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How Divorce Affects Your Business

Image of a divorcing business man at work

For business owners about to divorce, much of the complication has to do with determining income and the value of the business.

Going through a separation or divorce can be both emotionally and financially complicated. For business owners about to divorce, much of the complication has to do with determining income and the value of the business. Further, many business owners are unaware of the paperwork and steps involved in separation/divorce, leading to an unnecessarily long and expensive process. To save time, money and stress, all business owners should read up on the following points before they engage in the separation/divorce process.

In a separation, both spouses need to divide their property – and yes, your business interests are included!

Division of Net Family Property

When a married couple separates in Ontario, they must disclose to each other the property they accumulated during the marriage. In this case, a list of each spouse’s individual and jointly owned property is detailed with values for date of marriage and date of separation. In this context, “property” refers to anything owned by a person such as cars, household items, bank accounts, pensions, and yes, business interests. Debts are also included as “property”, so debts such as mortgage, car loans and/or credit cards are also part of the equation.

Business interests which must be disclosed, for the purposes of property division, can include (but are not necessarily limited to) the following:

  • The value of your share in the business;
  • Your shares in a business; and,
  • If you own the business, the business’ property and, good-will.

The idea is that the couple is sharing, equally, the increase in value of their net assets (assets minus liabilities).

You Will Likely Need to Have Your Business Professionally Valued

There are many different ways people value their business in divorce. Certainly, the larger the business, the more difficult it can be to determine its value. In these cases, one of the most common ways is to obtain a valuation from a Chartered Business Valuator (CBV). A CBV is a certified professional who can quantify a business by reviewing its profitability, tangible and intangible assets and future cash flows.

You Will Have to Prove Your Income

If child-support and/or spousal support are issues in your separation/divorce, then you will have to provide proof of your income. This is relatively straightforward for individuals who work for a company where their income is reported on a T4. In this case, pay-stubs, T4 slips and Notice of Assessments can be the best proof of income.

For the Self-Employed

Typically, if you are self-employed, the aforementioned proof is not good enough for determining support because the Income Tax Act allows self-employed individuals to deduct a variety of business expenses, therefore reducing your income. These deductions however are not all permissible under the Family Law Act (FLA), which clearly complicates matters. As a self-employed individual, you would need to go through all of the business expenses you used to reduce your income to see if they can also legitimately be deducted for the purposes of paying support. If the expenses cannot be deducted, these would be added back to the income, increasing your support obligations.

Prepare Ahead

Given all of this, if you are self-employed, it is extremely important to prepare your income statement in conjunction with a lawyer and business accountant to accurately determine your income and satisfy the disclosure obligations under the FLA (Family Law Act).

Blog posts and podcasts are for informational purposes only and do not constitute legal advice.

About the Author

Laura Tarcea

Laura is a family mediator dedicated to supporting families through divorce or separation. With a background in Mental Health, Research, Program Development, and a Master of Laws in Dispute Resolution, Laura brings valuable insight and critical knowledge to parents. She strongly believes that a healthy co-parenting relationship will protect children from short-term and long-term damage. As such, Laura is a supporter of out-of-court processes to help equip parents with appropriate tools to succeed in their next chapter.

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