A recent decision of the Court of Appeal of Alberta has clarified the disclosure of financial information for owners of private corporations. Paragraph 8 of the standard Notice to Disclose form requires the following disclosure:
8. If you have a 1% or more interest in a privately held corporation:
(a) the financial statements of the corporation and its subsidiaries for its 3 most recent taxation years;
(b) a statement showing a breakdown of all salaries, wages, management fees or other payments or benefits paid to yourself, or to persons or corporations with whom the corporation, and every related corporation, does not deal at arm’s length for the corporation’s 3 most recent taxation years; and
(c) a record showing your shareholder’s loan transactions for the past 12 months.
In Zdyb v. Zdyb, 2017 ABQB 44, the Honourable Mr. Justice Graesser provides guidance on how to satisfy the above requirements:
“ As a general rule, the shareholder should provide at least the following:
- a brief explanation concerning each payment category, including:
- the nature of the payment/expense;
- how it was calculated;
- why it was a reasonable corporate expenditure;
- whether any amounts paid or owing in relation to that category provided or resulted in a personal benefit to the shareholder or other non-arm’s length person (common examples of such expense categories in closely held corporations are vehicle, travel, promotion, phone, and insurance). This would include an explanation for:
- what portion of the total expense formed the personal or non-arm’s length benefit;
- how this was calculated;
- a description of any services performed for the corporation by a non-arm’s length person (such as a new partner/spouse of the shareholder), and information regarding whether the salary s/he was paid for the services was commensurate with the market value of the services; and
- documentation to support all of the above explanations, such as invoices and receipts regarding non-arm’s length payments.”
This means that owners of privately held corporations must provide more than their corporate financial statements; they will need to provide an breakdown or explanation or each expense category in the financial statement. They will need to indicate:
- If that category has any component of personal expenses (i.e is it a charge for transportation like a company car that is also being used for personal uses, or a company cell phone that is also being used for personal use);
- And what that portion of that category of expenses was related to personal use of the expense;
- How the personal expense portion of that category was calculated; and
- Invoices or receipts to support the expense that was claimed for both business and personal use.
We can assist you with this. Feel free to call us.