How is a business valued when spouses separate or divorce in Ontario?

When spouses separate, a business owned by one of them can be among the largest items in the financial picture. Small business valuation in divorce is governed in Ontario by the Family Law Act, a provincial statute, so the answer here is specific to Ontario. This guide covers only Ontario’s Act; if you live elsewhere, check your own province’s law. What follows explains the Act’s structure in plain terms, not how a court would value your business. That depends on the facts and the evidence.

The equalization framework

Under section 5 of the Act, when a divorce is granted or a marriage is declared a nullity, or when the spouses are separated and there is no reasonable prospect that they will resume cohabitation, the spouse whose net family property is the lesser of the two is entitled to one-half the difference between them. The Act does not split the business itself in half. Its value goes into the owner’s net family property, and the entitlement is one-half the difference between the two totals. Under subsection 5(6), the court may award more or less than half the difference if it is of the opinion that equalizing would be unconscionable, having regard to factors the Act lists. Section 5 also deals with other situations, such as the death of a spouse. This guide covers separation and divorce.

What net family property means

The Act defines net family property as the value of all the property, except property excluded by the Act, that a spouse owns on the valuation date, after deducting the spouse’s debts and other liabilities and the value of property, other than a matrimonial home, that the spouse owned on the date of the marriage, after deducting debts and liabilities, other than those related directly to acquiring or significantly improving a matrimonial home, calculated as of the date of the marriage. So if the business was owned on the date of the marriage, its value on that date enters the date-of-marriage deduction. Note that the Act has further detail on both deductions.

The valuation date and close of business

The Act defines the valuation date as the earliest of several dates. These include the date the spouses separate with no reasonable prospect of resuming cohabitation, the date a divorce is granted and the date the marriage is declared a nullity. Section 4 also says that when it requires a value to be calculated as of a given date, it is calculated as of close of business on that date. For a business, this means it is valued as of that specific day. BDC notes that a company’s value can change for many reasons, so the date matters.

Tax, exclusions and who must prove them

The Act says the liabilities deducted in net family property include any applicable contingent tax liabilities in respect of the property. Whether such a tax cost applies to the business, and how much it is, are questions for the accountant and valuator, not an afterthought. Certain property is excluded from net family property, including property acquired by gift or inheritance from a third person after the date of the marriage, other than a matrimonial home, and property the spouses have agreed by a domestic contract is not to be included. The onus of proving a deduction or an exclusion is on the person claiming it.

• Find out the valuation date that applies and gather financial statements for the years leading up to it.
• Establish whether the business, or an interest in it, existed on the date of the marriage, and gather records of its value then.
• Ask the accountant about any contingent tax liabilities connected with the business property.
• Check for a marriage contract or other domestic contract that deals with the business.
• Keep records for any gift or inheritance claim, because the person claiming an exclusion must prove it.

Goodwill and the practice question

In a business that depends on one person, a question to put to the valuator is how much of the value belongs to the business and how much to the individual. Treadstone Law, an Ontario law firm, describes the distinction as personal goodwill versus practice or enterprise goodwill, and says it sits at the centre of most valuation disagreements in dental, medical, legal and other professional practice sales. That article is about sales, not separation, and the Family Law Act does not itself use these terms, so ask the family lawyer how the distinction applies to your case. This is an issue for the valuator and the lawyers, and the answer depends on the evidence. See also what a valuation looks at in general.

Valuators and keeping the business running

BDC says that because of the complexity and stakes, it is helpful to hire a chartered business valuator to get an objective and realistic understanding of a company’s value. Each spouse can consider engaging one. The Act also protects the business to some degree: an order under section 9 or 10 shall not be made so as to require or result in the sale of an operating business or farm, or so as to seriously impair its operation, unless there is no reasonable alternative method of satisfying the award. To comply, the court may order one spouse to pay the other a share of the profits from the business, or, if the business is incorporated, order a transfer or issue of shares in the corporation.