Disclosure Requirement: Onus Shift and Obligation Defined

Kathryn Tweedie

Generally, when parents are employed by an arm’s length employer, determining income for support purposes is a relatively straightforward endeavor. Not so when a parent earns income from self-employment, a partnership or a closely held, private corporation.  The inquiry is usually complicated by ascertaining the value of personal benefits included in expenses deducted from gross revenue, which should typically be added back to net income for support purposes. Expenses incurred for home office, travel, entertainment, automotive, telephone, computer and the like commonly entail some personal component in addition to business purpose. The task is essentially one of evaluating the business necessity of an expense as opposed to using that money for support.

Practically speaking, it used to be down to the support recipient to attempt to quantify the value of personal benefits through questioning and/or expert reports, which would often end up being a frustrating, complicated and expensive process, while all or most of this information was typically within the direct knowledge, possession and control of the support payor.  This paradox was recognized by the Alberta Court of Appeal decision of Cunningham v. Seveny, 2017 ABCA 4, in which the disclosure burden has now clearly been placed on the parent who derives self-employment income or receives income or benefits from a closely held corporation.

The mandatory financial disclosure for a sole proprietorship, partnership and/or closely held corporation is essentially comprised of:

(a) financial statements for the 3 most recent taxation years; and

(b) 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 spouse or corporation, and every related corporation does, does not deal at arm’s length ( the “(b) statement”).

The particular information required to be provided in this (b) statement is somewhat vague and as such, may be one of the reasons the statement was rarely produced.  However, further particulars have since been found to necessitate a detailed breakdown of expenses, together with evidence as to the amount or percentage of personal benefit from any of the expenses.  Justice Yungwirth, in the case of Sweezey v. Sweezy, 2016 ABQB 131, defined the required information to be provided in the (b) statement as follows:

[48] As a general rule, the shareholder should provide at least the following:

• a brief explanation concerning each payment category, including
  • the nature of the payment/expense;
  • how it was calculated;
  • why it was a reasonable corporate expenditure;
  • whether any amounts paid or owing in relation to that category provided or resulted in a personal benefit to the shareholder or other non-arm’s length person (common examples of such expense categories in closely held corporations are vehicle, travel, promotion, phone and insurance).  This would include an explanation for:
    • what portion of the total expense formed the personal or non-arm’s length benefit;
    • how this was calculated;
    • a description of any services performed for the corporation by a non-arm’s length person (such as a new partner/spouse of the shareholder), and information regarding whether the salary s/he was paid for the services was commensurate with the market value of the services; and
• documentation to support all of the above explanations, such as invoices and receipts regarding non-arm’s length payments.

Consequently, the disclosure obligation is now more onerous for the self-employed/partner/shareholder parent, but hopefully this defined (b) statement information will facilitate more efficient resolution of these cumbersome income determination issues required to establish appropriate support.