Hidden Assets: How do you prove it, and how do you make them pay?

The process of divorce and separation can be incredibly draining emotionally, and it can be financially draining as well. Child and spousal support obligations present an unwelcome and often onerous responsibility for many – indeed, the Canadian Broadcasting Corporation (CBC) has reported that up to two-thirds of all support orders in Canada are in arrears. Impending support obligations can lead a spouse to understate their income. In British Columbia, equal division of family property under the new regime of the Family Law Act (the “Act”) can present another unwelcome shock, and efforts are often made to hide and ‘secret away’ assets. You may suspect your former spouse of understating their income or hiding assets, but how do you prove it, and how do you make them pay?

Disclosure is required

Full financial disclosure is required by all Canadian courts when dealing with family law matters. Financial Statements must be sworn and exchanged early on in the process of separation, along with tax forms and pay slips, to ensure that support orders are based on current income levels. Despite these requirements however, parties to family litigation often fail to meet their disclosure obligations.

Non-disclosure has long been called the “cancer” of matrimonial property litigation. The BC Supreme Court stated the following in Cunha v. Cunha (1994), 3195 (BCSC):

[Non-disclosure] discourages settlement or promotes settlements which are inadequate. It increases the time and expense of litigation. The prolonged stress of unnecessary battle may lead weary and drained women simply to give up and walk away with only a share of the assets they know about, taking with them the bitter aftertaste of a reasonably based suspicion that justice was not done. Non disclosure also has a tendency to deprive children of proper support.

Hiding Income and Assets

There are many ways to hide income, and especially where an individual is self-employed, simply looking at their tax return seldom provides an accurate picture of their finances. For example, where income is derived through a corporation, opportunities to understate income abound, including using retained corporate earnings to defer income in order to effect lower support payment obligations. Where your non-disclosing former spouse owns their own business, income is often disguised as expenses, including salaries, wages, benefits, management fees, travel expenses, et cetera. Even if Revenue Canada accepts certain expenses as legitimate, a court can still determine those expenses as income. Challenging these expenses can lead to higher child and spousal support orders, as the Federal Child Support Guidelines enables a court to add income back to a payor.

Equally, there are many ways to hide assets. Assets can include cash, bonds, mutual funds, cash value in insurance policies and variable annuities, stocks, and even travelers' checks. These assets can be transferred to third parties, or hidden behind false documents. Overpayments to the Canada Revenue Agency can be made prior to divorce, resulting less family property in divorce, and future refunds from the overpayment. Financial assets can be removed from Canada and hidden in non-reciprocating jurisdictions, or stashed in opaque ‘offshore’ tax havens.

Confronting Non-Disclosure

A competent BC family lawyer will be well versed with tools to confront willful nondisclosure, including Examinations for Discovery, Interrogatories, and Notices to Admit.

• Examination for Discovery provides an opportunity to essentially cross examine your former spouse about what may be their fraudulent financial empire. Answers given in discovery are made under oath, and are admissible in court.
• Interrogatories are written requests for further information, made with permission of a judge or the other party. Your former spouse must provide formal answers to these questions within a set time limit. Interrogatories can be a relatively inexpensive way to gain financial information.
• Another approach available in BC is to file a Notice to Admit, forcing your former spouse to either affirm or refute the truth of a fact or the authenticity of a document. Upon receiving a Notice to Admit, they will have two weeks to respond, either by admitting or denying the truth or authenticity requested, or by giving reasons why they cannot or will not admit. If they don’t reply in two weeks, they are deemed to have admitted everything claimed in your Notice to Admit.

MAREVA

Once property is sufficiently identified, BC courts have jurisdiction to order restraining orders which are intended to prevent the other spouse from disposing, transferring, converting or exchanging family property. Also available is also the “draconian” Mareva injunction, available where there is a real risk that assets will be disposed of before trial. If obtained, a Mareva injunction will prohibit your former spouse from disposing of assets – worldwide.

A Moreva injunction was ordered in Devathasan v Devathasan, 2017 BCSC 1010, where approximately $21-23.5 million in family real property was held in the United States and in Canada, along with $568,000 in vehicles. Further property of undisclosed value was held in Asia. A Moreva injunction restrained the Claimant from disposing of or transferring both his BC and extra-provincial assets prior to trial. The Mareva injunction was also directed to third parties regarding assets in the names of the Claimant and Respondent, freezing any accounts held in their names.

The Adverse Inference

The courts have been directed to take an adverse inference from one party’s concealment of assets: Cunha. In Laxton v. Coglon, 2008 BCSC 42, a formula was proposed: in cases of non-disclosure the inference to be drawn is that the value of undisclosed assets is at least equal to the value of the disclosed assets. In Rana v. Rana, 2014 BCSC 530, the court found that Mr. Rana hid assets, removed money from Canada and refused to disclose information and documentation. These factors led the court to conclude that it would be unfair to divide the known family property held in Canada equally. An unequal division was ordered and Ms. Rana received all of these assets.

Conclusion

Suspicion alone is not enough. The BC Court of Appeal has cautioned against making findings as to undisclosed assets where there is no evidence to support such a finding: Wu v. Sun, 2011 BCCA 239. If you suspect that your former partner is hiding income or assets, it is essential that you are represented by a family lawyer who can competently and confidently pursue those suspicions and obtain evidence of non-disclosure. At FC&Z Family Lawyers, we have a wealth of expertise and experience to navigate the complexities of non-disclosure.

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