dealt with a case where the mother challenged the reasonableness of the father’s expense deductions. The father argued that either the mother should hire an accountant or the court should appoint an expert to determine whether the corporate expenses he was claiming were reasonable (para. 20). Schutz J.A. clarified that the onus was actually on the father to show that the expense deductions were reasonable, stating “so as to leave no doubt about the correct principle: the evidential and persuasive onus under sections 18-21 of either the federal or provincial Guidelines as to the reasonableness of expenses, rests with the self-employed or corporate parent throughout” (para. 28).
Schutz J.A. also clarifies the disclosure obligations under s. 21(1)(d)(ii) of the Guidelines, stating that this “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” (para. 23).
The clarification of the law in the Cunningham v Seveny decision has already impacted Alberta cases. In the recent Alberta Court of Queen’s Bench case Zdyb v Ydyb 2017 ABQB 44, Justice Graesser found that, following the outcome in Cunningham v Seveny, the father’s disclosure in this case was not sufficient and that he was required to provide more detailed information about his corporate expenses (para. 58). Justice Graesser referred to the importance of the Cunningham v Seveny decision, stating “Cunningham is a very significant decision. It will have a broad impact on a high percentage of support claims. While it will undoubtedly result in more fulsome disclosure, it will likely generate a flood of notices to disclose and may well create a cottage industry of experts weighing in on personal benefits from corporate expenses in a way the courts have not seen before” (para. 70).
The previous law in Alberta regarding establishing the reasonableness of expense deductions came from Alberta Court of Queen’s Bench cases McCaffrey v Dalla-Longa 2008 ABQB 183 and Wildeman v Wildeman 2014 ABQB 732. McCaffrey v Dalla-Longa set out that the party challenging an expense deduction had the burden of first establishing that the deduction was not reasonable. If a prima facie case was established, then the burden switched to the responding party to show that the deduction should not be added back into their pre-tax income (para. 240).