A trucking company run from a yard off Steeles. A family grocery on Queen Street. A two-person accounting practice, a restaurant, a small construction outfit. In Brampton, a business is often part of the family. The spouse who does the books may be a director on paper, the in-laws may have provided the first loan, and the company may pay part of the household’s expenses. When the marriage ends, you cannot pull those threads apart cleanly, and yet the law asks you to do something like that.
Separation forces three connected questions. What is the business worth? Who shares in that value, and how? And what income does the owner really have for support purposes? Each has its own rules, and a mistake on one tends to affect the others.
This post is general information, not legal advice. The treatment of a real company depends on its records, its structure, and the people around it, so get advice from a family lawyer and, usually, a financial professional.
A spouse usually does not get half the company
Many people believe that separation means the other spouse gets half the business. For married spouses in Ontario, that is not how the Family Law Act works. The Act does not divide assets. It equalizes value. Each spouse calculates a net family property, which is, in broad terms, what they own on the valuation date after debts, less what they owned on the date of marriage. Then the spouse with the higher figure generally pays the other half of the difference under section 5(1).
So the non-owner spouse does not automatically become a shareholder, a partner or a boss. The owner may keep the shares and owe money. That is good for keeping the company intact, but it creates its own problem: a spouse can owe a large sum based on the value of a company whose worth is tied up in trucks, receivables and goodwill, not cash.
Section 7(3) also matters. An equalization claim generally has to be started within the earliest of two years after a divorce, six years after separation with no reasonable prospect of resuming cohabitation, or six months after the first spouse’s death.
Common-law partners are in a different position
Unmarried partners have no equalization claim, however long they were together. If a common-law partner helped build a business, a claim might instead be made for unjust enrichment or a constructive trust. Such a claim focuses on what was contributed and what benefit resulted, and it can be harder to pursue. In contrast, the shareholder register and the company’s records may give clearer answers if the partner holds shares in their own right.
Unmarried partners can still be spouses for the purpose of support if they meet the test in section 29 of the Act, and business income still counts for child support, so these questions are not limited to married couples.
Valuing the company
The starting point is usually the valuation date, which for most couples is the day they separated with no reasonable prospect of resuming cohabitation. If the parties dispute that date, the difference can be large for a business with seasonal revenue or a contract that was won shortly after the split.
Simple small companies can sometimes be valued by agreement. For anything more substantial, a Chartered Business Valuator may be retained, either jointly or by each side. A valuator looks at financial statements and tax filings, normalizes the earnings by removing personal expenses and unusual items, and considers assets, debts, risk and prospects.
Some recurring issues include:
- Personal goodwill versus commercial goodwill. A dental practice or a consultant’s business may depend heavily on one person’s reputation and contacts, and that may affect what the business could be sold for. A company with long-term contracts and a management team that would stay on is likely to be valued differently.
- Contingent tax. A sale of shares would trigger tax. Depending on how likely and when a sale is, the court may take into account a deduction for notional disposition costs.
- Minority interests. A spouse holding 30% of a company controlled by a sibling may hold an interest that is not worth 30% of the whole.
- Shareholder loans and retained earnings. These can add to value or reduce it, and they often turn up in places a non-accountant would not look.
- Equipment and real estate. A trucking company’s fleet or a family-owned building leased to the company may be valued separately. Holding companies should also be considered.
- Debts and guarantees. A personal guarantee of a bank line may count as a contingent liability, depending on how likely it is to be called.
Excluded and pre-marriage interests
Not every dollar of value goes into the calculation. The value of a business owned on the date of marriage is generally deducted, although growth during the marriage is shared through equalization. Under section 4(2), property acquired by gift or inheritance from a third person after the marriage is excluded, as is property that can be traced to that gift or inheritance. So a business given by a parent during the marriage may be excluded, but the spouse claiming the exclusion must prove it. Income from excluded property is itself excluded only if the donor or testator expressly said so.
The paper trail matters. If a parent “gave” shares with no documentation, or if a family loan was never written down, it may be hard to establish what happened years later. If the in-laws say a contribution was a loan and the spouse’s position is that it was a gift, expect a dispute. A marriage contract may have dealt with all of this, and if one exists, it should be the first document your lawyer reads.
Income for support is its own question
Value and income are different inquiries, and the result on one does not settle the other. Owner income is often the most contested number in the file. An owner may report a modest salary while the company pays for the truck, the phone, the meals and the family’s travel. Section 18 of the Child Support Guidelines lets a court add to the income of a shareholder, director or officer all or part of the corporation’s pre-tax income, or an amount commensurate with their services, where reported income does not fairly reflect the money available for support. Section 19 lets a court impute income in a number of situations, including where someone diverts income or unreasonably deducts expenses.
Salaries paid to a new spouse, a relative or anyone else not dealing at arm’s length may be examined too. Under section 21, a person who controls a corporation must provide corporate financial statements for the three most recent taxation years, along with a statement showing salaries, wages, management fees and other benefits paid to or on behalf of related persons. Retained earnings are not automatically treated as income, but a court will look at whether there is a genuine business reason for leaving the money in the company.
There is also a double-counting issue. A business may be valued on the basis of its income stream, and that same income may also be the basis for spousal support. In Boston v. Boston, 2001 SCC 43, the Supreme Court of Canada addressed a similar concern involving pension income. Whether and how the argument applies to a business depends on the facts, but your lawyers and any valuator should consider it.
Disclosure expectations
Rule 13 of the Family Law Rules requires sworn financial statements and, where property is in issue, supporting documents. In a business case, expect requests for the following:
- several years of financial statements and corporate tax returns
- general ledgers and shareholder loan accounts
- personal and business bank and credit card statements
- payroll records, particularly for family members
- major contracts, leases and equipment loans
- shareholder agreements, and minute books
- any offer to buy, or valuation done for a bank or an insurer
Being slow to produce these can result in costs orders, adverse inferences and a court’s skepticism about everything else you say. The spouse who does not run the business, on the other hand, should think about what they already know: they may have signed returns, have access to accounts, or remember the name of the company’s accountant. Copying what you can lawfully access is one thing. Logging in to a company account or taking records you have no right to is another, and you should get advice first.
Keeping the business alive during the case
A business is often the source of everyone’s income, so there is a shared interest in not destroying it. Yet two spouses who work together have to work out how to keep operating. Practical steps often include:
- Agreeing, in writing, who runs what, and who has signing authority, for the time being
- Keeping the books current and using an outside bookkeeper if the spouse who did them is leaving
- Avoiding big, unusual transactions, such as selling equipment, paying large dividends or making unusual loans, without notice
- Telling the bank or the accountant only what they need to know, after talking with your lawyer
- Keeping family disputes away from staff and customers
If one spouse is draining the company or moving assets, section 12 of the Family Law Act allows a court to make an interim or final order restraining depletion of a spouse’s property and for its preservation. The court can also deal with a company in some situations, but this can be complicated where other shareholders are involved, so advice on who needs to be served may be necessary.
Corporate law matters here too. Removing a spouse as a director, changing share rights or firing a spouse from their job can have legal consequences beyond the family case, including employment and oppression claims. Reviewing the shareholder agreement and corporate records is an early step. Advice on business disputes can be useful alongside the family law file.
Paying out without selling
Once the numbers are known, the question becomes how to pay. A spouse who owes an equalization payment usually wants to avoid selling the company. Common routes include refinancing, using a home’s equity, transferring other assets, or restructuring. Under section 9(1), a court may order payment by instalments over a period of up to ten years if necessary to avoid hardship, and may require security. It may also order that property be transferred or sold where appropriate. Since those options are at a court’s discretion, a negotiated plan is generally more flexible, and it allows both sides to take tax advice into account before committing. Paying out through the company can trigger taxes that make the true cost much higher than it looks.
If you are starting to think about this
If separation might be coming, and you run or work in a family business, pause before making any major business decisions, and collect the last several years’ financial statements. Do not move money or shares without advice. Spouses who have been left out of the numbers should begin with what they know. A consultation with a lawyer, along with an accountant’s early view, can make the numbers clearer than the fear of them. We are happy to speak with you through our Brampton office.
The business may well continue for many years after the separation. Decisions made now, carefully and with good records, can give it and the people depending on it a much better chance.