Disclosure Obligations Where One Party Owns a Company
Owning A Company Means You Have A Higher Disclosure Obligation
Section 3 child support is typically a straight forward calculation because the Federal Child Support Guidelines set the amount of child support payable based upon an equation of factors. The factors taken into account when calculating child support are: the number of children, the parenting arrangements of the children and the incomes of the parties. However, in some instances, child support calculations can become complex, for example if the payor parent makes well over $150,000 or if the payor parent receives his or her income from a company or partnership.
How Owning A Company Impacts Child Support And The Importance of Disclosure
If the payor parent is a shareholder, director, or officer of a corporation, his or her annual income on his or her tax return may not necessarily reflect the payor parent’s actual income. Under section 18(1) of the Federal Child Support Guidelines, the Court may consider further evidence beyond the taxable income if it is satisfied that the payor’s annual income does not accurately reflect the money available to the party to pay child support. A common scenario that arises is the payor parent, who receives his or her income from a company, will claim expenses in determining his or her taxable income. It can be difficult for the other spouse to ascertain whether or not an expense is really reasonable. In order to help address these issues, under a standard Notice to Disclose, the parent who has 1% or more interest in a privately held corporation is obligated to provide:
- the financial statements of the corporation and its subsidiaries for its 3 most recent taxation years;
- a statement showing a breakdown of all salaries, wages, management fees or other payments or benefits paid to yourself, or to persons or corporations with whom the corporation, and every related corporation, does not deal at arm’s length for the corporation’s 3 most recent taxation years; and
- a record showing your shareholder’s loan transactions for the past 12 months.
Case Law Regarding Disclosure Obligations In Alberta
The Alberta Court of Appeal recently released a decision, Cunningham v. Seveny 2017 ABCA 4, which dealt with determining who bore the burden of proof in showing certain business expense deductions are reasonable for purposes of calculating income for child support. Unsurprisingly, the Court found that 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.
- The nature of the payment/expense;
If you own a company or are separating from someone who owns a company, it is a good idea to speak to a lawyer to determine financial disclosure obligations and ensure you have a firm grasp on each parents income so that support issues may be dealt with properly.
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