BC Family Law Business Division and Valuation
When BC high income and high net worth spouses separate their BC family property, assets and their family debts need to be valued and fairly divided. Without skilled and experienced legal help thousands if not millions of dollars in real family asset value may be lost. Here are a few examples of traps and pitfalls:
- Did you know that not all family assets have equal value?
- Did you know that cash in the bank is worth more than an RRSP of equal value?
- Did you know a family home is worth more than a business of equal value?
- Did you know you may be entitled to discount or reduction and even a payment plan for buying a spouse out of certain assets?
- Did you know corporate reorganizations may help reduce tax so there is more for each spouse?
Our BC high net worth family law clients are often surprised to learn about these valuation concepts at their first strategy session with us. The reason certain assets with a similar value, may be different in value upon closer analysis, comes down to the income taxes that are payable on some types of assets and income taxes that are not payable at all on others.
BC Courts Have Growing Acceptance That Taxes Are Not Speculative
BC Courts are becoming very savvy in dealing with the income tax consequences of dividing various family property and more receptive to making reductions for compensation payments where one spouse buys out the other’s share of an asset. BC Family Law Business Division cases need a distributive income tax analysis by a top lawyer acting for you.
The recent BC Court of Appeal decision in Mckenzie v. Mckenzie allowed an appeal concerning a husband receiving more than half of his real estate and operating business and the Appeal Court granted him a 90/10 unequal division in his favour of a largely passive real estate investment business he owned before a 12 year marriage. The official headnote states the change the Court of Appeal Made to the trial decision after the appeal:
All of Mr. McKenzie’s business assets are owned by his holding company. The judge found the holding company to be a family asset. The judge erred in reapportioning the assets on the basis of a 70/30 division under s. 65 of the FRA by ignoring that the majority of the assets were passive real estate investments acquired before the marriage. The Court set aside the judge’s division of 70/30 and ordered that the assets be reapportioned 90/10 in favour of Mr. McKenzie.
Distributive Taxes Really Diminish The Asset Value
The BC Court of Appeal also remitted the valuation of the wife’s 10 percent interest in the BC Family Law Business Division case to the trial judge to decide if the payment should be reduced by up to 34% for distributive income tax consequences the husband might incur in buying out the wife’s 10 percent interest. Here is what they decided on this key issue:
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Tax or Discount Rate
[115] Mr. McKenzie argues that the judge did not deal with the tax or discount rate which he argues should be applied to any amount payable to Ms. McKenzie as a compensation payment. He says that the $607,000 compensation payment Ms. McKenzie should receive from Camaxco should be discounted by 33.71%. Ms. McKenzie says that issue should be remitted to the trial judge who indicated that he would hear submissions on this question after the appeal. I agree that it is appropriate to remit this question to the trial judge for the purposes of determining if any reduction is appropriate and if so the amount: see, Laxton v. Coglon, 2008 BCCA 414.
How Do Distributive Taxes On Family Property Division Apply?
Madam Justice Dardi provided a nice summary of the law in a 2012 BC Supreme Court Case of L.F. v. B.F., 2012 BCSC 1073
[102] The leading case on distributive taxes and valuation of assets is Halpin v. Halpin (1996), 27 B.C.L.R. (3d) 305 (C.A.). There is no absolute rule as to whether tax consequences should or should not be taken into account in the valuation of assets or in the determination of the appropriate compensation order: Oliver v. Oliver, 2011 BCSC 1126 at para. 52. In Halpin, Huddart J.A. cited with approval, at 323-324, the following statements by McKinlay J.A. in Sengmueller v. Sengmueller (1994), 17 O.R. (3d) 208 at 215 (C.A.):
If the evidence satisfies the trial judge, on a balance of probabilities, that the disposition of any item of family property will take place at a particular time in the future, then the tax consequences (and other properly proven costs of disposition) are not speculative, and should be allowed either as a reduction in value or as a deductible liability.
[103] It is critical to the analysis to appreciate that compensation does not necessarily equate to “fair market value”: Blackett at 105; and Weintz v. Weintz, 2012 BCSC 120 at para. 129. The assessment of appropriate compensation “is not an exact science and is not a matter of precise accounting”: N.M.M. at para. 93. The following observation of Huddart J.A. in Kowalewich v. Kowalewich (1998), 50 B.C.L.R. (3d) 12 at 16 (C.A.) is instructive:
… As Madam Justice Southin reminded us in Blackett, section 66 is not an expropriation provision. It is a mechanism to adjust matters between spouses who do not wish to continue in their joint ventures as joint owners.
[104] The authorities direct that the income tax consequences arising from the sale of an asset in order to realize the amount of compensation payable in respect of it are a relevant consideration and must be taken into account when determining the amount of the compensation order: Laxton at para. 52. On the other hand, the court should not take into account notional tax liability or speculative disposition costs in calculating an equalization payment where there is no evidence as to the likelihood or date of the other spouse incurring that loss: Dowling v. Dowling (1997), 43 B.C.L.R. (3d) 59 at 60-61 (C.A.); Rick v. Brandsema, 2009 SCC 10 at para. 55.
Lorne MacLean, QC has over 30 years experience dealing with BC family law business division and the complex tax consequences that need to be carefully navigated. Call Lorne MacLean,QC if you have a high net worth BC family property division case where you cannot afford to make a mistake.
