1. Business as Matrimonial Property
Under Alberta's Matrimonial Property Act, businesses are generally treated as matrimonial property subject to division upon divorce. This applies whether the business is a sole proprietorship, partnership, or corporation, and regardless of whose name appears on the business registration or corporate documents.
The timing of when the business was established matters significantly. A business started during the marriage is almost always considered matrimonial property. However, businesses started before the marriage present more complex scenarios. While the pre-marriage value may be excluded, any increase in value during the marriage is typically subject to division.
Key Principle:
The default rule in Alberta is equal division of matrimonial property. Courts may order unequal division only in exceptional circumstances, and simply owning a business does not automatically qualify as an exception.
What Counts as Business Property?
Business property subject to division includes:
- Shares in corporations
- Partnership interests
- Sole proprietorship assets
- Business goodwill
- Accounts receivable
- Inventory and equipment
- Intellectual property
- Customer lists and contracts
- Real estate held by the business
2. Business Valuation Methods
Determining the value of a business is one of the most complex and contentious aspects of divorce for business owners. Different valuation methods can produce dramatically different results, making expert guidance essential.
Asset-Based Approach
Values the business based on its net assets (assets minus liabilities). Best suited for asset-heavy businesses like real estate holding companies or manufacturing firms.
Methods: Adjusted book value, liquidation value
Income-Based Approach
Values the business based on its earning capacity. Most common for profitable operating businesses with consistent cash flow.
Methods: Capitalized cash flow, discounted cash flow
Market-Based Approach
Values the business based on what similar businesses have sold for. Requires comparable transaction data.
Methods: Comparable transactions, guideline public companies
Rules of Thumb
Industry-specific multipliers applied to revenue or earnings. Less precise but useful as a reasonableness check.
Example: Dental practices often valued at 65-85% of gross revenue
Hiring a Business Valuator
Courts in Alberta typically require a Chartered Business Valuator (CBV) to provide expert evidence on business value. When choosing a valuator:
- Ensure they hold the CBV designation
- Look for experience with businesses in your industry
- Understand whether they will provide a conclusion of value or a calculation of value
- Discuss the standard of value (fair market value vs. fair value)
- Clarify their role as an independent expert, not an advocate
3. Protection Strategies
The best time to protect your business from divorce claims is before you get married or before problems arise in your relationship. However, there are steps you can take at any stage.
Before Marriage
Prenuptial Agreement
A properly drafted prenuptial agreement can specify that your business remains separate property. Both parties need independent legal advice, and full financial disclosure is required for the agreement to be enforceable.
Document Pre-Marriage Value
Get a formal business valuation before marriage to establish the baseline value. This helps distinguish pre-marriage value from growth during the marriage.
During Marriage
Keep Business and Personal Finances Separate
Avoid commingling business and personal funds. Do not use personal accounts for business expenses or vice versa. Maintain clear corporate formalities.
Pay Yourself a Reasonable Salary
Taking a below-market salary to retain earnings in the business can backfire. Courts may impute income based on what you could have paid yourself, affecting support calculations.
Keep Detailed Records
Maintain thorough business records, including evidence of your personal contributions, capital injections from pre-marriage assets, and any inheritance or gifts invested in the business.
5. When Your Spouse Works in the Business
Divorce becomes more complicated when your spouse has been actively involved in the business. Their contributions can affect both property division and their ongoing role.
Impact on Valuation
If your spouse contributed to building the business, this may:
- Strengthen their claim to a larger share of business value
- Create arguments for sweat equity compensation
- Complicate claims that the business should be treated as separate property
- Affect how goodwill is categorized (personal vs. enterprise)
Ongoing Employment Issues
If your spouse works in the business, you will need to address:
- Whether they will continue working during and after the divorce
- Potential wrongful dismissal claims if you terminate their employment
- How their salary affects spousal support calculations
- Access to business information and records
- Non-compete and confidentiality obligations
6. Options for Dividing Business Value
Courts and parties have several options for addressing business value in a divorce settlement:
Offset with Other Assets
The business owner keeps 100% of the business but gives the spouse equivalent value in other assets such as the matrimonial home, investments, or pension. This is often the preferred approach as it allows the business to continue uninterrupted.
Buyout Over Time
The business owner pays the spouse their share of business value over time through structured payments. This helps when liquid assets are insufficient for an immediate offset but creates ongoing financial obligations.
Direct Share Transfer
The spouse receives shares in the business. This is generally undesirable as it creates an ongoing business relationship between divorcing spouses and can harm business operations.
Sale of the Business
If no other option works, selling the business and dividing the proceeds may be necessary. This is typically a last resort as it destroys ongoing enterprise value.
7. Professional Practices and Licenses
Professionals such as doctors, dentists, lawyers, and accountants face unique challenges because much of their business value may be tied to personal goodwill that cannot be sold or transferred.
Personal vs. Enterprise Goodwill
Courts in Alberta distinguish between:
- Personal goodwill: Value tied to the individual professional's reputation, skills, and relationships. This may be excluded from division or reduced in value.
- Enterprise goodwill: Value that exists independent of the professional, such as location, staff, systems, and transferable patient/client relationships. This is typically included in matrimonial property.
Valuators use various techniques to separate personal and enterprise goodwill, though this remains a contested area of law.
8. Tax Implications
Business division in divorce has significant tax implications that must be considered when structuring settlements.
Key Tax Considerations
- Tax-deferred rollover: Transfers of property between spouses pursuant to a separation agreement can occur on a tax-deferred basis under the Income Tax Act
- Retained earnings: Corporate retained earnings may have embedded tax liabilities that affect the true value of shares
- Capital gains exemption: The lifetime capital gains exemption for qualifying small business corporation shares should be considered in planning
- Income attribution: Post-separation income from transferred business interests may still be attributed to the transferor in some circumstances
Professional Advice Required:
Always consult with both a family lawyer and a tax professional when dividing business interests. The tax implications can be complex and significantly affect the real value of any settlement.