Law Times

Page 14 November 12, 2018 • Law Times www.lawtimesnews.com Divorce can hit family businesses hard BY MARG. BRUINEMAN For Law Times D ealing with a fam- ily business in divorce proceedings can be like having a divorce within a divorce, say family law lawyers. The traditional family struc- ture of a one-income earner employed at a company has given way to double-income families, many of them relying upon self-employment or their own business. According to the government of Canada, micro- enterprises — which are com- panies with fewer than four em- ployees — constituted about 54 per cent of all private employers in the country in 2016. "In the last 20 to 30 years, you have more women in the busi- ness world, more women who are equal if not greater provid- ers to the family, so that's already changed the mix in terms of what's going on in general society. And, more importantly, you've got a higher proportion of people who are exiting employment and entering self-employment," says Steven Benmor, principal of Benmor Family Law Group in Toronto. "As soon as you combine those two societal f luctuations or trends, you've got more women in the workforce combined with more people in general in the self- employment sphere. By virtue of those two factors co-occurring, you have more family businesses." The end result for family lawyers, he says, is that they're increasingly having to deal with the business arrangement be- tween the divorcing couple as well as the marital issues and that expands the intersection of family law with other areas of law, including real estate, tax, corporate, estates, property and possibly securities law. Divorce in this context, he adds, can present some unique challenges. In business, it is common for one spouse to put shares in the other spouse's name for tax pur- poses, whether or not the other spouse is active in the business. But when that couple divorces, those tax advantages may not seem as convenient, says Ben- mor. That other spouse, even if they're a silent partner, may want an active role in the busi- ness during divorce or claim a percentage of the business based on the shares they own in the company. "You can't on one end tell the tax court of Canada she's a half owner and on the other side say: 'No, no, no, she's just holding those shares for me. She's not re- ally the owner. Give those shares back to me,'" he says. And because divorces are so emotionally charged, there are disagreements and distrust, and that spills over into the is- sues related to the business, says Benmor. If the one spouse then de- mands their share based on a val- ue of the business that is not con- sistent with what the other spouse believes the business is worth, they then become involved in an expensive argument requir- ing the involvement of chartered business valuators, he adds. Valuation is crucial when cou- ples with businesses are divorcing because that can be the family's most significant asset, says An- drew Feldstein, principal of Feld- stein Family Law Group PC in Markham, Ont. But a valuation is not necessary for some smaller businesses, so that has to be as- sessed from the start, he says. If a valuation is warranted and the business is solely owned by one of the spouses, it's their responsibility to value their own business. If it's jointly owned, both spouses carry that responsi- bility. The ideal situation, he says, is for the spouses to jointly retain a business valuator to avoid "the battle of the experts," where each is challenged in court. "We frequently will suggest to parties that they hire a joint valuator and when we do that it has the advantage of significantly reducing the cost because there's one valuator involved. The downside to a joint retainer is if you don't like the result, it's hard- er to get around it. And the other problem you get into is what's the scope of how far they're going to review things," he says. Lawyers acting for the busi- ness owner will want to mini- mize the scope of the valuation and accept the financial state- ments as is. But, says Feldstein, the other side may ask for a deeper examination under the suspicion the other spouse is hid- ing some income to avoid paying support. Or if the business-owning spouse has valued the business, the other spouse will hire a fi- nancial professional to review it and may to decide to move fur- ther with a written critique or a full valuation report with re- quests for additional disclosure. "The real question with valu- ation comes down in my mind [to] who you're going to hire, because those valuators could also be hired to prepare income reports in order to determine what the owner of the business's income is for the purposes of support," says Feldstein. A joint valuation is also sought when divorcing couples who have a business interest use the collaborative approach where the spouses each have their own lawyer but use "neutral" profes- sionals to help them work toward a resolution. In collaborative di- vorces, the spouses agree to not go to court, says Russell Alexan- der, whose collaborative family law firm has offices in Lindsay, Markham, Whitby, Oshawa and Peterborough, Ont. "So, we're all working from one document and it saves a lot of time and expense," he says. It's a private process that is subject to confidentiality, which may appeal to business owners who don't want the details of the business and the related fi- nancial records to appear on the public court file and potentially expose that information to com- petitors, he says. In addition to using financial "neutrals," the approach also in- cludes the involvement of a fam- ily professional, who, again, is not representing one side or the other. Their role is to work with the inevitable emotional issues resulting from divorce to allow for a smoother resolution of the other issues. Alexander says there is also a recognition that it is in the in- terest of both spouses and their family to ensure the business, which has allowed them to pro- vide for the family, be sustained. "Oftentimes, what I experi- ence is when people are going through a divorce, usually it's just one person who is going to carry on the business legacy. And then it's a matter of structuring an out- come that doesn't kill the golden goose so to speak," he says. "If we have a business that is viable and generating an income that is vi- able and creating income for the family unit, we focus on trying to keep that moving forward in the future, so it can still provide for generations." Nathalie Boutet, whose To- ronto family law practice in- cludes alternative dispute resolu- tion such as mediation, points to recent research from the Cana- dian Research Institute for Law and the Family illustrating the benefits of staying clear of the courts. The research indicates that opting for alternative approach- es results in shorter average timelines and lower litigation fees with collaboration show- ing to be the most cost effective, coming in at about half the cost of litigation. Boutet, a certified family enterprise advisor, looks at the intersection of the individual family members, the business and its ownership and share- holders when a couple with a family business divorce. Often, what's paramount is to maintain the viability of the business as a source of income for the fam- ily, but if one member exits as a result of the divorce, it may have an impact on the success of that business, she says. "Divorcing inside of the fam- ily business is very complex be- cause sometimes there's a lot of family individuals that are im- pacted by this separation," she says. LT FAMILY LAW BOUTIQUES Childview_LT_Nov12_18.indd 1 2018-11-06 3:22 PM Steven Benmor says that, in business, it is common for one spouse to put shares in the other spouse's name for tax purposes. LawTimesNews.com Fresh Ontario legal news and analysis available on any device. Get More Online The downside to a joint retainer is if you don't like the result, it's harder to get around it. Andrew Feldstein

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