By Mark Demas
Building and maintaining a prosperous business enterprise requires hard work and dedication. Over the years you have put in the long hours but your sacrifices have paid off and your company is thriving.
However, your marriage or common-law relationship has ended and you are now tasked with dividing your assets. You can face a number of issues that need to be resolved during a breakup that may potentially impact your business. Can you maintain control over your enterprise and avoid costly disruptions to your operations? Can your former partner claim a share in the company? Will you have to buy them out?
Business holdings are typically considered part of family property and subject to division after a marriage or common-law relationship ends. Your ex may be entitled to a share of the company or a share in an increase in its value while you were together.
Your former partner’s entitlement will depend on a number of factors, such as when the business was started or acquired or if there is a prenuptial or domestic agreement in place. That is why it is in your best interest to seek legal advice from a knowledgeable family lawyer.
The breakdown of a marriage or an adult interdependent partner relationship can be stressful and the division of property can be complicated.
At Demas Schaefer Family Lawyers, we have had success in high net-worth negotiations as well as in high-conflict parenting and divorce disputes. We know there is more than one way to resolve an issue and we are not only able to litigate and argue your matter in court, we are also trained collaborative lawyers and mediators.
Alberta Law and property division
Property division can be a complex and confusing endeavour. Alberta’s Family Property Act, which was formerly known as the Matrimonial Property Act, states that family property (which includes all assets acquired by either spouse during the relationship as well as the increase on value of assets obtained or received under some other specific circumstances) is to be distributed equitably between spouses and adult interdependent partners, or common-law partners. However, that does not mean all property is automatically split 50-50.
Family property includes assets owned by the two partners, whether jointly or independent of the other. Under the Act, all real estate is family property, such as a house, a self-contained dwelling unit, part of business premises with living arrangements, mobile homes, condominiums or suites.
Also included is personal property owned by either spouse or ordinarily used or enjoyed by either partner or other family members for such uses as transportation, household, educational, recreational, social or esthetic purposes. Family property can also include bank accounts, investments or pensions.
Generally speaking, a business is considered to be family property if it was established or significantly grown during a marriage or adult interdependent relationship.
There are assets that may be protected from division upon divorce or separation, called exempt property, which can include:
- property owned prior to the relationship;
- Inheritances;
- a gift from a third party for the exclusive use of one spouse;
- settlement funds from a lawsuit; and
- insurance proceeds not related to the replacement of property.
Exempt property is normally protected from division, however any increase in its value during the relationship may not be. That means if a business was started before the marriage or adult interdependent relationship and grew significantly more valuable before the breakup, the increase could be subject to division.
Determining if something is an exempt property depends on how the asset was treated during the relationship. For example, if a spouse deposited proceeds from an inheritance into a bank account used by both parties, that spouse’s exempt property value could be reduced.
Details are important
Some business owners take steps to protect their interests in the event of a divorce. A prenuptial or cohabitation agreement (commonly referred to as a prenup) which lays out how assets will be divided if the relationship ends, can assure the owner maintains control of their enterprise. It should be noted that any value added to the business after the relationship began may be considered family property, as previously noted.
Those without a prenup may instead have a postnuptial agreement that addresses new assets acquired during the relationship or changes in financial status.
Both pre- and postnups are legally enforceable as long as they were entered into voluntarily, with full financial disclosure, that the agreement made is in writing and that each party signed and received legal advice independent of the other. It should be noted that parts of such agreements could be rejected if the court determines the terms are grossly unfair or if circumstances have significantly changed after the agreement was signed.
How you structure your business can have a bearing when it comes to determining if it is family property. For example, as your company grew you may have sought to minimize your tax obligations by incorporating or transferring shares in your company to your spouse.
In cases where both spouses play a role in the company, you may have a shareholders’ agreement that sets out what happens when one person leaves the business, whether because of the end of the relationship or for other reasons.
Though it is reasonable to assume no one goes into a romantic relationship expecting it to fail, it is always wise to be proactive when it comes to safeguarding your business interests.
Keep good records
Even if you don’t have a prenuptial or postnuptial agreement you can still take steps to protect your holdings by separating personal and business expenses and keeping good business records.
Consider issuing non-voting shares or setting up a discretionary family trust with your spouse as a beneficiary but not a trustee if you want to make your spouse a shareholder for the purposes of income splitting. This will allow you to maintain operational control.
Set yourself up as the sole owner and keep detailed records of the sources of capital for your business. You can establish your role as sole owner with documents such as valuations and notices of assessment. You should be aware that your claim for sole ownership will be weakened if you use funds from the relationship to pay business expenses. Similarly, using the resources of a private corporation for personal reasons could allow your spouse to gain access to the organization’s assets.
Determining an equitable split
In a divorce you may choose to simply sell your business and divide the proceeds with your former partner. However, if you intend to maintain control, a valuation may be required to establish the worth of a business owned by you or your ex. Because accurately identifying and valuing assets and debts is critical to ensuring an equitable division of property, you will typically need to enlist the help of financial professionals, such as forensic accountants or certified business valuators.
In placing a value on a business, these financial professionals may use an asset-based, market-based or income-based approach, taking into account how the organization operates.
It is important to remember that your former partner does not have to be active in the day-to-day operations of your company when determining their entitlement to a share in the business. The law recognizes the direct and indirect contributions of a spouse when dividing assets. For instance, if one partner was responsible for caring for the children and the household while the other ran the business, that contribution will be considered by the court.
You and your ex will need to prepare comprehensive financial reports. Failing to provide full disclosure or lying can result in serious legal consequences so it is imperative to be open and honest. This disclosure must include information about personal debts and business-related liabilities.
You will also need to keep tax implications in mind during the division of business assets. Considerations could include the GST/HST consequences of ownership changes, capital gain and business transfer tax implications and income tax obligations. This is another reason to enlist the help of a knowledgeable lawyer to guide you through the myriad legal challenges that lay ahead.
Consider a compromise
Going to court at any time can be risky, even if you believe you have the law on your side. A judge may not rule as favourably as you expect, impacting your control of your organization. A trial is also stressful, time-consuming and expensive.
You may consider a buyout if you and your ex have a claim in a company, giving one person ownership while providing the other with compensation for their share of the organization.
If you and your former partner are agreeable, you may also consider mediation as a way to reach an equitable settlement. This process gives you more control of the outcome, saves time and money and may help limit the animosity that can arise in a divorce.
Let us help
Dividing assets after the breakdown of a marriage or the end of an adult interdependent partner relationship can be stressful but the experienced team at Demas Schaefer Family Lawyers can offer practical advice to guide you through this complex area of the law.
Contact us today for a free 15-minute telephone or video consultation.