Show Me the Money: Financial Disclosure Obligations for the Self-Employed
The Federal Child Support Guidelines (FCSG) establishes the financial disclosure required by parties to determine monthly child support payments after separation. Under the FCSG, additional disclosure is mandated for an individual who is self-employed. Specifically, section 21(d) states a self-employed individual must provide:
(d) … for the three most recent taxation years
(i) the financial statements of the spouse’s business or professional practice, other than a partnership, and
(ii) 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 does not deal at arm’s length
Typically, where an individual is an employee, child support is determined using the Line 150 income. Section 17 – 19 of the FCSG prescribes power to the court to deviate from the Line 150 income where it is not the fairest determination for child support. When setting the income of a self-employed spouse, there are additional considerations the court is entitled to make. This includes the pre-tax income of a corporation and whether a spouse unreasonably deducts expenses from their claimed income.[1]
In Cunningham v Seveny (2017), the Alberta Court of Appeal discussed the requirement for a higher level of financial disclosure from self-employed individuals. The Income Tax Act allows for self-employed individuals to deduct expenses incurred as a result of their business.[2] The FCSG recognizes that personal benefit can derive from some of the expenses deducted. For example, this may include the use of corporate vehicles, computers, cellphones, and benefits associated with travel.
Where deductions are claimed, the Court requires the individual to explain how these deductions did not result in a personal benefit and as such, do not constitute income.[3] The onus is on the business owner to provide the explanation as to why the corporation’s pre-tax income is not available to them because they have the firsthand knowledge of the business expenditures.[4] It is important to be forthcoming in the disclosure requirements listed under the FCSG because a court could, in a worst-case scenario, apply the entire pre-tax income of a corporation to determine the child support payment.[5] It is the court’s role to balance the necessity of the expenses to the business with alternately using the funds for child support purposes.[6]
The level of scrutiny expenses undergo is largely dependent on the nature of the business and if the individual has sole control over the business’s financial choices. Expenses claimed by closely-held corporations and sole proprietorship business arrangements will be examined more closely than expenses made in arm’s-length business arrangements.
In sum, while it may be frustrating to hand over financial disclosure about your business to your ex-spouse, it is necessary to ensure the child receives the support they are entitled to.
[1] Federal Child Support Guidelines SOR/97-175 s1 18(a) and s 19(g). (FCSG)
[2] Income Tax Act RSC, 1985, c. 1 (5th Supp.)
[3] Cunningham v Seveny 2017 ABCA at para 25.
[4] Henderson-Jorgensen v. Hendersen-Jorgensen 2013 ABCA 328 at para 12.
[5] FCSG, supra note 1 s 18(a).
[6] Ibid., at para 27.