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Seeking Documents and Information for Financial Analysis in Matrimonial Litigation

28/11/2016


​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

  1. NET ASSETS

    1. Personal balance sheet of Defendant as of the Valuation Date and financial schedules, prepared for whatever reason, including data filed with any banks or other financial institutions, wherever located and for whatever purpose (including loan guarantees on behalf of third parties whether or not at arm’s length).

    2. 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.


    3. Listing, including copies of purchase invoices and insurance coverage, of works of art, antiques, paintings, coin, stamp and wine collections and jewellery owned by Defendant, wherever situated.

    4. Will helps establish the true net worth of Defendant. Insurance coverage generally provides indicia of replacement value of assets.


    5. List of Defendant’s life-insurance policies, indicating the names of insurance companies, face values of policies, the type of insurance and the cash surrender value of each policy, names(s) of beneficiary(ies), and whether such policies are owned by Defendant personally or by a corporation in which Defendant has an equity ownership interest.

    6. 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.


    7. Copies of (or access to) auditors’ or accountants’ year-end work papers, including journal entries, in respect of each of the Companies for the relevant fiscal years.

    8. A review of these auditors’ or accountants’ work papers may provide information with respect to adjustments necessary for valuation and income measurement purposes.


    9. Copies of shareholders’ agreements, including buy-sell covenants, to which either Defendant or his nominee was party, as well as copies of such agreements that were previously in effect.

    10. 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.


    11. Copies of all major contracts and agreements to which the Companies were party as of the Valuation Date.

    12. 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.


    13. Copy of insurance policy (or summary sheet) covering the Companies’ fixed assets (other than land) and inventory, including business interruption.

    14. 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.


    15. Copies of municipal valuations for land and building used in business operations. Will help corroborate the values of the Companies’ tangible operating business assets, which in turn impact the value of Defendant’s shares.

    16. Copies of any arm’s length offers received within immediately preceding 24 months in respect of Defendant’s real estate holdings.

    17. Will help corroborate the values of the Companies’ investment properties, which in turn impact the value of Defendant’s shares.


    18. Copies of any arm’s length offers received during the three years immediately preceding the Valuation Date for the Companies’ business assets and/ or issued shares.

    19. 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.

    20. List of securities owned directly or indirectly by Defendant in public companies and private corporations wherever located throughout the world; investments and other beneficial interests in entities in (but not limited to) Bermuda, The Bahamas, Liechtenstein, Luxembourg, Switzerland, Cayman Islands, Turks & Caicos, Cook Islands, or elsewhere; stock rights and warrants; bonds; debentures; guaranteed investment certificates; term deposits; bankers acceptances; treasury bills and bonds; interests in limited partnerships; interests in commercial partnerships; undivided co-ownership and joint tenancy interests in real estate; interests in joint ventures; pension plans; retirement savings plans; employee profit sharing plans; put options; call options; tax shelters; and any other investments or business ownership interests of any nature, held directly, indirectly, or in any manner whatsoever, located throughout the world.

    21. 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.


    22. Schedule of loans, accounts and claims receivable as of the Valuation Date, along with related particulars.

    23. Details of any patents, patterns, designs, trademarks, trade names, traded secrets, copyrights.

    24. Details of any contingent assets and liabilities of Defendant, including litigious claims by or against him, and respective status of each (other than with respect to subject matrimonial proceedings).

  2. ​NET INCOME

    1. Federal and Québec personal income tax returns for the last five years, as well as respective notices of assessment (and reassessment, if any) and any correspondence to and from the respective income tax authorities during the period.

    2. 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.

      1. Cancelled checks and bank statements of all personal checking, savings and other bank accounts, located throughout the world, for the three years immediately preceding the Valuation Date.

      2. 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.


      3. List of all bank accounts closed or transferred within the past three years.

      4. 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.


      5. List of all safety deposit boxes in Defendant’s name (and in the name(s) of nominee(s) or alter egos, if applicable), including location of each box over which Defendant has signing authority, wherever situated throughout the world, along with schedule of visits during the three years immediately preceding the Valuation Date and list of all persons having access to said boxes during the said period.

      6. 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.


    3. Details of all sums received by Defendant and/or paid or credited to him by any third persons, companies, firms or corporations either as salaries, bonuses, fees, dividends, profit-share redemptions and/or sale of shares, reimbursement of loans, advances, liquidation or sale of assets, payment and/or reimbursement of expenses (expense accounts), expense allowances, car allowances, golf club, yacht club, social club, and other club dues and expenses, entertainment, sporting events (including season tickets), and other emoluments or forms of payment or remuneration received or enjoyed by Defendant, directly, indirectly or in any manner whatsoever, including those received constructively.

    4. 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.


    5. List of all personal credit cards held in Defendant’s name, or that/those of his nominee(s) with respective account numbers, as well as monthly statements of his credit cards for the 24-month period ended on the Valuation Date.

    6. Relevant in determining Defendant’s level of living expenses, lifestyle, standard of living, identification of payees and assets, etc.


    7. Copies of all pages of Defendant’s passport and, if passport had recently been renewed, copy of immediately preceding passport.

    8. 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.


    9. Copies of all bank, mortgage loan and government grant applications of the Companies during the relevant period, including all documentation filed with the particular lending institution(s) for purposes thereof.

    10. 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.


    11. Copies of all contracts and sub-contracts with respect to any and all repairs, renovations and improvements made at any of Defendant’s residence(s) or with respect to any real estate which he owns or has an interest in, and names and addresses of architects, engineers, designers, roofers, electrical and plumbing contractors, and gardeners who rendered services at any time during the three years immediately preceding the Valuation Date.

    12. 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.


      1. Names and addresses of any persons to whom Defendant has given power of attorney and/ or a mandate (whether general or specific) within the immediately preceding five years.

      2. Copies of relevant documents applicable to Item 22. (a).

    13. Schedule of all vehicles owned or leased by, or for the personal use of, Defendant and his family, including (but not limited to) automobiles, aircraft, snowmobiles and watercraft, including sea-doos and jet skis.

  3. NET ASSETS AND NET INCOME

    1. Details of any non-arm’s length, or related party, transactions of the Companies during the three fiscal years immediately preceding the Valuation Date.

    2. 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.

    3. Schedule of all payments made on Defendant’s behalf and/or for his benefit by any of his Companies with respect to his use of credit cards or charge cards such as (but not limited to) American Express, Master Card, Discovery, Visa, retail stores, restaurants, or any other credit cards, including copies of all credit card statements.

    4. 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.


    5. Schedule of all out-of-town travel (business and pleasure) (outside radius of 300 miles from office/ home) during the immediately preceding 36 months, including: (a) Purpose of visit. (b) Place(s) visited. (c) Duration of stay. (d) Copies of invoices for hotel and other accommodation. (e) Copies of airline tickets (or e-mail itinerary). (f) Person(s) by whom Defendant was accompanied. (g) Approximate cost per trip. (h) Names and addresses of travel agents used to book Defendant’s travel. (i) Copies of all airline frequent-flyer statements and other air-miles program statements.

    6. 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).


    7. Copies of all applications submitted by Defendant to any third-party or financial institution, which were accompanied by his personal balance sheet.

    8. Applications for credit are serious documents, providing Defendant’s own representations and assessments of his income and net worth.


    9. Copies of financial statements of the Defendant’s corporation for the immediately preceding three fiscal years.

    10. Federal and Québec corporation income tax returns of the Companies, along with respective notices of assessment (and notices of reassessment, if any).

    11. 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.


    12. Access to minute books of the Companies, including articles of incorporation, amendments, by-laws, as well as minutes and resolutions of shareholders and directors during the relevant period.

    13. 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 [email protected].