Is a Business Included in Equalization in Ontario?

If you own a business, separation raises an obvious worry: will your spouse end up with part of it, and could it be sold out from under you? The short answer is that the value of the business is usually part of the calculation, but the business itself is not automatically divided.

This article explains how a business or company shares are treated when married spouses in Ontario separate or divorce, how the value is arrived at, and what protections exist for an operating business. It does not cover every situation, so use it as a starting point for a conversation with a lawyer and an accountant.

Is your business part of the equalization calculation?

Generally, yes. The Family Law Act defines property very broadly, as any present or future, vested or contingent interest in real or personal property. That includes shares in a business or company, which are counted at their value in net family property.

When spouses separate with no reasonable prospect of resuming cohabitation, or when a divorce is granted, the spouse with the lower net family property is entitled to one-half of the difference between the two. So the business is not split in half. Its value goes into your net family property, and the result affects the payment, if any, that one spouse owes the other.

Equalization applies to married spouses. Unmarried partners are not covered by it, which is a different situation with its own rules.

How the number is built

Net family property is the value of all property a spouse owns on the valuation date, except excluded property. From that you deduct your debts and other liabilities, and the net value of property (other than a matrimonial home) that you owned on the date of marriage. If the result is below zero, it is treated as zero.

The valuation date is the earliest of five dates, such as the date of separation with no reasonable prospect of resuming cohabitation, the date a divorce is granted, or the day before a spouse dies. Your business is valued as of that date, not as of today.

Valuing the business

There is no statutory formula for valuing a business. Valuation usually depends on the type of business, its records and evidence from a qualified business valuator, and two valuators can reach different numbers. That is why this step is often where disputes arise.

If you claim a deduction or exclusion, such as a value on the date of marriage or an inheritance, you have the onus of proving it. Start gathering proof early, because old records can be hard to find.

• Financial statements and tax returns for the company, over several years
• Shareholder agreements, articles and share registers
• Records showing what the business was worth, or what you owned, on the date of marriage
• Records of loans between you and the company

Paying without selling the business

The court can order one spouse to pay the other the equalization amount and can order security for that payment. To avoid hardship, it may allow payment in instalments or delayed payment for up to ten years. If your circumstances change materially, the court may vary instalment or delayed-payment terms, but it cannot change the amount owed or postpone payment beyond the ten-year period.

There is also a specific protection for operating businesses and farms. A property order must not require or cause the sale of an operating business or farm, or seriously impair its operation, unless there is no reasonable alternative. The court may instead order a share of profits or, for an incorporated business, a transfer of shares.

The court may award more or less than half the difference only if equalizing would be unconscionable, and factors include undisclosed debts and intentional or reckless depletion of property. If you are worried that business assets may be moved or drained during a dispute, a court can make restraining orders, called preservation orders.

Disclosure and what to do next

In a property claim each party must serve and file a financial statement, and for property claims the form is Form 13.1. In an equalization application each party must also serve and file a sworn statement of property, debts and liabilities. Supporting documents, including account and investment statements issued closest to the valuation date, are due within 30 days after the financial statement is due.

Be complete and accurate. A party who discovers that a disclosed document is incorrect must promptly serve corrected information, and the court can order missing disclosure and must then order costs. A separation agreement can also be set aside if a party failed to disclose significant assets, debts or liabilities that existed when it was made.

• Identify your likely valuation date
• Collect company records and proof of any date-of-marriage value
• Speak with an accountant or business valuator about valuation
• Ask a family lawyer about protecting the business and structuring payment
• Do not move or transfer business assets without advice

Frequently asked questions