We routinely deal with the valuation and division of BC family and BC business assets. It is important for a medium to high net worth BC family law property division and valuation clients to hire a Vancouver or Kelowna family lawyer familiar with the BC family business valuation issues and property division strategies that can be applied depending on whether you are the business owning spouse a joint business owning spouse or the non-business owning spouse. We are also one of the first firms ( ask about our Bennewith decision) to ensure that business assets and profits are shared equally or restrained from disposition prior to trial so that the value of a business is not reduced improperly before it can be fairly divided.
Highly Rated Partner Lorne MacLean, Q.C. is concerned that many people do not understand that a business valuation takes into account only a small portion of the income and capital gains taxes associated with that business. Many times a spouse will agree to give the matrimonial home or other tax-free assets to their spouse at a value equal to the business valuator appraised value of their business. This is often a mistake as a business owner may then be left with an asset full of risk while their spouse gets a risk-free asset. Further, a business owner will pay tax on the sale of his business but more importantly the valuation of a family business often is not equal to its cash value unlike the sale proceeds of a matrimonial home for example. Further, in order for a business owner to realize on the value of the business monies will need to be withdrawn from the company in which case a minimum tax will likely need be paid a dividend tax rate of 32%.
Our high net worth BC family law clients will often approach us with respect to “butterfly” transactions whereby the income tax paid to withdraw money from a company-called distributive taxes-will be shared equally with their spouse by creation of two companies being one for each spouse so tax free rollovers of company assets can occur. Alternatively, a further tax discount may be applied to the business taking into account the need for the business to be sold in the near future. Finally, and becoming more common is a division of the business or investment assets “in specie”. An “in specie” division ( divides the asset itself equally without a cash buyout) and leaves both spouses as owners of the business or investment asset. One spouse may wish the division in kind to occur if the business has significant risks and clouds on the horizon but conversely a non-owning spouse may wish to remain in as an owner on the asset if they believe the asset has a huge upside that has not yet been realized that they want to stay in on and share in down the road.
Our British Columbia courts are required to first divide the family and business assets and only then decide the issue of spousal support. The issue of attribution of income to a spouse receiving a large cash payment for the income they could earn on investing it compared to a business owning spouse whose ownership of the business produces the income used to pay spousal support upon is a common one of our offices deal with.
The recent SEABROOK decision reviews the principles to be applied and in this case the husband who had mislead the wife on finances near the end of the marriage was successful in obtaining an order where he did not have to buy out the wife’s interest in the family business which also had the complication of third party owners which restricted the husband’s ability to control the company.
Here are the extracts on the case for those who want to know the full details. While the husband succeed on the in specie division, he had to share dividends with his wife AND he paid spousal support at the high range being $6900 a month.
The parties agree that family assets should be divided equally. The main area of dispute concerns whether there should an order that all of the non-business assets be transferred to Ms. Seabrook and a compensation order made under s. 66 of the Family Relations Act, R.S.B.C. 1996, c. 128 (the “FRA”) in respect of the business assets, which would remain with Mr. Seabrook (Ms. Seabrook’s position); or an in specie division of all family assets (Mr. Seabrook’s position). There is also a dispute over the responsibility for certain debts incurred after separation.
[62] On behalf of Ms. Seabrook, Ms. Guthrie submits that the appropriate way to divide the assets is to transfer the non-business assets (Warnock Road, Quadra Avenue, Mr. Seabrook’s RRSP, the cash value of the Great West Life policy and the 2008 Ford Edge), other than Mr. Seabrook’s Vehicles, to Ms. Seabrook, and to make a compensation order under s. 66 of the FRA in respect of her share of the business assets (Mr. Seabrook’s shares in 0743 and Inlet), which would be retained by Mr. Seabrook. The liabilities (other than Mr. Seabrook’s liability for the Inlet shares) would be shared equally. Ms. Guthrie submits that the amount payable by Mr. Seabrook under a compensation order would be in the range of about $450,000, and Ms. Seabrook is willing to accept payment of some of this amount over a period of a couple of years. Ms. Seabrook opposes anin specie division, because, from her perspective, this would merely preserve the status quo and, in particular, leave her in the position of a minority shareholder, with no real prospect of realizing any financial value from a significant asset.
[63] On the other hand, on behalf of Mr. Seabrook, Mr. Daltrop submits that family assets cannot be divided by allocating non-business assets to Ms. Seabrook and business assets to Mr. Seabrook. This is because there are insufficient assets available to him following such a division to make the payment that would be required under a compensation order, without Mr. Seabrook having to borrow large amount of money. Mr. Daltrop argues that Mr. Seabrook is not in a position to withdraw large amounts of money from 0743 or Inlet because he is only a 50% shareholder in each company, and every dollar withdrawn by him from either company is subject to the consent of the other shareholder (Bruce Seabrook), who (in theory) would have to receive an equal amount on a dollar-for-dollar basis. Mr. Daltrop also points to Mr. Seabrook’s evidence to the effect that the withdrawal of large sums from Midway will impair its ability to carry on business.
[71] Ms. Guthrie relies on the principle, that, where possible, the parties’ financial affairs should be separated and that it is preferable not to leave one ex-spouse as a minority shareholder of a company controlled by the other. She says that, while 0743 and Inlet are not personal service businesses, there is no reason why Ms. Seabrook should not be able to realize her interests in these assets now, rather than waiting for an event – the sale of the business assets – that may never occur. She submits that there will not be any significant business interruption if Mr. Seabrook is ordered to compensate Ms. Seabrook for her interest in the business assets. Ms. Guthrie submits further that, on the evidence, there would be little if any hardship to Mr. Seabrook. Other than credit card debt and the outstanding joint liabilities, Mr. Seabrook has no debt other than what is owing on the Inlet shares, and he has not advanced any good reason why he cannot take on debt. Ms. Guthrie relies on parts of Mr. McKay’s report to support her position that Mr. Seabrook has access to assets that would permit him to borrow to satisfy the terms of a compensation order. Midway has no debt and the gloomy prospects alluded to by Mr. Seabrook, Bruce Seabrook and Ms. Whitmore were not borne out by Mr. McKay’s analysis of the business set out in his report. In 2011, Midway spent a significant sum (approximately $200,000) purchasing new equipment, and Ms. Guthrie submits that this strongly suggests Mr. Seabrook and Bruce Seabrook are optimistic about future operations.
[72] As Mr. McKay noted in his report, as of the valuation date (August 31, 2011), Midway had net redundant assets of approximately $1,200,000, including cash of $300,000 and “investments” of approximately $481,025, of which $403,017 was held in a GIC. Midway also had retained earnings of approximately $2,200,000.
[73] Mr. Daltrop essentially distinguishes Smith on the facts. There, Newbury J.A. concluded that, based on other assets Dr. Smith was receiving, he would have enough money to satisfy the proposed compensation other “without difficulty.” Dr. Smith would not be forced to borrow, and he would not be left in the poor house: see Blackett v. Blackett (1989), 40 B.C.L.R. (2d) 99 (C.A.), at p. 106. That is not Mr. Seabrook’s situation.
[78] However, I cannot discount entirely Mr. Seabrook’s perception that, with the change in the way that B.C. Hydro does business, the business risks have increased for Midway. The division of assets proposed by Ms. Guthrie places all of the future business risks on Mr. Seabrook. I also cannot overlook that Mr. Seabrook, on his own, does not have the power to withdraw large sums from 0743 (or from Inlet), or to cause 0743 or Midway to grant security over assets, because he does not control the company. Finally, I agree with Mr. Daltrop that the facts here are distinguishable from those in Smith, and the other assets Mr. Seabrook is receiving will not assist him to satisfy a compensation order in the amount involved “without difficulty.” Rather, Mr. Seabrook would be required to take on substantial debt.
[79] I accept the principle that where possible, the parties’ financial affairs should be separated, and that it is preferable not to leave one ex-spouse as the minority shareholder of a company controlled by the other spouse. I also acknowledge the concerns raised by Ms. Guthrie on behalf of Ms. Seabrook relating to Mr. Seabrook’s honesty and trustworthiness (e.g., his hiding of the January 2010 bonus; taking steps to escape payment of tax; claiming an expense on his Financial Statements for something that was fully paid for). However, I have concluded that an asset division and compensation order, as contemplated by Ms. Guthrie, is not practical in this case.
