Financial disclosure is a recurring issue in family law. Many court decisions repeat the words from a 2015 Court of Appeal decision that said:
The most basic obligation in family law is the duty to disclose financial information. This requirement is immediate and ongoing.
Fine. But how do you know you have made enough disclosure to satisfy your duty?
Disclosure is not a straight line – A to B, start and finish. There are layers of disclosure, the amount and thickness depending on each person’s personal circumstances and the legal issues involved. Let’s explore:
Layer 1 – Information
The most basic layer of disclosure is imparting relevant information to the other party.
But not all information has the same value. If I tell you last night’s hockey score, that is information. But:
- it may or may not be accurate,
- it can be checked (verified) against another source, to see if it’s accurate or not, and
- it has little to do with family law.
So the Ontario court system has forms – Financial Statements – to direct people to provide information that is relevant to family law. Any information you jot down may or may not be accurate or verified, but it’s a start. We use the same forms whether you are in court case or not.
The requirement for a sworn statement of information for property division following the breakdown of a marriage is codified in the Family Law Act, at Section 8, which states:
Statement of property
8 In an application under section 7, each party shall serve on the other and file with the court, in the manner and form prescribed by the rules of the court, a statement verified by oath or statutory declaration disclosing particulars of,
(a) the party’s property and debts and other liabilities,
(i) as of the date of the marriage,
(ii) as of the valuation date, and
(iii) as of the date of the statement;
(b) the deductions that the party claims under the definition of “net family property”;
(c) the exclusions that the party claims under subsection 4 (2); and
(d) all property that the party disposed of during the two years immediately preceding the making of the statement, or during the marriage, whichever period is shorter.
Layer 2 – Documents attached to the Financial Statement
The Family Law Rules, Rule 13(3.1) says that with service of the first financial statement in a court proceeding, the following documentation needs to be provided:
1. The income and financial information referred to in subsection 21 (1) of the child support guidelines.
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For completeness, that list is set out here:
(a) a copy of every personal income tax return filed by the parent or spouse including any materials that were filed with the return for each of the three most recent taxation years;
(b) a copy of every notice of assessment and reassessment issued to the parent or spouse for each of the three most recent taxation years;
(c) where the parent or spouse is an employee, the most recent statement of earnings indicating the total earnings paid in the year to date, including overtime, or, where such a statement is not provided by the employer, a letter from the parent’s or spouse’s employer setting out that information including the parent’s or spouse’s rate of annual salary or remuneration;
(d) where the parent or spouse is self-employed, for the three most recent taxation years,
(i) the financial statements of the parent’s or 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 parent or spouse does not deal at arm’s length;
(e) where the parent or spouse is a partner in a partnership, confirmation of the parent’s or spouse’s income and draw from, and capital in, the partnership for its three most recent taxation years;
(f) where the parent or spouse controls a corporation, for its three most recent taxation years,
(i) the financial statements of the corporation and its subsidiaries, 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 corporation, and every related corporation, does not deal at arm’s length;
(g) where the parent or spouse is a beneficiary under a trust, a copy of the trust settlement agreement and copies of the trust’s three most recent financial statements; and
(h) in addition to any information that must be included under clauses (c) to (g), where the parent or spouse receives income from employment insurance, social assistance, a pension, workers compensation, disability payments or any other source, the most recent statement of income indicating the total amount of income from the applicable source during the current year or, if such a statement is not provided, a letter from the appropriate authority stating the required information.
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2. If the party became unemployed within the last three years,
i. a complete copy of the party’s Record of Employment, or other evidence of termination, and
ii. a statement of any benefits or income that the party is still entitled to receive from his or her former employer despite or as a result of the termination.
3. In the case of a claim for the support of a child, proof of the amount of any special or extraordinary expenses, within the meaning of section 7 of the child support guidelines.
In reality, rarely is the information from the Child Support Guidelines list provided. To successfully file your first financial statement with the court, you only need to attached the documents on page 2 of the financial statement, which include three years’ notices of assessment, pay stubs if employed; EI, WSIB or social assistance stubs if not employed; record of employment and termination benefits – if checked off (as set out above in #2); and profit, and loss statement if self employed.
Keep in mind at this level that the purpose of documentation is to verify that the information provided in the financial statement is accurate. But not all documentation is equally reliable.
Consider the employed person’s income documentation: A Notice of Assessment is a computer summary of what is said in the filed Tax Return. The Tax Return will reflect what is said on a T4. The T4 is a summary of accumulated paystub information over the course of a tax year. Each document provides a different level of detail, and even a different perspective. But which documents are the most reliable? Only those from the employer, who is a third party and presumably has nothing to gain (and much to lose) by manipulating income information for an employee. But if the employer is a close friend or family member of the employee, even that documentation may not be reliable.
Something else to think about: The financial statement itself is the product of a time when the court system was wholly paper-driven. It asks you to append some documents (but not others), and doesn’t provide you with a place to put them. So they are included at the back, unorganized. Think about when you complete a passport application, where do you put the photos? Currently, family law disclosure is a album of photos, with no album.
Layer 3 – Documents not asked to be attached to the Financial Statement, but required under the Family Law Rules
Rule 13(3.3) requires the following documentation where there is also a family law equalization of net family property claim. Some of these documents are included in the Child Support Guidelines list:
1. The statement issued closest to the valuation date for each bank account or other account in a financial institution, pension, registered retirement or other savings plan, and any other savings or investments in which the party had an interest on that date.
2. A copy of an application or request made by the party to obtain a valuation of his or her own pension benefits, deferred pension or pension, as the case may be, if any, as of the valuation date.
3. A copy of the Municipal Property Assessment Corporation’s assessment of any real property in Ontario in which the party had a right or interest on the valuation date, for the year in which that date occurred.
4. If the party owned a life insurance policy on the valuation date, the statement issued closest to that date showing the face amount and cash surrender value, if any, of the policy, and the named beneficiary.
5. If the party had an interest in a sole proprietorship or was self-employed on the valuation date, for each of the three years preceding that date,
i. the financial statements of the party’s business or professional practice, other than a partnership, and
ii. a copy of every personal income tax return filed by the party, including any materials that were filed with the return.
6. If the party was a partner in a partnership on the valuation date, a copy of the partnership agreement and, for each of the three years preceding the valuation date,
i. a copy of every personal income tax return filed by the party, including any materials that were filed with the return, and
ii. the financial statements of the partnership.
7. If the party had an interest in a corporation on the valuation date, documentation showing the number and types of shares of the corporation and any other interests in the corporation that were owned by the party on that date.
8. If the corporation in which a party had an interest was privately held, for each of the three years preceding the valuation date,
i. the financial statements for the corporation and its subsidiaries, and
ii. if the interest was a majority interest, a copy of every income tax return filed by the corporation.
9. If the party was a beneficiary under a trust on the valuation date, a copy of the trust settlement agreement and the trust’s financial statements for each of the three years preceding that date.
10. Documentation showing the value, on the valuation date, of any property not referred to in paragraphs 1 to 9 in which the party had an interest on that date.
11. Documentation that supports a claim, if any, for an exclusion under subsection 4 (2) of the Family Law Act.
12. The statements or invoices issued closest to the valuation date in relation to any mortgage, line of credit, credit card balance or other debt owed by the party on that date.
13. Any available documentation showing the value, on the date of marriage, of property that the party owned or in which he or she had an interest on that date, and the amount of any debts owed by the party on that date.
(3.4) A party who is required under subrules (1) to (3) to serve and file a financial statement in relation to a property claim other than a claim under Part I of the Family Law Act shall, no later than 30 days after the day by which the financial statement is required to be served, serve on the other party any information necessary to support the claim, unless the court orders otherwise.
For the average person going through divorce, the paper-chase can come as a complete surprise and then an overwhelming project. In addition to income documentation, there is a legal expectation that (almost) every entry in your financial statement will have an underlying document that verifies the information. Some of that documentation is easy to get – e.g. a recent bank statement pulled from your online banking. Some will be more difficult, depending on the age of the document needed and the cost to obtain it. This problem is acutely felt with date of marriage statements and foreign account statements.
Layer 4 – Documents you will need to support or defend a claim
Say you received an inheritance during a marriage and want to “exclude” it. Here’s what the Financial Statement says about that:
Show by category the value of property owned on the valuation date that is excluded from the definition of “net family property” (such as gifts or inheritances received after marriage).
Well, not so fast. There is a statute (law) that addresses “excluded property”, and on account of that law many prior court decisions discuss various legal tests on how to evidence the exclusion, and how to calculate the exclusion. But the financial statement form can’t explain everything.
Say you are unemployed. The financial statement asks for an employment insurance stub and a record of employment. But there is a statute that addresses a claim that will likely be made against you, that you are intentionally under/unemployed and many, many prior court decisions that provide various legal tests on evidencing the nature of the job loss and reasonable steps to reemployment in your specific circumstances. But the financial statement form can’t ask for everything.
One of the worst situations people find themselves in going through all the hoops to finally attend a formal court hearing, only to hear the judge say “This there is insufficient evidence before me to even discuss this claim, so I am dismissing it.”
Within this layer we can include “contingent future liabilities”, something lawyers know all about, but the average person would not. Failing to include (and justify) these line items in a financial statement where otherwise warranted can have significant impact on property calculations. And you don’t even know about it.
Layer 5 – Valuations
How much “value” is your chequing account on January 1, 2021? Easy, right? Just look up the account balance online.
How much is your pension worth? Your house, cottage or investment property? Your business?
The value of some entries on your financial statement will require you to provide more than a document. It will require a professional opinion of fair market value. Opinions cost money, and you are not just paying for the report, but the credibility of the professional and their valuation technique. Opinions also need information and documentation, which you need to provide to the professional providing the opinion.
For certain assets, like cars and boats, lawyers have used shortcuts to professional opinions such as Canada Red Book or Kelly Blue book. But those are shortcuts and not necessarily proper evidence for a unique vehicle.
“Opinion evidence” is a body of law that relates to the problems that arise when you hire someone to provide an opinion on value. The Family Law Rules now have specified requirements that need to be considered before even thinking of retaining a professional.
Layer 6 – The Full Audit
We usually relate the term “audit” with a review by Canada Revenue Agency. But all it means is a review of documentation to determine of the information provided is accurate.
Look back to Layer 2, that too is an audit of sorts. The full audit in family law, though, is where information provided in Layers 1, 2 and 3 is so unreliable or does not reflect other realities, as to require a large volume of reliable (often historic) documentation to reconcile the discrepancy. Requests for such documentation are typical where:
- For support claims, a party is self employed, whether as a sole proprietor or through corporation(s), and the income they declare on their tax return does not reflect the actual money they have available or their lifestyle.
- For property claims, a party is claiming to have less assets than previously presented to the other party or the outside world.
- For support and property claims, where a party is employed by a business controlled by a close friend/family member.
What is important to understand that while the full audit rarely actually occurs, the documentation to conduct it is frequently sought and found relevant to provide. Layer 6 claims often arise in the context of litigation, and it is essential to get ahead of these claims, failing which you may find yourself providing voluminous documentation and still have a successful claim made against you. It comes back to telling a cogent story and to reconcile or mitigate the discrepancy.
Conclusion
People having trouble with Layers 1, 2 and 3 usually just need some supportive help.
But the recurring problems family law fall squarely in Layers 4, 5 and 6. If it is possible to identify these issues as early as possible after the separation process is started, it is more likely they can be properly addressed, proactively documented/evidenced so claims can be pursued or defended on their merits on a “full disclosure” record.