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This article originally appeared in
The Montreal Lawyer and has been reproduced with permission.
In performing a forensic analysis in matrimonial litigation, the business valuator or investigative accountant (“Expert”) will typically request a number of documents considered relevant, as well as access to various parties who could provide additional information and explanations.
As noted below, there are situations in which the Expert might be denied the requested data. This article provides examples of the types of documents and information generally required by the Expert (joint expert or other) in order to determine the value of the moneyed spouse’s assets and his income-earning capacity (“notional income” or “real income”)1 in connection with spousal support, child support, lump-sum payment and/or compensatory allowance.
For a number of items, it also provides reasons why the documents and information requested are relevant for purposes of the Expert’s analysis. In Québec, the rules relating to expert evidence are found in the new Code of Civil Procedure (“NCCP”).2 The regulation relating to child support payments prescribed under the NCCP and the Civil Code of Québec3 is Regulation Respecting the Determination of Child Support Payments.4
The Civil Code is accompanied by the Child Support Determination Form (7 pages) and table.5 There are also the Spousal Support Advisory Guidelines6 and Federal Child Support Guidelines7, which provide guidance on the definition and determination of notional income, considering, inter alia, adjustments pursuant to Schedule III (Adjustments to Income).
In many instances, the non-moneyed spouse can be a critical resource for information about the moneyed spouse’s financial state of affairs, because during the “better” days of the marriage Defendant may have disclosed valuable information about his business operations, investments, others assets, sources of cash and various economic benefits over which he has control (nominees, trusts, offshore accounts, etc.).
As an example, Plaintiff may allege that the business operations of the private companies (“Companies”) that Plaintiff or Defendant control are actually highly profitable and that both he/she and his/her businesses have substantial unreported or undeclared income. Plaintiff might also disclose that much of the family’s lifestyle is paid for by Defendant in cash, including, for example, expensive ocean cruises and other vacation trips at exotic resorts where the family stays at five-star hotels in luxury suites. Expenses for personal travel in the United States or Canada are typically booked through the business, which records these in its accounts as operating expenses (rather than as shareholder advances).
Other personal and living expenses, such as the children’s nanny, golf club, hockey tickets, landscaping, gardening, interior decoration, home renovations, roof repairs, electronic equipment, country home, summer sleep-away camps for the children, art, jewelry and vintage wines, are paid by Defendant in cash. The automobiles of Plaintiff and children are leased by the business from the car dealership and recorded by the business as “automobile expenses”, as are gas, oil and maintenance of the autos and watercraft (at the lakeside cottage in the country and/or the condo in Florida). Florida condo expenses are booked by the Companies as travel expenses.
Plaintiff may also be in possession of important documents, such as copies of deposit slips or credit memoranda issued by offshore banks, plans and specifications of interior designers and architects, copies of suppliers’ invoices, etc.
While this example might appear somewhat exaggerated, it is the authors’ experience that there are many real-life situations where this has been the norm. The Québec Superior Court (Family Division) has rendered many judgments in this regard, following lengthy in camera proceedings in each of these cases.
In valuing Defendant’s business ownership interests in matrimonial litigation, the Expert will prepare a detailed list of the documents and information he or she requires in order to perform the financial analysis. Defendant’s counsel might refuse to allow his or her client to produce the documents and provide the information enumerated on the Expert’s request list, claiming that most of these items are not relevant.
In such cases, Plaintiff’s counsel may ask the Expert to prepare an affidavit that would be filed in court, enumerating the documents and information the Expert still requires to perform the valuation and income analysis, explaining why each specific document or item of information is necessary for a meaningful analysis to be used in the preparation of the Expert’s Report.
The Expert (whether joint expert or consulting expert) may be examined on the affidavit by Defendant’s counsel, requiring the Expert to justify why the particular documents and information requested (including any interviews and site tours) are relevant for the analysis. Often, Defendant’s counsel attempts to characterize the Expert’s document and information request as a “fishing expedition”. The Expert should reply that, to the contrary, the Expert is “hunting ... for the truth!”
This article provides a partial list of the documents and information the Expert often requires, along with the respective reasons why each is relevant for purposes of his or her analysis. The latter portion of the list identifies additional types of documents and information that the Expert may request, as appropriate in the specific circumstances; it does not provide the respective reasons.
Examples of documents and information requested by expert
Basic information and necessary starting point for purposes of establishing true net worth and financial state of affairs of Defendant, including identification of income-generating assets.
Will helps establish the true net worth of Defendant. Insurance coverage generally provides indicia of replacement value of assets.
Relevant for purposes of establishing true net worth of Defendant and may provide indication of his own views of his net worth, as policy(ies) may have been purchased to provide liquidity for succession planning purposes and/or fund the post-mortem acquisition from his estate of Defendant’s private-company shares.
A review of these auditors’ or accountants’ work papers may provide information with respect to adjustments necessary for valuation and income measurement purposes.
Shareholders’ agreements generally include buy-sell provisions that contain a formula or other mechanism to acquire or sell shares of the Companies, as well as references to price/value formulas”, when there is a “triggering event”. Such agreements can also include provisions restricting the transferability of shares, and provisions regarding payments and distributions of profits and gains.
Will facilitate the assessment, for valuation purposes, of the nature and amount of any contractual benefits or obligations of the Companies, as the case may be. Further information that might be provided by such contracts and agreements may include the timing of such benefits or obligations. For purposes of the valuation analysis, a materiality threshold could be applied, limiting the request to all contracts and agreements involving financial consideration that, say, are in excess of $20,000.
Will help corroborate the value of the Companies’ tangible assets, as well as the Companies’ profitability and intangible value. The business interruption portion of the policy might indicate what the Companies’ own management considers to be the level of profitability of the business(es). Profitability can directly impact corporate value, the ability of the Companies to make corporate distributions of income by way of dividends or otherwise, invest in capital projects and/or repay debt.
Will help corroborate the values of the Companies’ investment properties, which in turn impact the value of Defendant’s shares.
Will help corroborate the indicated value of the Companies and/or their assets, as arm’s length, open-market transactional market data may provide a good indication of price/value.
Will help establish the true net worth of Defendant in that it would disclose his direct, indirect and/or beneficial interests in various investment vehicles and other assets.
The information contained in these documents is relevant for identifying income by source, assets generating such income and disposal of capital assets during the period under review. The tax notices of assessment and reassessment may contain tax authorities’ revisions, if any, to Defendant’s declared income, based on information that they might possess.
Correspondence with tax authorities may contain detailed explanations by them and/or by Defendant relating to income-inclusion items and/or legitimacy of certain deductions, in arriving at income reported on his Defendant’s tax returns.
Will help establish Defendant’s sources of income, cash receipts, living expenses, allocation of his funds, lifestyle, possible existence of non-arm’s length payees and unrecorded investments, and other assets acquired by him.
There may have been cash transactions that occurred in bank accounts that are now closed, but with respect to which these transactions would be relevant for determining Defendant’s real income.
Relevant for establishing location of Defendant’s assets. May provide information as to when safety deposit box contents might have been added or removed, possibly indicating unrecorded cash transactions during relevant period, as well as additional information regarding Defendant’s net worth.
Relevant for obtaining a complete perspective of all cash in-flows and out-flows to/from Defendant during the relevant period for purposes of determining his real income, sources of receipts, and any other intellectual property owned and/or licensed by Defendant. disposals of assets, and possible identification of existence of other assets.
Relevant in determining Defendant’s level of living expenses, lifestyle, standard of living, identification of payees and assets, etc.
May assist in measuring more accurately indicated real income of Defendant by providing details (e.g., destinations and length of visits) of his personal travel charged to business but enjoyed by him as a personal benefit. To extent that there is indication of frequent visits to tax-haven jurisdictions, it might be a sign that further enquiry is necessary.
Applications for financing are serious documents and may provide Defendant’s or management’s own assessment of income and value. Defendant derives his primary sources of income and value from the Companies.
Will provide information as to expenditures that may have been charged to, and paid by, Defendant’s Companies, but which were for his personal benefit. Also possibility that certain of these contractors/ suppliers may have been paid partly or totally in cash. This may impact both the value of Defendant’s shares as well as his real income and help trace the sources of cash used to make the payment.
Such details are relevant in determining Defendant’s real income through the determination of personal (or other non-business) amounts and to assess the level and quality of the income generated by each of the Companies. Moreover, given the closely-held, family-run nature of the Companies, any non-arm’s length or related-party transactions involving consideration not at market values or market prices, or non-operational in nature, may distort the true income-generating capacity and, hence, the value of the Companies’ business. The Defendant’s principal sources of income and business equity value are derived from the Companies.
Relevant for purposes of determining Defendant’s real income. Will assist in analysis of nature and amount of expenses paid by his Companies on his behalf, thereby forming part of his real income (whether directly, indirectly or constructively received or enjoyed), as well as for determining value of his Companies for purposes of establishing Defendant’s true net worth. In addition, expenses paid by any of his Companies on Defendant’s behalf, or expenses claimed by such business that are not effectively connected therewith (untaxed benefits in his hands) should be adjusted in pay or company’s accounts (income for valuation purposes), thereby increasing company’s valuation and, hence, value of Defendant’s ownership interest therein.
Will assist in analyzing expense items such as travel, promotion, etc., paid by Defendant’s business which may, in fact, be of a personal, nonoperational nature and which may have to be adjusted on books of the business(es) in determining value thereof for purposes of establishing Defendant’s true net worth. Moreover, this information is relevant for establishing, more accurately, the real income of Defendant (forming part of the recipient’s notional income).
Applications for credit are serious documents, providing Defendant’s own representations and assessments of his income and net worth.
Notices of assessment and reassessment may contain the taxation authorities’ revisions to the Companies’ respective declared incomes, based on information tax authorities might possess. Schedules appended to corporation income tax returns might contain other information relevant from a valuation standpoint, such as tax cost bases, tax credits, loss carry forward balances and identification of related parties, etc. The information contained therein may impact value of the Companies and, as Defendant derives his income mainly from his family-controlled entities, such information will also assist in measuring his income-earning capacity for spousal and child support purposes.
Relevant for ascertaining the rights, privileges, restrictions, obligations, and other attributes of the Companies’ shares, as contained in articles of incorporation, by-laws, minutes and resolutions, and the existence of contracts and shareholders’ agreements. These factors, in turn, may have a direct and material impact on the value of Defendant’s shares, to extent that the documents may refer to shareholder agreements, dividend rights, profit-sharing and bonus arrangements, management fees and other potential income distributions.
Not every case is simple or straight forward. The items included on this list are only some of the types of data an Expert may require in order to value a spouse’s business interests and other assets, and to calculate income for spousal and child support purposes, when there is resistance by the Defendant to disclose.
For more information on MNP’s Valuation and Litigation Support Services, contact Richard M. Wise, FCPA, FCA, CA-IFA at 514.861.9724 or
[email protected], or Alissa Kahan, CPA, CA, CBV at 514.228.7842 or
Related Topics:Valuations; Forensics; Litigation Support; Lawyers
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