Family Companies

When parties separate a spouse’s share in a ‘family company’ is often at issue. Businesses are operated through an incorporated company for a variety of reasons, including limited liability and tax savings. Post separation, spouses sometimes struggle with how to define the value of that business. In Canada, a company is a separate legal entity. It is the shareholders of a company which own an interest in the company. The company itself, can sue and be sued, and holds title to its own assets. The Court of Appeal in British Columbia has repeatedly confirmed that the claim by a non-owning spouse is to the “shares” owned by the spouse, not to the company’s underlying assets which the company owns.

In Nowak v. Nowak 2014 BCCA the wife claimed, an interest in a commercial building that the husband had transferred to a holding company during the marriage. The wife claimed directly against the building, rather in the shares of the company owned by her husband. The Court of Appeal found that a spouse’s interest in corporation is represented by his or her shareholding, and not the assets of the company. From a policy point of view, the court found there would be an inherent risk is deeming both shares and the ‘sheltered’ underlying assets of a company as family property, including the potential for double recovery.

A court will, however, look behind the company to its asset holdings and retained earnings in certain situations. For example, the Federal Child Support Guidelines do allow a court to look at the pre-tax income of a company (before distribution to a spouse) in order to determine child support obligations under the Guidelines. The higher a spouse’s income, the higher monthly support is generally payable. The court will not allow a spouse to ‘hide’ behind a corporation, and retain funds in the company which would otherwise be available for support, in order to lower child support obligations. This is one of the limited basis upon which a court will look behind the corporate entity in family law proceedings.