Law Times

Law Times • November 7, 2011 FOCUS PAGE 11 tersect, the result can be compli- cated and confusing. With family breakdown a common part of many people's experience these days, should business arrange- ments take this possibility into account and how do they do so? Shane Kelford of Howard Lawyers cautious after surprising McNamee ruling W BY JUDY VAN RHIJN For Law Times hen succession plan- ning in a business and family law in- was no issue that it was a gift," he adds. "Th ere was a deed of gift, and clearly no money came from the sons." One special feature of the Ryan Kelford Knott & Dixon in Smiths Falls, Ont., has seen how many family businesses don't consider the future when clearly they should. He practises family and corporate law, so he has seen the issue from both sides. "Marriage breakdown can eff ectively end a family busi- ness," says Kelford. Th ose businesses that do ad- dress the matter have a few tools at their disposal, although the certainty surrounding them has taken a hit in light of a recent decision that found that a gift of shares under an estate freeze wasn't excluded from matrimo- nial property in a subsequent marriage breakdown. Th e decision of Superior Court Justice Gary Tranmer at fi rst instance in McNamee v. Mc- Namee sent shockwaves among family, corporate, and tax law- yers. No one was more surprised than Kelford, who drafted the documentation. Although the Court of Appeal has now reversed the decision, he still fi nds himself proceeding much more cautious- ly with what he previously per- ceived to be black-letter law. "Th e primary purpose of an estate freeze is to crystallize the value of the business for tax pur- poses and to transfer the value of all future growth to the children," says Kelford. "As a corollary to that, you should consider how to protect the business in the event of a marriage breakdown. Th e tech- nique I used in McNamee is very common. In 2007, the busi- ness was worth $2 million. Mr. McNamee Sr. issued preferred shares for $2 million and then issued common shares, which he gifted to his sons. Much to my surprise, my estate plan was challenged in the family law pro- ceedings and we lost at fi rst in- stance. Fortunately, the Court of Appeal took a sober second look and said the gift was excluded, so now we are back on track." James Eastwood, a partner at Stewart Corbett in Brockville, Ont., who was co-counsel for the appellants, says the appeal deci- sion has certainly calmed fears that an estate freeze is no longer a viable approach to protecting future tax growth and guarding against future family law claims. His co-counsel Hunter Phil- lips of the family law boutique MacKinnon & Phillips in Otta- wa is also confi dent. "Th ere is no uncertainty now that the Court of Appeal has restored the origi- nal position if the gift is set up the way this one was," he says. "In the McNamee case, there Untitled-2 1 www.lawtimesnews.com 6/14/11 11:37:28 AM McNamee deal was that the declaration of gift made special mention of the possibility of a future marriage breakdown. It said that neither the shares nor any increase in their value or in- come from them were to form part of the net family property in the event of marital breakdown. It also said the shares were to re- main separate property free from the control of the spouse. "Mr. McNamee Sr. had himself gone through a marriage breakdown, so he was aware of some aspects of the exclusions under Part 1 of the Family Law Act," says Eastwood. "Th e Court of Appeal put suffi cient weight on the provisions that they put the entire document verbatim into the judgment. Given the onus is on the spouse arguing for the gift exclusion, it is certainly good advice to do the same." Phillips agrees. "Th e special clauses that referred to marriage breakdown are particularly sig- nifi cant under the Family Law Act. Assets that are transferred are excluded from the calculation of joint matrimonial property, but you need special wording if the income on that is to be excluded." Another tool in the McNa- mee case was a shareholders' agreement that restricted the transfer of the shares without the father's consent. Kelford also recommends the use of a family trust. "It is commonly accepted that an interest in a family trust is ex- cluded and has no value in family law," he says. "Th e parents have assets they would like to go to the children but wish to protect them from future marriage breakdown, so Mom and Dad become trust- ees in a discretionary trust. Th ey control how any assets are distrib- uted and they don't have to treat the children equally. Th e child might get nothing or a lot." However, Kelford raises the scenario where the son owes the daughter-in-law $200,000 but has no assets except an in- terest in a discretionary trust. "Can the court go into the trust to pay her? Academics and commentators have expressed concern that it might happen. At this point, it's black-letter law. What's in the trust is not part of the child's family assets. But after the McNamee case, I have to give that advice much more cautiously." CHERYL GOLDHART An experienced, knowledgeable and creative family law Mediator / Arbitrator who is not one of "the boys" Cheryl Goldhart has close to 25 years of family law experience, more than a decade of experience as a Dispute Resolution Offi cer and she is certifi ed as a Specialist in Family Law by the Law Society of Upper Canada. Cheryl will work with you and your clients to achieve an expedited and just resolution. To retain Cheryl as your Mediator and / or Arbitrator call 416-967-6111 x 31 or email cgassistant@goldhartlaw.com. For more information about Cheryl and her services, visit our website at www.goldhartlaw.com. Goldhart_LT_Nov7_11.indd 1 11-11-01 3:08 PM

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