Where a parent is self-employed or controls a corporation, who bears the burden of proof to demonstrate that certain business expense deductions are reasonable for the purposes of calculating income for child support? The short answer is the person who is claiming them.
Proving expenses when calculating income for child support
In Cunningham v. Seveny, 2017 ABCA 4, Ms. Cunningham applied for retroactive child support on the basis that Mr. Seveny had not been honest about his income and expense calculations while practising with his law partnership, or in respect of his professional corporation. In calculating income for child support, the Chambers judge relied on Mr. Seveny’s Line 150 income, effectively placing an onus on Ms. Cunningham to demonstrate that Mr. Seveny’s corporate expenses were unreasonable and should be imputed to his income.
The Court of Appeal allowed Ms. Cunningham’s appeal, stating definitively that the evidential and persuasive onus as to the reasonableness of expenses rests with the self-employed or corporate parent throughout. The matter was remitted to the Court of Queen’s Bench for a re-hearing once Mr. Seveny provided full financial disclosure, including all relevant information relating to certain expenses deducted from income (all of which he was required to disclose forthwith).
This post will discuss the Court’s rulings on the onus of proof and disclosure requirements with respect to calculating income for child support where business expenses have been claimed by a parent who is self-employed or controls a corporation. Have a look at some of my earlier posts for discussion of calculating income for child support where the paying parent received deemed dividends or has annual income of over $150,000 per year.
What are the governing legislative provisions?
In matters involving a parent who is self-employed or controls a corporation, ss. 18 to 21 of the Federal Child Support Guidelines, SOR/97-175 apply. These provisions recognize that the taxable income declared in a tax return completed by a self-employed parent or a parent who is a shareholder, director, or officer of a corporation whose income derives from a corporation or business undertaking, may not fairly reflect the amount of the parent’s annual income available for child support purposes. A determination of the reasonableness of expenses claimed in reduction of annual income is a core, and critical, aspect of this analysis.
Who bears the onus of proving expenses?
It is the disclosing parent who has the financial information, and it is therefore he or she who bears the responsibility to provide relevant and material disclosure. The Court of Appeal stated (at para. 28):
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, and is the most effective means by which to serve the best interests of the child.
It is not reasonable for the recipient of child support to have to pay a lawyer to question the disclosing spouse, and to embark on other discovery processes, including the hiring of experts, in order to obtain the information that is in the possession or control of the disclosing spouse. That approach utilizes financial resources that would otherwise be available for the children and goes against the objectives of the Guidelines.
When is disclosure triggered?
In matters concerning child support, the required disclosure arises at the outset and continues to be the obligation of the disclosing parent throughout the duration of all child support proceedings. A parent challenging the reasonableness of corporate or business expenses is not legally required to first establish a prima facie case that such expenses are unreasonable before disclosure becomes necessary (Cunningham at para. 26).
What must be disclosed?
The disclosure obligation will depend on a number of factors, the most important of which is the degree of control exercised by the parent shareholder, director, or officer, partner or proprietor. The level of scrutiny that is justified will be commensurate with the level of control the disclosing parent has over the business entity’s overall financial choices. Cunningham involved a partner in a small law firm over which he had sole control, thus greater disclosure was directed. However, the Court suggested (at para. 34) that “had this case involved a larger law partnership, relevant and material disclosure might have been most quickly and cheaply achieved by having the managing partner provide a letter confirming that expenses claimed in the partnership financial statements conferred no personal benefit on the disclosing parent”.
Where the source deducted expenses for income tax purposes may have resulted in a personal benefit to the parent and, therefore, may be relevant in determining child support obligations, the parent must disclose those deductions. Common examples include personal use of corporate vehicles, computers, cell phones, personal benefits associated with travel, entertainment and promotional expenses, and other non-arm’s length expenditures. If the parent takes the position that those deductions did not result in a personal benefit, an explanation is required for why those expense deductions (or a part of them) should not be attributed to the parent’s income for child support purposes.
Is compliance with the Income Tax Act sufficient to prove reasonableness of expenses?
Mr. Seveny took the position that the expenses were approved for income tax purposes and should thereby be found to be reasonable. That position is not reflective of the test for analyzing expenses when calculating income for child support purposes. Calculating income for child support purposes engages an entirely different legislated methodology, as the disclosure requirements of s. 21 of the Guidelines make clear. Moreover, as provided in s. 19(2) of the Guidelines, “the reasonableness of an expense deduction is not solely governed by whether the deduction is permitted under the Income Tax Act (Canada).” Child support is the right of the child, thus a parent’s legal obligation to pay child support that fairly reflects the parent’s income is not to be limited by income tax statutes that may confer entitlements in relation to deductibility of business expenses (Cunningham at para. 31).
Bottom line on business expenses and calculating income for child support
When calculating income for child support where a parent against whom the order is sought derives self-employment income or receives income or benefits from a closely held corporation, the onus as to the reasonableness of expenses rests squarely with the self-employed or corporate parent. That parent must disclose details of the business expenses, and quantify the value of any personal benefits obtained from any of the expenses. The level of scrutiny and content of the disclosure obligation will depend on a number of factors, the most important of which is the degree of control exercised by the parent shareholder, director, or officer, partner or proprietor.