In the recent court case of Hartshorne v. Hartshorne the Supreme Court of Canada has stated that when parties enter into a prenuptial agreement the terms of that agreement will be upheld in all but the most unusual of cases. This decision has essentially rendered the Family Relations Act section 65 provision that allows separation or marriage agreements to be set aside on grounds of unfairness” effete.
The decision of the majority also held that a business asset should be excluded from division of assets if that asset is used to pay support.
HARTSHORNE CASE RAISES BAR TO DIVIDE A BC BUSINESS ASSET AND SUPPORTS REAPPORTIONMENT OF BC BUSINESS ASSETS WHERE THE ASSET GENERATES INCOME TO PAY SUPPORT SO AS TO PREVENT DOUBLE DIPPING!
In the recent court case of Hartshorne v. Hartshorne the Supreme Court of Canada has stated that when parties enter into a prenuptial agreement the terms of that agreement will be upheld in all but the most unusual of cases. This decision has essentially rendered the Family Relations Act section 65 provision that allows separation or marriage agreements to be set aside on grounds of unfairness‚Äù effete. It would seem that unfairness‚Äù has been defined by the Supreme Court of Canada to mean something equal to unconscionable or grossly inappropriate. As British Columbia’s variation provisions to set aside unfair marriage or separation agreements were by far the most generous in the country it would appear that marriage agreements and separation agreements in other provinces will now be routinely enforced. Just as shocking as the new test created for setting aside or more accurately enforcing a marriage agreement, is the decision of the majority to exclude a business assets from division or alternatively, the minority decision to reapportion that asset 100% in favour of the owning spouse, if that asset is used to pay support. The decision in Hartshorne has the lawyers at the MacLean Family law Group scratching our heads on the issue of when a business or professional practice will be divided.
Carolyn Christiansen Of the Offices of MacLean Family Law Group has already written an extensive article analyzing the decision in Hartshorne which has been published in our March newsletter. We recommend you read that article if you are entering into or trying to vary a marriage or separation agreement. It is critical that parties do not sign any agreement without the benefit of the Independent legal advice.
The Hartshorne decision is also notable for its radical reinterpretation of what if any division of a spouse’s corporate or professional asset should occur. Frankly, the decision in Hartshorne wipes out years of jurisprudence in British Columbia which broadly defined family assets to include almost all business and professional assets owned by one spouse to the exclusion of another. This writer had advised most businessmen or professionals in the past that their company or professional practice was almost certainly going to be found to be family asset and thus divided based on a presumed 50-50 division. You can imagine the writer’s shock and surprise when he viewed both the majority and minority decisions in Hartshorne on the issue of what if any division of the husband’s law practice should be made by the courts. Simply put, the decision dramatically favours the owners of businesses and corporations in excluding these assets from any division whatsoever.
If you are business owner, or the owner of a professional practice the following words from the majority of the SCC will put a smile on your face:
Under s. 59 of the FRA, in absence of a marriage agreement, a law corporation could potentially be classified as a family asset. Indeed, the trial judge found this to be the case and fixed a 60/40 split in favour of the appellant. In any event, in this case, the trial judge erred in finding the appellant’s law corporation to be a family asset. Under s. 59(1), property is not a family asset if it “is owned by one spouse to the exclusion of the other and is used primarily for business purposes and if the spouse who does not own the property made no direct or indirect contribution to the acquisition of the property by the other spouse or to the operation of the business”. It is also noteworthy that the value of the practice has not increased since the time of the marriage. Under these circumstances, the law practice must not be considered a family asset. The appellant is entitled to keep the law corporation in full, after transferring out the Ford Expedition.‚Äù
Despite 25 years of jurisprudence from British Columbia courts saying that it was virtually impossible to exclude business assets from the presumptive 50-50 division under our Family Relations Act, the majority of judges in the Supreme Court of Canada have, in one fell swoop, wiped out those decisions and seemingly replaced it with a test that would exclude many if not all businesses and professional practices from division in British Columbia. Given that Madame Justice McLachlin is from British Columbia and well aware of the previous jurisprudence concerning the almost routine division of business and professional practices, the judgment is most puzzling.
Unfortunately, the analysis by the majority of the Supreme Court of Canada on when a business asset will be divided was reduced to a couple of sentences with no reference to the 25 years of BC case law on when business assets are to be divided. It remains to be seen if BC Judges will follow the majority decion on this issue given the sparse reasoning provide by the majority decision in Hartshorne.
A more detailed analysis on the issue of when business asset or professional practice should be divided was undertaken by the minority in the Hartshorne decision. The minority judges were Binnie, Lebel and Deschamps JJ. While disagreeing with the majority’s decision to exclude the husband’s law practice from division entirely they were still unabashedly favourable to the side of the business or professional practice owner. The minority would have ordered 100 percent reapportionment of the law practice to the husband despite the obvious indirect contribution by the wife through effective household management and child rearing duties. Using an analysis which took into account that there should not be any double dipping by allowing a division of a business based on its capital value without taking into account that it is a source of income to that business or professional owner which must be used to pay spousal or child support:
(2) The Law Partnership
94 At paras. 66 of its opinion, the majority recognizes that “a law corporation could potentially be classified as a family asset” capable of being reapportioned under s. 65(1) of the FRA. In fact, the categorization of professional practices as family assets is consistent with British Columbia’s jurisprudence. For example, in Underhill v. Underhill (1983), 45 B.C.L.R. 244, the British Columbia Court of Appeal held that the husband’s interest in a law partnership was a family asset. In the case at bar, I disagree with the majority’s finding that the appellant’s interest in the partnership should not be categorized as a family asset.
95 Family assets are defined in s. 58 of the FRA:
58 (1) Subject to section 59, this section defines family asset for the purposes of this Act.
(2) Property owned by one or both spouses and ordinarily used by a spouse or a minor child of either spouse for a family purpose is a family asset.
(3) Without restricting subsection (2), the definition of family asset includes the following:
(e) a right, share or an interest of a spouse in a venture to which money or money’s worth was, directly or indirectly, contributed by or on behalf of the other spouse.
I am of the view that the appellant’s interest in the law firm falls squarely within the ambit of paras. 58(3)(e) and is, consequently, a family asset.
96 The majority states that it must be excluded under s. 59(1):
59(1) If property is owned by one spouse to the exclusion of the other and is used primarily for business purposes and if the spouse who does not own the property made no direct or indirect contribution to the acquisition of the property by the other spouse or to the operation of the business, the property is not a family asset.
Based on this definition, for an asset to be excluded as a business asset, two conditions must be met: (1) it must be used primarily for business purposes, and (2) the non-owning spouse must have made no contribution to its acquisition or to the operation of the business. The problem with the majority’s position is that, in this case, the respondent did contribute significantly to the operation of the law partnership.
97 As explicitly recognized in s. 59(2):
(2) In section 58(3)(e) or subsection (1) of this section, an indirect contribution includes savings through effective management of household or child rearing responsibilities by the spouse who holds no interest in the property.
A contribution can thus be inferred from the fact of participation in household management and child rearing: see Elsom v. Elsom (1982), 35 B.C.L.R. 293 (S.C.), aff’d (1983), 37 R.F.L. (2d) 150 (B.C.C.A.) (leave to appeal refused, [1984] 1 S.C.R. vii); Gillespie v. Gillespie (1995), 1 B.C.L.R. (3d) 28 (C.A.), at paras. 56. It is noteworthy that in Peter v. Beblow, [1993] 1 S.C.R. 980, at p. 1000 (per McLachlin J., as she then was) and at p. 1020 (per Cory J.), this Court has recognized that, in the context of common law unions, indirect services such as the provision of household services may justify the award of a proprietary interest in assets acquired over the course of a relationship. Indirect contribution can also include other types of contributions. For example, in Piercy v. Piercy (1991), 31 R.F.L. (3d) 187 (B.C.S.C.), additional reasons (1993), 86 B.C.L.R. (2d) 285 (S.C.), a wife was living in affluent circumstances, with considerable household help, and there were no children of the marriage. The court found that she had made an indirect contribution in fulfilling the husband’s expectations that she occupy a largely social role and be a “confidante and sounding board” (paras. 25). In the case at bar, the respondent clearly provided a significant indirect contribution to the operation of the appellant’s law practice. From 1987 to the date of separation, and indeed since the date of separation, she assumed full time responsibility for child care and homemaking, allowing the appellant to continue to practise full time, with significantly fewer concerns on his mind. This is more than sufficient to fulfill the requirements of ss. 59(2) and 58(3)(e). Therefore, Mr. Hartshorne’s interest in the law partnership is a family asset capable of judicial reapportionment under s. 65(1) of the FRA.
98 Obviously, concluding that the law partnership is a family asset does not provide guidance as to whether Beames J. erred in reapportioning Mr. Hartshorne’s interest in the law partnership in favour of the respondent. In fact, unlike the rest of her analysis, Beames J.’s reasoning on this issue lacks some coherence. In her initial analysis of the fairness of the marriage agreement and of the percentage of each family asset that should be reapportioned to achieve fairness, Beames J. did not mention the law corporation (1999 Reasons, at paras. 63-64). She did, however, have an opinion on the matter at the time. In her second set of reasons, dealing with the issue of valuation, she writes, at paras. 27:
During the course of this hearing, I advised counsel that it had been my view, at the time I provided Reasons following the first hearing, that the 60% to the plaintiff and 40% to the defendant distribution that I applied to all of the family assets, other than the home and contents, was appropriate for the law corporation as well.
The problem with this conclusion is that, during the first hearing, the trial judge did not have access to important valuation information that was introduced in the course of the second hearing, such as the decrease in value of the law firm relative to the value stated in the marriage agreement.
Despite this important new information, Beames J. chose to stick to her first impressions.
Compounded with the difficulties arising from the unconventional sequence in which she chose to address the issues of maintenance, support, division and valuation of property, her desire to remain faithful to her intuitions seems to have contributed to her failure to realize that she was committing an error.
99 Indeed, it seems illogical for Beames J. to have reapportioned the appellant’s law practice, his main source of revenue, in a 3:2 ratio, while having previously demanded that he pay the respondent significant spousal support. On the facts of this case, this would amount to the respondent biting the hand that feeds her and imposing an unreasonable burden on the appellant. As noted by Major J., writing for the majority in Boston v. Boston, [2001] 2 S.C.R. 413, 2001 SCC 43, at paras. 1:
“Double recovery” or “double dipping” are terms that have come to describe the situation where, after an equal division of assets on marriage breakdown, one spouse claims continued support from the previously divided or equalized assets of the other spouse.
Double recovery can also happen when a capital family asset is reapportioned without considering the conditions of separation as whole, including a prior spousal support order. This principle applies equally in the context of s. 65(1) of the FRA. In exercising her discretion to apportion family assets under s. 65(1), a trial judge must not come to a solution which results in double-dipping.
100 Admittedly, the order for spousal support was discontinued two years after the initial judgment (oral reasons for judgment of Melnick J., February 11, 2002). This state of affairs cannot, however, be determinative since support orders, or discontinuation thereof, continue to be reviewable when the circumstances laid out in the Divorce Act arise. Moreover, what is being reviewed at this stage is the fairness of the trial judge’s judicial reapportionment per se. At the time her reasons for judgment were released, the trial judge had no means to anticipate if, when and how her spousal support order would be modified.
101 To assess the fairness of a division of family assets, one must look at it as a whole and consider it together with the parties’ other financial arrangements. Had the trial judge first proceeded to the reapportionment of the law partnership and then tailored the amount of spousal support in consequence, my conclusion might have been different. Alternatively, had she been careful to reapportion the law partnership while giving full consideration to her prior spousal support order and to the decrease in value of the firm, I might also have been inclined to be more deferential. She did neither, instead considering each issue in a vacuum. In this case, given the amount of spousal support ordered and the reapportionment of other family assets, the law partnership should simply not have been included in the redistribution. The trial judge should have realized that it was inappropriate to deprive the appellant of 40 percent of his interest in his main source of income if he was to pay $2,500 per month to the respondent as spousal support. On the one hand, taken together, Beames J.’s orders for spousal support and for reapportionment of the law firm constituted “double-dipping” and are thus anomalous; on the other hand, the remaining family assets considered together can properly be viewed as respondent’s fair share. This conclusion does not prejudice any variation application that the respondent might bring for a reevaluation of her need for spousal support following this decision.
III. Conclusion
102 For the reasons given above, I would only allow the appeal in part, that is, to the extent that the appellant’s law firm should not have been reapportioned in favour of the respondent. Costs should be awarded to the respondent in this Court.
In short- the law on division of business assets and professional practices now seems to be the opposite of what it was over the past 25 years in BC. This decision will provide ample ammunition to exclude businesses and professional practices from equal division. The question remains as to whether spousal support and child support awards will be increased to reflect an increase in BC court orders in favour of the exclusion of business and professional practices from what has been routine equal division.
In counterpoint to those who feel the new test for division of business assets is unfair- I have often thought that a business that provides income to a spouse upon which support is based in no way compares to having a matrimonial home of equal value which provides a place to live and to relax in rather than a place to slave away at work.
