Six common mistakes to avoid when completing financial statements

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This is a brief summary of a paper prepared by Robert Shawyer and Andrew Sudano for the Law Society of Ontario‘s The Six-Minute Family Law Lawyer. Their paper was titled, “An Ounce of Prevention is Worth a Pound of Cure: The Six Most Common Mistakes When Drafting Financial Statements And How to Avoid Them.”

Don’t ignore the proposed budget section

The first common mistake is ignoring the proposed budget section at the end of the financial statement. The authors discuss a number of case law examples where a party received a lower quantum of support or failed to get the order they were hoping for because they did not include a proposed budget or their proposed budget was not given the required care. The proposed budget allows parties the chance to explain any increases or discrepancies from their current budget, and get ahead of problems that could arise from shortfalls in disclosure or unexplained increases in expenses or the absence of expenses.

Case law examples where a proposed budget would have strengthened the party’s position included a matter where the wife could not explain increases in her proposed budget and another where the court was actively looking for child expense budgets from the parties that accounted for the increased costs of shared custody arrangements.

Any party seeking claims relating to child support, s. 7 expenses not yet incurred, spousal support, a shared custody situation and/or if a party’s expenses will be changing in the future (such as the sale of a matrimonial home) should consider a carefully drafted proposed budget.

Don’t include RESPs as Net Family Property

The second common mistake is including RESPs as Net Family Property (NFP). RESPs are not part of the property to be equalized and, rather, must be marked on the Financial Statement to ensure they are not mistakenly rolled into the parties’ assets for equalization.

Provide evidence and disclosure for disposition costs

The third common mistake is estimating and claiming disposition costs with no disclosure or evidence. While lawyers often include notional disposition costs, they should not be automatically included unless the party can justify it by way of disclosure or evidence. It is important to include evidence to demonstrate that the property will eventually be disposed of in the future. Such evidence as to the expected time of disposition can be used to make a present value when parties disagree on notional RRSP disposition costs. Future intent to sell a matrimonial home can include a spouse considering moving, downsizing after a child finishes school, or else a spouse’s advanced age or poor health.

Make sure monthly expenses add up and include important information

The fourth common mistake is when monthly expenses do not add up or miss key information. The authors explain that such obvious mistakes are common and “since a poorly thought out monthly budget invites counsel to seek to impute income to your client, the importance of questioning your client on expenses that do not make sense or that are overinflated cannot be overstated”. This is particularly true if your client is self-employed. Furthermore, if they set off numerous business expenses against their income, it can trigger considerations under the Child Support Guidelines and require evidence to be put before the court.

Include non-taxable benefits

The fifth common mistake pertains to other benefits. Box 14 is critical to determining a party’s income, and clients are to provide all of the non-taxable benefits they receive which are covered by their employer on an annual basis, such as health benefits, meal allowances and stock options.

Include all sources of income

The sixth common mistake relates to income sources and the amount received per month. It is absolutely crucial to include all sources of income, including gifts and rental income, to avoid stepping below the threshold of making full and fair disclosure or for the court to draw adverse inferences. Pre-tax corporate income is likely attributable to the payer if it is easily available and would not seriously undermine the corporation’s finances if taken. Section 19 permits the court to impute income so that a person operating a business is the same as an employee in receipt of a salary. 

To sum up, taking extra care when drafting financial statements can avoid future headaches and put the party in the best possible light.