1. What happens to a business when you divorce in Alberta?

2. Is a Business Considered Family Property in Alberta?

3. Does My Spouse Get Half of My Business?

4. What If I Owned the Business Before the Marriage?

5. How Do You Determine What a Business Is Worth?

6. What Is Goodwill?

7. What If Both Spouses Work in the Business?

8. Can I Keep My Business After Divorce?

9. What If the Business Owner Cannot Afford a Buyout?

10. Can My Spouse Force the Business to Be Sold?

11. What If There Are Other Shareholders?

12. What Financial Disclosure Is Needed for a Business?

13. What If I Think My Spouse Is Hiding Income in the Business?

14. Business Value and Income Are Not the Same Thing

15. Don't Make Major Business Changes Without Advice

16. How Bridgestone Law Can Help

Introduction

When a marriage ends, dividing a house or bank account can be complicated enough. When one or both spouses own a business, property division can become significantly more complex.

A business may represent years of work, a family's primary source of income and one of the most valuable assets accumulated during the relationship. Unlike money sitting in a bank account, however, the value of a business may not be immediately apparent.

This often leads to an important question:

What happens to a business when you divorce in Alberta?

A business interest can be relevant to the division of family property even if only one spouse owns the shares, operates the company or works in the business.

However, this does not necessarily mean that the business itself must be sold or that the other spouse automatically becomes an owner.

The first questions are usually: What is the business worth, how much of that value is subject to division, and how can the spouses' property claims be resolved without unnecessarily damaging the business?

Is a Business Considered Family Property in Alberta?

It can be.

Under Alberta's Family Property Act, the Court has broad authority to distribute property owned by either or both spouses.

Business interests can therefore form part of the property that must be identified and valued following separation.

This can include interests in:

• corporations;

• professional corporations;

• partnerships;

• sole proprietorships;

• family businesses;

• holding companies; and

• other privately held companies.

  
  

The fact that a corporation's shares are registered only in one spouse's name does not necessarily mean that the value associated with those shares is irrelevant to property division.

For example, suppose Jason incorporated a construction company five years after getting married. Jason owns all of the company's shares and his wife, Michelle, has never formally worked for the company.

At separation, the company has significant value.

Jason cannot necessarily say:

"The corporation is mine because Michelle isn't a shareholder."

The value of Jason's ownership interest may still need to be considered when the spouses divide their family property.

Does My Spouse Get Half of My Business?

Not necessarily.

This is one of the biggest misconceptions surrounding business ownership and divorce.

Dividing family property does not ordinarily mean taking every individual asset and physically cutting it in half.

If one spouse owns a corporation, the other spouse does not automatically receive half of the company's shares or become involved in running the company.

Instead, the business interest may be valued and considered as part of the spouses' overall property division.

For example, one spouse might retain the entire business while the other receives additional equity from the family home, investments, RRSPs or a payment to equalize the property division.

In many cases, keeping the operating business intact may be preferable to turning former spouses into business partners.

What If I Owned the Business Before the Marriage?

This can significantly change the analysis.

Under Alberta's Family Property Act, certain property acquired before the marriage or qualifying relationship may have an exempt value.

However, owning a business before the relationship does not necessarily mean that all of its value at separation is exempt.

The value of the business at the relevant starting date may be important, as may any increase in value that occurred during the relationship.

Example: Business Started Before Marriage

Suppose Emma started a landscaping company several years before marrying Ryan.

At the beginning of their relationship, Emma's shares were worth approximately $100,000.

During their 15-year marriage, the company expanded considerably. It acquired equipment, hired employees, developed a large customer base and became much more profitable.

At separation, Emma's shares are worth $900,000.

It would be too simplistic to say:

"Emma owned the company before the marriage, so Ryan has no claim."

It would also be too simplistic to assume that the entire $900,000 must simply be divided equally.

The original value, any available exemption, the increase in value and the provisions of Alberta's Family Property Act all need to be considered.

This makes evidence of the business's historical value particularly important.

How Do You Determine What a Business Is Worth?

Business valuation is often one of the most complicated parts of a family property case.

Unlike a publicly traded stock, there may be no readily available market price for a privately owned company.

A business may own equipment, real estate, investments and other assets. It may also have significant value arising from its profitability, customer relationships, contracts, intellectual property or goodwill.

A qualified business valuator may be required to determine the value of the spouse's interest.

The valuator may review information such as:

• corporate financial statements;

• corporate tax returns;

• general ledgers;

• shareholder information;

• bank statements;

• accounts receivable and payable;

• equipment and other assets;

• corporate debts;

• contracts;

• historical earnings;

• shareholder loans; and

• compensation paid to owners or related parties.

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Depending on the business, the valuator may use an income, asset or market-based approach, or a combination of methods.

What Is Goodwill?

Goodwill can be an important component of business value.

A successful company may be worth considerably more than the value of its equipment, cash and other physical assets.

Imagine a dental practice with $200,000 of equipment.

Someone might assume the business is worth approximately $200,000.

But the practice may also have an established patient base, trained employees, operating systems, a strong location and an established reputation.

Those factors may contribute additional value.

However, goodwill can be particularly complicated where the success of the business is closely tied to the personal reputation, skills or relationships of the owner.

Business valuation professionals can help determine whether goodwill exists and how it should be treated in valuing the business interest.

What If Both Spouses Work in the Business?

A jointly operated family business can create additional challenges.

During the marriage, the spouses may have divided responsibilities naturally.

One spouse may have handled customers and operations while the other managed accounting, payroll or administration.

After separation, continuing to operate the company together may become difficult or impossible.

The spouses may need to decide whether:

• one spouse will purchase the other's interest;

• the business will be sold;

• both will temporarily continue operating it;

• one spouse will leave the business in exchange for other property; or

• another restructuring arrangement is appropriate.

  
  

Where the business provides the family's primary source of income, maintaining stability can be particularly important.

Allowing a personal dispute to disrupt employees, customers, suppliers or financing can reduce the value of the very asset the spouses are trying to divide.

Can I Keep My Business After Divorce?

Often, yes.

A business does not automatically have to be sold because the owner is getting divorced.

If the spouses can determine the value of the business and resolve the other spouse's property entitlement, the business owner may be able to retain their shares and continue operating the company.

For example, suppose a business interest is valued at $600,000 and the couple also owns substantial equity in their home and investments.

The spouses might structure their settlement so that the business owner keeps the company while the other spouse receives additional property elsewhere.

Another possibility is an equalization payment, where one spouse pays the other an agreed amount to resolve the property division.

The appropriate structure depends on the couple's assets, debts, financing and tax circumstances.

What If the Business Owner Cannot Afford a Buyout?

This is a common practical problem.

A business can be valuable on paper without having hundreds of thousands of dollars sitting in cash.

Suppose a spouse owns a business valued at $1 million.

That does not mean the owner has $1 million available to write a cheque to their former spouse.

Much of the company's value may be tied up in equipment, inventory, receivables, real estate or the future earnings of the business.

Requiring an immediate large payment could potentially damage the company.

Depending on the circumstances, spouses may negotiate:

• installment payments;

• payments over a defined period;

• security for amounts owing;

• transfers of other property;

• refinancing;

• a combination of cash and other assets; or

• another structure that allows the business to continue operating.

  
  

These arrangements need careful drafting, particularly where payment will occur over several years.

Can My Spouse Force the Business to Be Sold?

Not every business dispute results in a sale.

In many cases, the more practical solution is to value the business and allow the operating spouse to retain it while resolving the other spouse's property claim through other assets or payments.

However, the available options depend on the circumstances.

If there is insufficient property to offset the business interest, financing is unavailable and the spouses cannot agree on another solution, the dispute can become much more difficult.

Corporate ownership arrangements, shareholder agreements and the rights of other shareholders can also affect what can realistically be done.

This is particularly important where the spouse owns a company with unrelated business partners.

What If There Are Other Shareholders?

A divorce involving a privately held company does not occur in isolation from corporate law.

The business may have:

• other shareholders;

• investors;

• shareholder agreements;

• restrictions on transferring shares;

• buy-sell provisions;

• financing arrangements; or

• professional regulatory requirements.

For example, a shareholder agreement may restrict who is permitted to own shares or specify what happens when a shareholder experiences a family property claim.

These documents should be obtained and reviewed early.

A family property settlement should not be structured on the assumption that shares can simply be transferred if the company's governing documents or applicable law restrict such a transfer.

What Financial Disclosure Is Needed for a Business?

Proper disclosure is essential.

A spouse cannot reasonably evaluate a business property claim without understanding the company's finances.

Depending on the circumstances, relevant disclosure may include:

• corporate income tax returns;

• financial statements;

• notices of assessment;

• bank and credit card statements;

• shareholder registers;

• minute books;

• shareholder loan accounts;

• general ledgers;

• payroll records;

• accounts receivable;

• accounts payable;

• major contracts;

• asset lists; and

• information concerning related companies.

  
  

Several years of records may be necessary to identify trends and properly value the company.

What If I Think My Spouse Is Hiding Income in the Business?

This is an important issue because privately owned businesses can create complexities that do not exist for ordinary salaried employees.

A business owner may control when income is paid, whether funds remain inside the corporation and how certain expenses are recorded.

This does not mean every corporate expense is personal income or that every dollar retained by a company is available to the shareholder.

But the financial records may need careful examination.

Questions may arise about:

• shareholder loans;

• personal expenses paid through the corporation;

• payments to family members;

• management fees;

• unusual expenses;

• retained corporate earnings;

• transfers between related companies; and

• significant changes in compensation.

An accountant, business valuator or other financial expert may be required where the financial circumstances are complicated.

Business Value and Income Are Not the Same Thing

This distinction is extremely important in family law.

A business can affect both property division and support, but the analyses are different.

For property purposes, the issue may be the value of the spouse's ownership interest.

For child or spousal support, the issue may be the income reasonably available to that spouse.

The same corporate financial records may be relevant to both questions, but that does not mean business value and income are interchangeable.

For example, a company may be worth $800,000 while providing its owner with annual income of $150,000.

Those numbers answer completely different questions.

Care must also be taken to avoid inappropriate double counting when resolving property and support issues.

Don't Make Major Business Changes Without Advice

Separation can create a strong temptation to restructure finances quickly.

A business owner might consider transferring shares, paying large bonuses, moving money between corporations, selling assets or changing compensation.

Those decisions can have significant family law, corporate and tax consequences.

Similarly, the non-business-owning spouse should be cautious about demanding immediate actions that could unnecessarily damage the company's value.

Preserving the business may ultimately benefit both spouses.

Before making significant corporate changes during a separation, obtaining advice from the appropriate family law, corporate, accounting and tax professionals can be extremely important.

How Bridgestone Law Can Help

Business interests can make an Alberta divorce considerably more complicated.

At Bridgestone Law, our Calgary family lawyers can help identify the business interests that need to be disclosed, obtain the necessary corporate financial records and determine whether professional business valuation is required.

We can also help determine whether an exemption may apply to a business owned before the relationship, assess increases in value and consider how the business fits into the spouses' overall family property.

Where necessary, we can work with business valuators, accountants, tax professionals and corporate lawyers to understand the company's value and develop a practical settlement.

The objective is often not to destroy or unnecessarily disrupt the business.

Instead, the goal is to determine its proper value, understand each spouse's legal rights and find a workable way to divide the family's property.

If you are separating or divorcing in Alberta and you or your spouse owns a business, corporation, professional practice or partnership interest, contact Bridgestone Law to speak with a Calgary family lawyer about protecting your interests and resolving the business as part of your property settlement.