Lorne N, MacLean, QC head of our experienced group of Vancouver Calgary Family Business Distributive Taxes Lawyers, is impressed with the newest BC Court of Appeal analysis on distributive taxes involving two holding companies and a professional services corporation. This decision has huge consequences for high net worth business owners and wealthy professionals. Contact our high net worth family property division team at any of our 6 offices in Vancouver, Calgary and across BC or call our toll free line at 1-877-602-9900.
BC Appeal Case A Game Changer For Vancouver Calgary Family Business Distributive Taxes Lawyers
What is exciting about the decision for family clients and our Vancouver Calgary Family Business Distributive Taxes Lawyers, is the fact that there was no immediate withdrawal of funds from the companies anticipated. Nevertheless, the BC Court of Appeal said to be fair, Vancouver family property division could not be treated by “giving one spouse apples and the other spouse oranges” as far as tax liabilities are concerned. Vancouver Calgary Family Business Distributive Taxes Lawyers at MacLean Law have been concerned for some time about the potential inequity of routinely ignoring distributive taxes unless there was immediate liquidation or withdrawals from the business entities. Tax strategies to equally share tax liabilities such as corporate reorganizations or “butterfly” transactions are routinely used by our Vancouver Calgary Family Business Distributive Taxes Lawyers to ensure an equitable division of business and personal family property. The impact of distributive taxes can run in the hundreds of thousands and even millions of dollars so hiring a savvy no nonsense senior family lawyer like Lorne N. MacLean, QC is prudent.
Vancouver Calgary Family Business Distributive Taxes Lawyers Welcome New Decision
A business owner who keeps their business often has to give the other spouse a tax free home or cash payment. The business income is then often used to fund spousal and child support. But a business and a home are very different in their net value after income and other taxes are taken into account. Mistakes can be made if you do not hire a seasoned group of Vancouver Calgary Family Business Distributive Taxes Lawyers.
Vancouver Calgary Family Business Distributive Taxes Lawyers at MacLean Law read with great interest this weeks “game changing” family property division case from our BC Court of Appeal, the BC Appeal Court expanded the somewhat restrictive traditional distributive tax treatment in family cases. In Sinai v. Mahmoud 2017 BCCA 155, the BC Court of Appeal noted that the money in the companies the husband was retaining would be drawn out at some point given their nature. As such a deduction for the potential distributive income taxes to withdraw money from the companies was allowed. This decision represents a welcome expansion of when distributive taxes will be deducted in a case of family or matrimonial property division In Vancouver or Calgary.
Vancouver Calgary Family Business Distributive Taxes Lawyers Explain Distributive Taxes Impact
The case is hugely important to our Vancouver and Calgary high net worth clients who have their own companies, professional practices or other business ventures. Our Vancouver Calgary Family Business Distributive Taxes Lawyers know these family businesses often have huge value and retained earnings being cash, equipment, investments or real property. The sale of these assets incurs potentially multiple disposition expenses such as real estate or investment commissions, corporate capital gains tax AND most importantly personal income taxes for the shareholder to get the monies out of the company. In contrast, one spouse may want to keep the family home which is a tax free family property.
In Sinai v. Mahmoud the BC Court of Appeal had to address the issue of taking into account distributive taxes on businesses that were not immediately going to be liquidated but were not companies that would have an infinite existence.
[30] In my view the judge’s expressed understanding of the circumstances in which distributive taxes should be factored into division of family assets does not accord with the jurisprudence that has developed under the Family Relations Act.
[31] The judge referred to the relevant authorities before him, and said:
[163] … In determining the amount of the compensation order, disposition costs, including tax consequences, must be taken into account if an asset must be sold in order for the non-owing spouse to realize his or her interest in the asset. They need not be taken into account “when it is not known when, if ever, the asset would be sold”, or where those costs are “hypothetical and speculative”…
[32] While this statement is correct, it is incomplete, and does not give effect to the first premise, which is to the extent the circumstances of the asset permits, and provided there is evidence on which to do so, the parties are entitled to equality of treatment (see Stein at para. 9). To that end, assets should be put upon the same level for fairness and proper assessment of the relative outcomes. This removes opacity and allows for a clear view of the equivalence of wealth distributed, absent which an order may effect an unintended and unrecognized redistribution, and may ricochet onto the support orders made. The principles of fairness and presumptive equal division apply, with due regard to the practical character of the assets and inherent limitations. Recently Mr. Justice Savage summarized the law under the Family Relations Act in Maguire v. Maguire, 2016 BCCA 431:
[38] The case law that developed under the FRA provided that there is no absolute rule as to whether tax consequences should or should not be taken into account in the division of family assets. Where there is evidence that a division of family assets will attract tax consequences, an allowance should be made for tax. Where it is not clear when or in what amount taxes will be exigible, an allowance may not be made: Murchie v. Murchie (1984), 53 B.C.L.R. 157 at para. 390 (C.A.); Halpin at para. 63; McPherson v. McPherson (1988), 48 D.L.R. (4th) 577 at 583 (Ont. C.A.). Likewise, where taxes are “speculative” the court may not take taxes into account: O’Bryan v. O’Bryan (1997), 43 B.C.L.R. (3d) 296 at para. 54 (C.A.); Ouellette v. Ouellette, 2012 BCCA 145 at paras. 31‑32.
[33] I consider that the law, correctly understood, does not limit the requirement of an allowance for distributive taxes to cases in which the asset must be sold to allow the non-owning spouse to realize his or her interest in the asset. It was this feature which appears to have prompted the judge’s valuation of the corporations without allowance for personal income taxes that will become payable. In Laxton Madam Justice Smith discussed the correct treatment of tax consequences from selling the asset in issue (shares of a publicly traded company) and held the personal tax consequences to the seller “should have been deducted from the compensation award”. In doing so she affirmed the requirement for such treatment when a sale is required for the non-owning spouse to realize his or her interest, but she did not limit accounting for tax consequences to that single circumstance, citing Madam Justice Huddart’s comments in Kowalewich, in turn referring to the reminder of Madam Justice Southin in Blackett that “section 66 is not an expropriation provision”.
[34] As Ouellette demonstrates, it will not be necessary and indeed perhaps not always even possible, to account for tax consequences inherent in liquidating an asset. In Ouellette, however, the sums discussed appear to have been speculative and unsupported by evidence as to the quantum, and the judge found “Mr. Ouellette did not intend to sell his interest in the business …”. That is not the case before us. Here the corporations are two holding companies and a personal services corporation, none of them requiring the continuity essential to an on-going concern as was the case in Ouellette. Significantly, the record here includes evidence of the scale of the tax liability inherent in bringing the wealth out from behind the corporate curtain, which the appellant was willing to do immediately, and there is no evidence to the effect the monies retained in the corporations could be sheltered so as to attract a tax burden less than posited by the expert Mr. Tidball.
[35] In the case before us, I consider an error in principle is established in the failure to allow for the distributive tax burden the appellant will face.
[36] The question then becomes whether we should make the allowance. Although it is unusual for this court to make findings of this nature, s. 9 of the Court of Appeal Act, R.S.B.C. 1996, c. 77, provides:
9(1) On an appeal, the court may
(a) make or give any order that could have been made or given by the court or tribunal appealed from,
(2) The court or a justice may draw inferences of fact.
(3) The court may exercise any original jurisdiction that may be necessary or incidental to the hearing and determination of an appeal.
[37] The evidence of the quantum of distributive taxes is not extensive. In my view, we are positioned to determine the issue and it is in the interests of justice that we do so without referring this matter to the trial court with the attendant delay and expense for the parties.
[38] The judge referred to Mr. Tidball’s evidence that now the tax range that will apply is 27% to 38%. There is discussion in the expert opinion and Mr. Tidball’s viva voce testimony of the possibility of a “butterfly” transaction whereby assets of a company devolve to another company that may be owned by the recipient spouse, thereby to postpone taxes for both parties equally. The judge, however, elected to allocate the corporate assets entirely to the appellant, by-passing this possibility. Following the judge’s lead, it seems the way to bring parity to the division of family assets – to “level the field” – is to make an allowance for distributive personal income taxes. The appellant has made submissions that the lowest rate, 27%, produces an over-all effect on the value of family assets in excess of $400,000. In my view this diminution in real value should be shared, at this rate. I recognize that this conclusion will result in a significant reduction in the required compensation payment. However, that alone, cannot be a reason to decline to interfere, and the size of the adjustment itself illustrates the unevenness inherent in the order although it purported to effect an equal division of assets.
