Justifying Reasonable Business Expenses
When a payor spouse operates an incorporated business or sole proprietorship, his or her disclosure obligations under s 21(1)(d)(ii) of the Federal Child Support Guidelines are quite broad. Schutz JA stated the following at paragraph 23 of Cunningham v Seveny, 2017 ABCA 4 [Cunningham]:
… where a parent’s corporation or business undertaking is the primary vehicle through which he or she earns income. It 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 in the context of determining income available for discharge of child support obligations.
The issue of “benefits”, touched upon in the above quote from Cunningham, is further elaborated upon in the 2017 Alberta Court of Queen’s Bench decision Zdyb v Zdyb, 2017 ABQB 44 [Zdyb]. In Zdyb, the payor husband argued that he provided sufficient disclosure, in respect of his expenses that were incurred through his company, by providing unaudited financial statements, without explanation as to the reasonableness such expenses. The Court found that the husband’s disclosure was insufficient without an explanation of the personal benefits received. At paragraph 48 of Zdyb, Grasesser J set out the disclosure standard in Alberta:
In cases of a closely held operation, such as a sole proprietorship (incorporated or not) or where the parent is a majority shareholder, or where the shareholder and another non-arms-length party control the finances, detailed breakdowns of expenses are now required, together with evidence as to the amount or percentage of personal benefit from any of the expenses. It is now not sufficient to rely only on financial statement line items unless there is obviously no possibility of a personal benefit being derived from such an area of expense. A letter or advice from the corporation’s accountant that expenses have been treated in accordance with Canada Revenue Agency requirements and generally accepted accounting principles will not suffice.
In light of the current law in Alberta, it is incumbent upon the payor spouse to present documentation to the other party confirming that a particular expense is reasonable with respect to the ongoing operation of the business. Any unjustified personal financial benefit are oftentimes attributed to the payor as income for the purpose of child or spousal support, as is consistent with the Guidelines and the current law in Alberta.
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