When a couple goes through a divorce in Canada, all liabilities and assets between them are split using a process called equitable distribution. Basically, the court that dissolves the marriage will classify the property as either marital or separate, put a monetary value on that property, and then distribute it between the soon-to-be ex-spouses.
Of course, some types of property are simpler to distribute than others. For example, usually, both spouses have a vehicle, and each spouse will hold their respective vehicle. However, other property types are generally more challenging to distribute, like marital residence. In order to equally distribute the residence, in most cases, the spouses will either consent to sell the house and split the proceeds, or one of the spouses will want to stay in the place and will have to buy the other party out.
Another type of property can be even more complex to distribute between the spouses. For example, what if a spouse has an ownership interest in a business—how would you go about splitting this interest, and how do you value the company for detecting how much it’s worth? As you can tell, splitting business assets in a divorce is way more complicated than distributing the vehicles or the marital home, as explained in the above examples.
To distribute business assets and interests, there are three techniques that most couples use when divorcing in Canada. Below, we’ll go through each method separately so that you’re prepared better if you ever need to divorce and protect your business.
To begin with, the most frequently used method to divide business assets is the scenario where one spouse buys the other spouse’s interest in the company. The example below will better illustrate how the buy-out works.
Let’s say the spouses are dentists Tom and Linda, and they jointly own and run a dental practice in Toronto. After a company valuation, they both agree that the dental practice’s value is $800,000. After the divorce is finalized, Linda plans to move to Calgary and start working for another dental practice, while Tom will continue to work at the couple’s dental practice. So, for Linda to get her half of the valuation, Tom will essentially owe her $400,000.
However, according to Wahi, the price of the business’s assets and their valuation is not the only fee that needs to be settled for a buy-out, as many legal and administrative costs vary from lawyer to lawyer and depending on how complex is the buy-out is. For that reason, the buy-out technique works only if the buying spouse has enough funds to satisfy the selling spouse and pay all legal and administration fees that arise from the transaction.
Sometimes, the soon-to-be ex-spouses may agree to structure the buy-out to take place over time. So, if we go back to the example from above, Linda may decide to let Tom give her $200,000 now and $200,000 in the next three years.
The second method to distribute a business asset in a divorce is to actually not distribute it at all and continue to own the business even after the divorce is finalized jointly.
For example, using our above example, if Tom and Linda were amicable and wanted to keep running the joint dental practice, they could continue to co-own and run the business even after they get separated or divorced. Another variant of co-ownership might exist where one party continues to run the practice while the other agrees to receive monthly or annual payments from business proceeds to satisfy their share of the marital assets.
Nevertheless, co-ownership is not a very popular method to distribute a business asset in a divorce because many couples cannot have a productive working relationship after the divorce of their marriage. Co-ownership only works well in situations where the parties are amicable and can continue to respect and trust each other.
Sell The Company
If none of the two ways listed above seem viable options to distribute the business interest, the best way to ensure that each spouse gets fully compensated for their interest in a business is to sell the business entity and divide the proceeds between the two parties. This is a fairly common way to distribute other types of property since spouses, in many cases, agree to sell the marital home and split the proceeds.
However, this method may present some difficulties along the way. For example, if the business is not very profitable or obscure, it may take a while for the spouses to find a buyer for their company. In addition, it may not be the best option if the spouses disagree over the valuation of their company. Lastly, if one of the spouses wants to continue contributing to the business, they will most likely be opposed to selling it to an outside buyer.
In the end, when it comes to distributing business interest because of a divorce in Canada, the methods discussed above are the three most common techniques for the spouses to take a fair, equal distribution. Still, there are both pros and cons to each method that the soon-to-be ex-spouses need to consider carefully before deciding on the best method to apply in their case.
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