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Advanced Issues in Domestic Contracts in Family Law. Getting Instructions and Drafting the Agreement “Financial Disclosure and the Formulas”
“Non-disclosure in financial cases is the cancer of family law.”
– Justice Binnie, Leskun v. Leskun, 2006 SCC 25
All relevant documents in a family law case are to be disclosed and made available to the other party. It is critical to obtain complete and accurate disclosure to properly embark on discussions to negotiate a resolution in a family law matter – either within a formal court process or private negotiations. Without complete and accurate disclosure, from both your own client and the other party, you will be unable to properly advise your client, and assist them in making informed and educated decisions about the financial matters in their case.
However, this is often easier said than done. The goal of complete, accurate and timely financial disclosure can face many obstacles. An unorganized client, difficult opposing counsel, or a busy legal practise lacking strong file organization habits, can all undermine your efforts to collect and analyze the information you need to advise your client and prepare a fair resolution of the issues.
Faced with the tension between the goal of complete and timely financial disclosure, and the realities of family law, this paper is provided to assist you in developing strategies and processes to obtain the financial disclosure you need, and draft the corresponding agreement that your client can confidently rely upon.
REVIEW OF APPLICABLE LEGISLATION
When providing financial disclosure within a court process, the obligation to provide full and complete financial disclosure is clearly set out in the legislation and Family Law Rules.
Section 8 of the Family Law Act outlines disclosure requirements, and that each party shall provide 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.
Similarly, section 56(4) of the Family Law Act places a positive obligation on a spouse to make complete and accurate financial disclosure about their financial affairs and related values – meaning that a list of assets and liabilities without information regarding values is insufficient:
56. (4) A court may, on application, set aside a domestic contract or a provision in it,
(a) if a party failed to disclose to the other significant assets, or significant debts or other liabilities, existing when the domestic contract was made;
(b) if a party did not understand the nature or consequences of the domestic contract; or
(c) otherwise in accordance with the law of contract.
Rule 13 of the Family Law Rules provides for the disclosure and production of documents, the use of sworn Financial Statements as per Form 13 or Form 13.1, and ability to request additional information under Rule 13(11) when the initial financial information provided is insufficient:
13. (1) If an application, answer or motion contains a claim for support, a property claim, or a claim for exclusive possession of the matrimonial home and its contents,
(a) the party making the claim shall serve and file a financial statement (Form 13 or 13.1) with the document that contains the claim; and
(b) the party against whom the claim is made shall serve and file a financial statement within the time for serving and filing an answer, reply or affidavit or other document responding to the motion, whether the party is serving an answer, reply or affidavit or other document responding to the motion or not.
INSUFFICIENT FINANCIAL INFORMATION
13. (11) If a party believes that the financial disclosure provided by another party under this rule, whether in a financial statement or otherwise, does not provide enough information for a full understanding of the other party’s financial circumstances,
(a) the party shall ask the other party to give the necessary additional information; and
(b) if the other party does not give it within seven days, the court may, on motion, order the other party to give the information or to serve and file a new financial statement
Rule 19 of the Family Law Rules provides additional requirements for document disclosure, such as the ability to request an affidavit listing every document that is relevant to any issue in the case, and in the party’s control, or available to the party on request.
Rule 20 of the Family Law Rules also provides the procedure for questioning a party or witness about disclosure under oath or affirmation.
FINANCIAL DISCLOSURE IN PRIVATE NEGOTIATIONS
While parties to a court process have the benefits of referencing the requirements and repercussions for financial disclosure under the Family Law Rules, and the threat of obtaining Orders for disclosure or sanctions for failure to cooperate, a party engaging in private negotiations may not experience the same sense of obligation or pressure.
In order to obtain complete, accurate and timely financial disclosure in private negotiations, it is important to get your client into the same frame of mind as a client proceeding through court.
Using standard court forms, such as Form 13 and Form 13.1 Financial Statements, can assist in demonstrating and communicating the seriousness of these disclosure formalities to your client. Highlighting that this final Financial Statement will also need to be sworn as to the truth of its contents, in a manner equivalent to taking the stand in court, can also help demonstrate this point. However, nothing will replace the value of taking the time to educate your client about the importance of properly completing financial disclosure, and convincing them that it is in their best interests. For example, it is critical that your client appreciate that:
· Your advice is only as good as the financial disclosure provided;
· Without full information and cooperation, their final agreement may not properly consider or incorporate different assets, liabilities or tax considerations;
· Without full disclosure from your client, the other party will have strong grounds to pursue setting aside any agreement entered into; and
They will incur additional legal fees and delays if your office must continually request and remind them that certain information is needed and outstanding.
FINANCIAL DISCLOSURE AND THE FORMULAS
Section 33(9)(a) and section 33(9)(b) of the Family Law Act highlight the importance of income disclosure in determining the amount and duration, if any, of financial support:
33. (9) In determining the amount and duration, if any, of support for a spouse or parent in relation to need, the court shall consider all the circumstances of the parties, including,
(a) the dependant’s and respondent’s current assets and means;
(b) the assets and means that the dependant and respondent are likely to have in the future;
A client’s “assets and means” inform upon the “circumstances” relevant to determining support arrangements at first instance, and whether there has been a “material change” warranting an order varying the current support arrangements in the future.
In addition to the Family Law Act and the Family Law Rules, financial disclosure is essential to the proper application of support formulas, including the Child Support Guidelines and the Spousal Support Advisory Guidelines (the “SSAG” and/or the Revised User Guide “RUG”).
Section 21 of the Child Support Guidelines outlines income information that the parties must provide:
(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.
In reference to the support formulas, full financial disclosure is essential to avoiding mistakes while inputting income information into Divorcemate, deducting union dues, grossing up incomes, and calculating the range of spousal support. It is therefore important to seek out copies of all supporting income documents, and assess them for yourself.
For example, while many family lawyers are aware that WSIB benefits to a payor spouse are received tax-free, and will need to be grossed-up accordingly under the Child Support Guidelines, another key detail is needed: is your client still contributing to Employment Insurance and CPP at this time (Hodge v. Hodge, 2011 ONSC 3178)? Only a supporting document will be able to confirm this important detail. If these contributions are not still being made, the correct selection within Divorcemate must occur to avoid grossing up your client’s income too much.
ONUS FOR SEEKING FINANCIAL DISCLOSURE
As outlined in Emery v. Emery (2008 CanLII 8605, ON SC), the onus of establishing the value of an asset is on the party that owns the item. However, this should not be conflated with the onus of actually seeking financial disclosure.
The Ontario Court of Appeal in Butty v. Butty (2009 ONCA 852) held that there is no obligation on a party to provide further detailed information when it is not sought by the other side.
However, the Ontario Court of Appeal recently revisited this topic, and the nature of the onus of financial disclosure in the case of Virc v. Blair (2017 ONCA 394). In this case, the husband initially brought a motion for summary judgement in response to his wife’s claim to set aside their separation agreement. At paragraph 24, the Court of Appeal outlined the decision of the motion’s court judge hearing the summary judgement:
[The motions judge] concluded that even if the numbers the husband had provided were deliberately false and the wife received substantially less than her entitlement, there was no genuine issue for trial relating to setting aside the Separation Agreement. She held that the party who seeks to set aside a separation agreement cannot rely on the fact that she failed to undertake her own investigation into values when she had the opportunity to do so. The motion judge noted that the wife was a shareholder and eventually an officer of Renegade. She had full access to its books and records and chose not to review them. She also did not ask the husband for further information or consult with anyone regarding the value of the shares.
The wife appealed the summary judgement, and in 2014 the Court of Appeal (Virc v. Blair, 2014 ONCA 392) set aside the motion court judge’s order. Writing for the Court at paragraph 58, the Honorable Justice Pepall noted that the motion judge erred in shifting this onus to the wife:
[The motion judge] erred in shifting the onus to the [wife] to inquire as to the veracity of the [husband’s] financial disclosure. In the face of a deliberate material misrepresentation, the onus is not appropriately placed on the recipient spouse. Rather, the burden is on the party disclosing to establish actual knowledge of the falsehood by the recipient. The respondent could point to no authority for the proposition that the suggested duty of a spouse receiving financial disclosure in a matrimonial case, to investigate or test the veracity of the information provided, overtakes deliberate material non-disclosure by the other spouse.
Similarly, Justice Pepall continued at paragraph 68 to highlight that:
It is one thing to disclose assets and liabilities and their values believing the disclosure to be true. It is quite another to deliberately misrepresent the values of assets and liabilities knowing them to be untrue. The law does not entitle a liar to succeed just because the recipient of the falsehoods has not ferreted them out.
The Court of Appeal directed a new trial of the matter in Virc v. Blair. In the Court of Appeal’s summary of the trial at paragraph 29, the Court notes that the trial judge followed the two-step procedure set out in LeVan v. LeVan (2008 ONCA 388):
The analysis undertaken under s. 56(4) is essentially comprised of a two-part process: […] First, the court must consider whether the party seeking to set aside the agreement can demonstrate that one or more of the circumstances set out within the provision have been engaged. Once that hurdle has been overcome, the court must then consider whether it is appropriate to exercise discretion in favour of setting aside the agreement.
As a result of the above procedure, the trial judge held that the husband had not discharged his duty to disclose the value of his property, the husband had misled the wife with respect to the value of his company at the date of marriage, and that the wife believed that the husband’s financial disclosure was accurate.
The husband appealed once again, and in Virc v. Blair (2017 ONCA 394) at paragraphs 54-55, the Court held that the trial judge did not err in setting aside the separation agreement:
The trial judge correctly followed the two-step process directed by this court in LeVan. As discussed, step one requires the party seeking to set aside the agreement to demonstrate that one or more of the circumstances in s. 56(4) is engaged. The trial judge concluded that the husband had breached his disclosure obligations (s. 56(4)(a)) and, in accordance with the law of contract (s. 56(4)(c)), had materially misrepresented his assets. The trial judge then moved to step two and exercised his discretion to set aside the Separation Agreement
In addition, at paragraph 59 the Court of Appeal emphasized that:
Inherent in the duty to disclose is the duty of the titled spouse to fairly value the asset. This is a basic principle of disclosure. The onus is on the party asserting the value of an asset that he or she controls to provide credible evidence as to its value… The husband’s submission to the contrary is wrong in law [emphasis added].
At paragraph 72, the Court of Appeal cited their decision from the first appeal, and noted that the trial judge was correct to conclude the onus was on the husband to establish that the wife had actual knowledge of the misrepresentation:
In the face of a deliberate material misrepresentation, the onus is not appropriately placed on the recipient spouse. Rather, the burden is on the party disclosing to establish actual knowledge of the falsehood by the recipient. The respondent could point to no authority for the proposition that the suggested duty of a spouse receiving financial disclosure in a matrimonial case, to investigate or test the veracity of the information provided, overtakes deliberate material non-disclosure by the other spouse [emphasis added].
As a result, the lesson here is clear and glaring: parties must provide complete financial disclosure, and a party who provides inaccurate financial disclosure does so at their own peril.
SWORN FINANCIAL STATEMENTS
Another common concern is whether or not counsel in private negotiations should permit a client to proceed without a sworn Financial Statement. In light of Rule 13 of the Family Law Rules, which provides for disclosure through the use of sworn Financial Statements, sworn statements are regarded as the “gold standard”.
In Ward v. Ward, (2011 ONCA 178), the Ontario Court of Appeal suggests that a sworn Financial Statement isn’t always necessary, and that the focus should be on the completeness of the disclosure, rather than the specific form of the disclosure. Therefore while the exchange of financial statements may not be necessary, full disclosure and knowledge of the other person’s financial circumstances is always essential. In this case, the parties exchanged financial information with the assistance of their family accountant, and were deemed to have sufficient disclosure exchanged between them – even though they did not exchange sworn financial statements, or complete disclosure in the format of Form 13 or Form 13.1 documents.
In Rolland v. Tevendale (2015 ONSC 3226), the issue of sworn financial statements was also discussed. The wife informed her lawyer that she had reached terms for a separation agreement privately with her husband. The parties had also exchanged sworn financial statements, and the wife was satisfied with the husband’s financial disclosure and didn’t request anything further. In citing the Superior Court of Justice in Quinn v. Epstein Cole LLP (2007), 87 O.R. (3d) 184, which was affirmed by the Ontario Court of Appeal (2008 ONCA 662) at paragraph 37, the Honourable Justice Patrick Smith noted:
[F]ormal disclosure by way of sworn financial statements prior to executing an agreement is not necessary to meet the obligation to disclose. A general awareness of the assets of the other party may be sufficient to avoid setting aside an agreement. Parties are expected to use due diligence in ascertaining the facts underlying their agreements; a party cannot fail to ask the correct questions and then rely on a lack of disclosure. One must inquire whether the responding party withheld information or whether the information was available to the party seeking to set aside the agreement.
A similar result was reached in the British Columbia Court of Appeal decision, Reid v. Reid (2017 CarswellBC 388), where the trial judge found that although the husband failed to disclose certain financial information, the non-disclosure was inconsequential to the agreement as a whole. As a result, while full financial disclosure is the standard, due to the high thresholds of unconscionability, duress, uncertainty, undue influence, mistake and misrepresentation under section 56(4)(c) of the Family Law Act, not every inaccuracy will cause an agreement to be set aside.
MANAGING CLIENTS AND CLIENT EXPECTATIONS
In light of the lessons offered in Virc v. Blair, it is important to manage your client and their expectations in regards to financial disclosure. When educating your client about financial disclosure, and while working through this process with them, staying alert to potential issues can prevent conflict and frustration.
In particular, does your client’s approach to financial disclosure resemble any of the following “Disclosure Personality Types”?
- The “Buyer Beware” Client: Like the husband in Virc v. Blair, this client views financial disclosure in a one-sided manner. Like a criminal trial, where the Crown must put all their cards and evidence on the table, this client will only disclosure items that they are directly (or repeatedly) queried on. Their approach to financial disclosure may be for various reasons, including a desire to spend as little as possible on legal fees and valuations, or due to a desire to keep certain details undisclosed.
These clients need to have additional educational sessions on the importance of financial disclosure, and the risks and repercussions of failing to commit to this process. A client who is trying to save money now may be persuaded by learning of the legal costs for a court process to set aside an agreement. However, those that stubbornly resist these obligations should be invited to obtain a second opinion from another lawyer.
- The “Missing in Action” Client: This client may be unorganized, unsophisticated, or simply have a very busy life or professional obligations. They may also be suffering from fatigue related to their separation or court process. As a result, these clients struggle to track down and provide the financial disclosure you require from them, and they may unintentionally be causing additional skepticism and conflict between the parties.
These clients need guidance and structure, to resume feeling a sense of control and willingness to participate in the disclosure process. Make sure to provide them with a checklist of what needs to be provided, and review your checklist to remove any items that don’t apply to them.
Ensure to have these clients sign Authorizations and Directions to help obtain information from their personal or corporate accountants and lawyers directly. If your client is ill-suited to collecting information and documents, redirect as much of this legwork to your law clerk or legal assistant. They may pay additional legal costs by failing to undertake these tasks themselves, but these strategies will keep the disclosure process moving forward.
- The “Sherlock Holmes” Client: This client is an amateur forensic accountant, and will dig through every tax return and bank statement that they can get their hands on. They may wish to excessively involve experts and third parties in valuations and critique reports. Every document will lead to requesting another document, and they may fixate on assets that they claim are being undervalued or unlisted. Basic items that lawyers often try to avoid addressing, like household goods and furnishings, may become a common topic of conversation.
While these clients have understood the importance of financial disclosure, and are likely forthcoming with their own, they’re at risk of missing the forest for the trees.
These clients will benefit from discussions that focus on what relevant and appropriate financial disclosure includes (with references to a checklist), and the need for a balanced approach to disclosure issues when assessing what is appropriate and necessary.
Without proper guidance, this client’s potential cost of compiling, gathering, and critiquing the information may quickly outweigh the actual benefits of the information or how relevant it is to the issues.
BEST PRACTISES: TIPS, TRICKS & FORMULAS
In addition to the above recommendations related to the personality of your client, the following tips and tricks can greatly improve your ability to complete full and accurate financial disclosure in a timely and organized manner:
· Never underestimate the value of including formulas and sample calculations in your Agreements. While parties may believe that they’re in agreement on how various items will be calculated or reviewed in the future, setting out a clear example helps to ensure that everyone is on the same page. Think of your Agreement as a living document, that needs to be accessible and used as a reference for the parties and legal counsel in the future. By setting out the initial formula used, you can reduce the potential for conflict down the road.
For example, consider including clear and detailed formulas and sample calculations for the following issues:
o How a party’s income will be determined for spousal support purposes, particularly for self-employed individuals;
o How the Spousal Support Advisory Guidelines will be utilized in a support review, when addressing range and duration of support;
o How a party’s proportionate share of special or extraordinary expenses will be calculated;
o How time will be counted in accordance with the Child Support Guidelines, under section 3 and section 9 (e.g. parenting time counted in terms of days, hours, overnights, and treatment of holidays);
o How contributions to post-secondary expenses will be calculated, and particularly how funds from a child’s RESP’s, OSAP loan, employment income, or even a bursary from a parent’s employer and other funding sources will be addressed;
o How valuations will be completed, such as business valuations for determining a party’s available income for support purposes; and
o How decreases in life insurance coverage used to secure support obligations may be stepped down and reduced over time.
· While your “Missing in Action” client may benefit from signing Authorizations and Directions, this can be an excellent mechanism for speeding up disclosure with all of your clients. Consider having blank Authorizations and Directions available to execute once formally retained, so you can quickly reach out banks and investment advisors, as well as personal and corporate accountants and lawyers;
· Create a “Financial Disclosure Checklist” for your clients. The sample checklist provided by Divorcemate is a strong example of a clear and concise outline for clients to review and work through;
· With your checklist in mind, manage financial disclosure requests like Undertakings. Create a chart for all disclosure that your client needs to provide, as well as disclosure that you’ve requested. Three columns noting “Disclosure Requested”, “Date of Request” and “Status of Request” can be a living document you can forward to your client and opposing counsel to keep everyone organized and on track;
· A supporting document brief for your Form 13 or Form 13.1 is helpful for keeping incoming disclosure organized, and for future records. It should be compiled concurrently with your Financial Statement, and easy for you and the other party to navigate with documents organized by Tab number. For example, if your Financial Statement lists the Black Book Value for your client’s vehicle, include a notation that this Black Book information is listed at Tab 8. This will allow both parties to easily review supporting documents, and set out a concise structure for providing complete, accurate and timely disclosure;
· Have your client review the other party’s financial disclosure. For example, do the expenses claimed in the budget make sense in light of their income and lifestyle? No one is likely to have better insight into a party’s expenses than their former partner;
· Take your time, and do it right. Errors and omissions in your financial disclosure may bring into question the credibility of the statement and your client as a whole, and give rise to distrust and avoidable requests for follow-up information. Such distrust can prevent your client from securing a timely and affordable resolution;
· Consider jointly retaining experts and valuators, whenever possible and appropriate. If parties can agree on an expert or valuator in advance, the time and expense of addressing a “war of the experts” after obtaining conflicting reports and valuations may be avoided;
· Ask your client for documents regarding their estate planning, to ensure that you’re listing beneficiaries correctly. For example, a client may provide you with an outdated beneficiary designation form from 2015, but their recent 2017 Last Will and Testament includes an insurance declaration clause;
· It likely goes without saying, but ensure the other party obtains Independent Legal Advice, and encourage them to obtain assistance with creating their own Financial Statement. Far too often, a more organized spouse (who wants to conclude matters as soon as possible) will privately offer assistance to the other party in completing their Financial Statement. Questions may be directed to you through your client, on behalf of the other party. In other cases, a party without counsel will simply duplicate the entries in your client’s Financial Statement, and omit various accounts or assets held in their name alone; and
· While counsel is to keep financial disclosure confidential, this may not be sufficient for your client with unique business interests, or a successful company that is considering going public. In this case, review your client’s Shareholder Agreements and other corporate documents to ensure that they’re complying with their obligation to safeguard certain sensitive corporate information. Consider a Confidentiality Agreement for clients and counsel to execute, and limiting sharing sensitive financial documents by e-mail.
As demonstrated by the legislation and decisions such as Virc v. Blair, the obligation to complete accurate financial disclosure is critical to negotiating a dependable agreement in a family law matter. This obligation can be more manageable and streamlined by educating your client on their obligations, managing your client’s particular approach to providing disclosure, and utilizing the above best practises and to guide the process as a whole.