As top rated BC family lawyers MacLean Law’s family law team handles hundreds of cases involving family company valuation and division. Vancouver Family Business Division cases require the parties to be cognizant of pitfalls on valuation that could lead to an unfair result. Hiring an experienced Vancouver Family Business Division lawyer right from the start can ensure you don’t overpay for the family business if you wish to keep it.
A skilled Vancouver family lawyer can also ensure a proper payment plan that allows the business to continue to exist and thrive. Vancouver Family Business Division involves two levels of income taxes, first capital gains and second income taxes payable to get money out of the corporate structure and into the hands of the individual spouses. Discounts, payment plans, corporate reorganizations such as pipelines butterfly transactions and spouses staying as owners after separation are all opti0ns. Unequal Vancouver Family Business Division is also possible given the duration of the relationship and whether the gains in value were active or passive.
Courts in BC now recognize the economic reality of income taxes decreasing the potential value in Vancouver Family Business Division case. The most recent case of McKenzie v. McKenzie, provides a tidy summary of this area of law:
Distributive Taxes
[4] The result of the decisions aforesaid is that the shares in Comaxco are a family asset in which the respondent has a 10% interest. A 10% interest in Comaxco is valued at $607,000. The Court of Appeal noted at para. 118 that the 10% interest in Comaxco “may need to be reduced on account of distributive taxes”. The question before me is whether it should be reduced and, if so, by what amount?
[5] The most recent decision of the Court of Appeal on the issue of compensation payments and distributive taxes is Weintz v. Weintz, 2014 BCCA 118. Madam Justice Smith in Weintz at para. 1 referred to the question there as “the vexing issue of how to give effect to a division of assets pursuant to s. 66 of the Family Relations Act, R.S.B.C. 1996, c. 128 [FRA] that includes shares in a closely held corporation”. The same question arises here.
[6] In Laxton v. Coglon, 2008 BCCA 414 at paras. 52-54, 58 R.F.L (6th) 1, Madam Justice Saunders usefully summarized the issue there:
[52] I am persuaded, however, that the personal tax consequences to the party selling the shares should have been deducted from the compensation award. While s. 66 of the FRA gives the court a broad discretion to “determine any matter respecting the ownership, right of possession or division of property,” the court must consider relevant factors that alter valuation. The tax consequences attracted by the sale an asset in order to realize the amount of the compensation is a relevant factor. This factor relates to Southin J.A.’s characterization in Blackett, at 343, of the “cash in hand” advantage. If an asset must be sold in order for the non-owning spouse to realize his or her interest in that asset, then the tax consequences arising from the sale of that asset must be taken into account when determining the amount of the compensation order.
[53] Madam Justice Huddart in Kowalewich v. Kowalewich (1998), 50 B.C.L.R. (3d) 12 (C.A.), also recognized the relevance of this factor when she stated, for the Court, at para. 12:
[12] … As this court explained in Blackett v. Blackett (1989), 40 B.C.L.R. (2d) 99 (B.C.C.A.) and Halpin v. Halpin (1996), 27 B.C.L.R. (3d) 305 (B.C.C.A.), the cost of borrowing, the tax consequences of a transfer of ownership, and any other costs to effect an in specie division, must be taken into account in determining the amount to be paid to adjust the division under section 66(2)(c) of the Family Relations Act. 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.
[54] In this case, the compensation order was predicated on a finding that, if Mr. Coglon had made the appropriate disclosure at the material time, Ms. Laxton would have exercised the options and sold her 20% interest in the Heartland Public shares between June 2003 and August 2003. In the alternative, if Mr. Mericle’s evidence is accepted, the share options could have been disposed of by either party. Had either party done so, they would have paid capital gains tax on the sale of the shares. Blackett and Kowalewich are authority for the principle that, in these circumstances, a compensation order should reflect the tax consequences that the disposing party would have incurred. This would have yielded the sale proceeds net of the option exercise price and the capital gains tax.
[Emphasis added.]
[7] Not all compensation orders include disposition costs or tax consequences arising from a transfer of property. In Ouellette v. Ouellette, 2012 BCCA 145 at paras. 27-32, the Court declined to take hypothetical and speculative disposition costs into account where no sale was contemplated and funds were available wholly from the sale of the matrimonial home. In Ouellette, however, the only issue at trial was the appropriate amount of the compensation to pay Mrs. Ouellette, not whether it would be fair to Mr. Ouellette to pay compensation in any particular manner or at all.
[8] In my view the principles arising from Weintz, Laxton, Ouellette, Blackett, and Halpin are:
(1) where there is sufficient evidence to satisfy the Court of tax consequences or other costs inherent in a compensation order the Court should take these into account in setting the compensation amount;
(2) the onus is on the payor to provide the trial judge with the necessary evidence of the tax consequences arising from the division of assets or other consequences of having to acquire the funds to pay the payee;
(3) there is no absolute rule as to how the compensation order might be calculated, depending, as it does, on the type of assets to divided, timing, the parties involved and other orders in the action;
(4) the matter should be considered as of the date of trial, not as of the date the matter comes back before the court; and
(5) the overriding principle is fairness.
How Much Was The Discount?
The husband argued a full 34% discount for taxes should be applied while the wife argued almost no taxes should be deducted from her share in the family business. In the end the judge applied a 10 percent or $60,000 discount.
[14] I do not think the Court should be looking to fund the division of a family asset which is a closely held corporation wholly from after tax dollars derived from other sources. To fund the compensation payment wholly from after tax dollars would unfairly visit the tax consequences of the compensation order solely on the claimant. In my view that would not share the burden of distributive taxes appropriately.
[15] On the other hand, I do not think that a party can select a method of funding the division of a family asset in a way that reduces the amount payable to the payee based on his or her own particular preference. In this case that is what selecting the refinancing option would do, although it may have other consequences.
[16] In my view selecting the Sales Option achieves the dual objectives of sharing the burden of taxation and accomplishing the goals of achieving a fair division of the family asset. In the result, I order that the claimant pay the respondent $539,399.31 on account of her 10% interest in Comaxco.
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