In this second part, let’s look at protecting a business, and calculating child and spousal support.
Part 1 of this article explained the various ways a divorcing spouse can be compensated for their family property claim to a business. Part 2 now looks at how to insulate a business from the negative effects of a divorce, what steps should be taken by a shareholder or their spouse when they’re divorcing, and how a self-employed spouse’s income is calculated for child and spousal support purposes.
How do I protect a business?
The most effective way to minimize the impact of a separation on a business is to enter into a Pre-nuptial Agreement or other domestic contract. These agreements can even be signed after the couple marries or if they have no plans to marry. They set out rules about how to divide property on the divorce or death of the spouses. A common agreement is “what’s mine is mine, what’s yours is yours”, however there are several potential agreements. For example:
- one spouse keeps the business, but the rest of the family property is divided normally,
- one spouse keeps the business, and the other spouse keeps another major asset, such as the house or investments, or
- there could be a payout amount agreed to in advance, while everyone is still on amicable terms. Sometimes it is a formula based on the length of the relationship.
Pre-nuptial and other domestic contracts can also address spousal support (alimony) in advance.
You may not want to be in business with a business partner’s estranged spouse. Where there are multiple families or shareholders other than the spouses, all shareholders can sign a Unanimous Shareholders Agreement (USA). Among other terms, these agreements typically aim to prevent a spouse from owning shares directly, or from the shares being sold without the other shareholders’ consent. They may also include buy-out provisions. Even if you are not worried about a divorce, USAs can be very beneficial where there are multiple shareholders and may help to avoid a future court battle. Business law lawyers can help you draft USAs.
There are other creative arrangements as well. For example, where there are multiple divisions or locations, perhaps each family owns a separate division. A joint venture agreement or licensing agreement can address their interconnectedness.
If there are multiple shareholders and another shareholder family is separating, you will want to make sure there isn’t any corporate misconduct against an estranged spouse. Misconduct can put the corporation’s assets at risk as occurred in Aubin v Petrone, discussed in Part 1 of this article. If the divorcing shareholder is the company’s President, CEO, or otherwise controls the business, it may be a good idea to have someone neutral manage the business instead, at least until the divorce is concluded. That person should be truly independent and not the spouse’s puppet. Part of the rationale in Aubin v Petrone was that the spouse had a history of treating the company’s assets as their own personal assets, even though there were other shareholders. Proper corporate governance and board of director oversight can be helpful, as well as avoiding intermingling corporate and personal funds. Do not get drawn into their divorce as it can harm your investment, and in some cases, you can even be sued yourself. Frequent board meetings can help you become aware of shareholders separating from their spouses when it happens and might help to keep the company from being drawn into the separation.
Avoid making changes to the share structure, or any other significant unilateral changes which could devalue the shares or prejudice the spouse. For example, do not start a new company or enforce loans against the spouse. Get written consent from the estranged spouse for these changes, do not assume their spouse is speaking on their behalf. There are cases where a spouse did not tell their business partners that they had separated, and they took steps on behalf of the corporation designed to harm their spouse. Even terminating an estranged spouse’s employment might be problematic, although sometimes that is necessary because of the negative impact on business operations. Sometimes a restraining order is even necessary, or court orders to return corporate property.
It is very important to consult a family law lawyer with significant experience dealing with businesses before you take these types of steps. Being careless or overly aggressive can backfire. Speaking to a business law lawyer can also be helpful but usually is not enough on its own. Business law lawyers typically focus on the rights of the shareholders and employers rather than how the family courts might react.
How is child and spousal support calculated when someone is self-employed?
When a person is self-employed, we do not usually use their total income in their tax return to calculate their income for child and spousal support purposes.
Sometimes their reported income is too high, particularly where they receive large dividends. Dividends appear larger in personal tax returns due to something called a “dividend gross-up”, which we deduct when calculating support.
In most cases, their reported income is too low:
- Owning a business means being able to deduct expenses. Family courts do not have to follow the same rules as CRA when it comes to deductions. The court assesses what it thinks was a legitimate and reasonable business need, and may add a part of the expense to a person’s income. Sometimes even the CRA would not allow the deduction, but the company has not been caught yet. For example, some shareholders deduct vacations. I have even seen people try to deduct all their living expenses, although that level of impropriety is rare.
- Income might be kept in a company rather than being paid out as a salary or dividends. If there is no legitimate corporate need for that money, all or part of that undistributed profit might also be added back to their income.
- Where a new partner, family member, or close friend is compensated by the company, the courts can look at whether that compensation and any benefits are reasonable.
- There are many other adjustments the courts can make. The onus is generally on the business owner to provide evidence and explanations about each of these items. Failing to properly do so could lead to paying more in support than they should be.
Sometimes the company does not expect past revenues or expenses to reoccur, which might mean excluding them. A change in circumstances may mean predicting what a true ongoing amount might be, or retroactively adjusting later.
We will often hire a financial expert to calculate what a business owner’s income should be for support purposes. Some Chartered Business Valuators have experience with child support rules and can draft a “Guideline Income Report”.
I’m separating from my spouse, what now?
There are resources and guides to help you navigate your separation and articles about minimizing parenting disputes. If you are divorcing and have children under 16 years of age, you’ll need to take the Alberta government’s Parenting After Separation course. Taking time to go through these resources and prepare can save you a lot of headaches. Judges often chastise both spouses for their bad behaviour. If you want a judge to see you for the upstanding human being and excellent parent that you are, make sure your behaviour is pristine. Even if you think your former spouse is the source of conflict, do not sink to their level.
Courts and lawmakers have developed many rules to address the unique issues that arise when there is a business. Whether you are the business owner or their spouse, if you separate, it is critical that your family law lawyer have plenty of experience with businesses. Ask them questions to gauge their knowledge.
When a separation occurs and there is a business involved, it can be advantageous to choose better alternatives than going to court. Divorces involving businesses are often too complex for most court hearings to address. The Court of Queen’s Bench does not have separate family law judges, and you do not get to choose which judge you appear before. You will not know if your judge has much experience with businesses, family law, or divorces involving businesses. For example, before becoming a judge they may have prosecuted a candy bar theft. Mediation, arbitration, and their hybrid med-arb are excellent alternatives to the courts, for both business owners and their spouses. Through those processes, you can choose a family law mediator/arbitrator with experience dealing with businesses to help come to a resolution that is fairer, more attentive, less costly, and faster than through the courts.
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The information in this article was correct at time of publishing. The law may have changed since then. The views expressed in this article are those of the author and do not necessarily reflect the views of LawNow or the Centre for Public Legal Education Alberta.
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