Mind your business: Business Assets, Professional Corporations & Divorce

November 15, 2021

Business owners or the spouse of a business owner encounter unique considerations when facing a divorce.

The Marital Property Act’s Treatment of Business Assets

The New Brunswick Marital Property Act, RSNB 2012, c 107 [hereinafter the “Marital Property Act”] exempts business assets from division with a spouse upon the breakdown of a marriage. Business assets are defined as:

“property owned by one spouse and used principally in the course of a business carried out by that spouse, either alone or jointly with others, and includes shares that the spouse owns in a corporation through which he or she carries on a business.”

At first glance, excluding business assets from division with a spouse may be good news to a business owner going through a separation and divorce but bad news to the non-owning spouse. However, the analysis concerning business assets does not necessarily end here.

New Brunswick courts have found that efforts and support from the non-owning spouse may entitle them to a business asset division. For example, in Bezzeg v Bezzeg, 1996 CarswellNB 117, the Court of Appeal ruled that the wife’s beauty products business, in which the husband had invested $90,000, was a “family project” divisible under the Marital Property Act and held it was not a “business investment.”

However, even when the non-owning spouse does not provide monetary or direct contribution in the form of work to the business, the non-owning spouse may still be entitled to a share of the business. Section 8 of the Marital Property Act provides three circumstances that warrant dividing the business assets. These three circumstances are essentially:

(1) if one spouse has unreasonably impoverished the marital property (i.e., gambling);

(2) if the division of the marital property is inequitable in all of the circumstances; or,

(3) if one spouse has assumed the majority of child care or household management responsibility, allowing the other spouse to acquire and grow their business.

For example, suppose the non-owning spouse assumed more of the household management responsibilities, which allowed the business-owning spouse to focus on their business. In that case, a court could divide the business assets with the non-owning spouse to recognize their indirect efforts to the business’s success. However, there are limits to the court’s discretion, and the parties should carefully consider the division of marital assets.

For example, in Bastow v. Bastow, 2001 CarswellNB 455, the wife had not financially contributed to the husband’s business, nor had she worked as unpaid labour. However, it was a long-term marriage of over 20 years. The wife had made many career sacrifices and essentially prioritized raising the children, allowing the husband to grow his business. The court considered the division of marital property as a whole, which only included the marital home. It determined that it would be unfair for the wife to only receive her share of the equity in the marital home after demonstrating so “much loyalty” over 20 years, which contributed “enormously to the husband’s success today”. The court ordered the husband to pay one-half of the business equity as an equalization payment to the wife.

In sum, there are two ways a court will grant a share of a business to the non-owning spouse, these are:

(1) to remedy an inequity resulting from the division of marital property; or,
(2) to recognize the ownership interest through a constructive trust acquired by the non-owning spouse through their contributions to the business property.

The New Brunswick Court of Appeal has rejected any “rule of thumb” that a non-owning spouse is entitled to a certain percentage of the business (i.e., 25 per cent of the business assets owned by the other spouse). In general, the larger the business asset, the more likely it is that a judge will award the non-owning spouse a share in the value of the business on marriage breakdown. The greater the non-owning spouse contributes to the business’s success, either through working in the business or assuming the responsibility for child care and household management, the more likely it is that they will receive a share of the business. What percentage this spouse is entitled to will be heavily fact dependant.

Professional Corporations

Professional corporations (“PC”) are a helpful tool for many professionals, including dentists, doctors and lawyers, for dividing income with their spouse and/or deferment of taxes on income. New Brunswick courts have stated that if the spouse mainly utilizes the PC for tax deferral purposes or investment or savings, it is subject to a marital property division as a family asset. In one decision, the court held that the PC was a “cousin of the RRSP”. In contrast, if the spouse uses the PC principally in business or for an entrepreneurial purpose, a court may determine that it is exempt from division on the breakdown of the marriage. How the parties used the PC will primarily inform this analysis.

Take away

• If possible, if you are the non-owning spouse, you should arrange to have your name on the business.

• If you are the spouse who owns a business or uses a PC, you should consider a marriage contract or cohabitation agreement to protect the business assets.

If you are a business owner or own a PC, it may be prudent to consult with a family law lawyer proactively. In either event, consulting with a member of Cox & Palmer’s family law team at any stage, can help you determine your respective risks and rights.

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