Q: I own a small business that I started before my marriage. Now that my spouse and I are separating, I’m worried about how this might affect my business. How does a business get divided during a divorce in Ontario, and what can I do to protect it?
A: Dividing assets during a divorce can be a complex and emotional process, especially when it comes to a business you’ve built yourself.
In Ontario, the division of assets during a divorce is governed by the Family Law Act. For married couples, the Family Law Act sets out how property is divided after a separation or divorce using the equalization of net family property process.
When two people enter a marriage, each spouse is automatically entitled to an equal share of the profits of that marriage. When a marriage breaks down or a spouse passes away, the right to equalization is activated, meaning each partner is then entitled to one half of the value of property accumulated during the marriage.
Each spouse calculates their net family property (NFP), which is the total value of their assets and liabilities they have each accumulated during the marriage. This will exclude any debts and the value of what they brought into the marriage, except for the matrimonial home, the entire amount of which is included. Based on this, one spouse may be required to pay the other an equalization payment, to equalize the value of each spouse’s net family property.
It’s important to understand that equalization deals with value, not specific assets. This means you will not necessarily lose half your house, business or savings, but you may owe your spouse a financial amount to balance the value accumulated during marriage.
In this context, a business is considered property. If only one spouse owned the business before the marriage, the amount to be included in the equalization will typically be based on the increase in value of the business during the marriage. If this business was received as an inheritance or gift, it will be excluded from equalization.
This means that if your business grew significantly after you married, your spouse may be entitled to a portion of the increase in value, which will be factored into the equalization payment. Even if you started your business on your own before the marriage, the increase in its value during the marriage will still be included in equalization. The fact that your spouse wasn’t involved in the business doesn’t protect you from their claim to its appreciation.
If you want to keep the business, you can buy out your spouse’s share of the increase in value. It’s important to negotiate a fair deal and get legal and financial advice to make sure you’re not putting your business at risk. If an agreement cannot be reached, you may be required to pursue a forced sale. In this situation, the business could be sold to the highest bidder.
In order to calculate the equalization payment, it is often necessary to hire a business valuator to ensure a fair valuation. They will calculate the value of your company by reviewing your past and present earnings, business debt, as well as how the split will affect future operations.
If your spouse contests the valuation, or claims the business is worth more, they can request their own independent valuation.
It is important to note that a marriage contract or pre-nuptial agreement can help protect the business. A business and its assets can be excluded from potential net family property divisions through these agreements. Spousal and child support obligations are typically calculated based on your income, including your net income from a business, as well as other factors. In a marriage contract or pre-nuptial agreement, you may specify how you wish to address equalization and/or spousal support obligations in the future.
Having a pre-nuptial agreement or marriage contract in place can reduce future financial stress, including any business-related concerns.
While divorce can complicate things, with the right legal support and planning, you can protect your business and keep it on track for the future.
