Business Ownership and Divorce Mediation in Ontario

Quick Answer: How Can Mediation Address a Business During Divorce?

Divorce mediation can help spouses identify the financial issues connected to a business and negotiate practical settlement options. The business does not necessarily have to be divided or sold.

The mediation process may address:

• Each spouse’s direct or indirect ownership interest
• The value of shares, partnership interests or business assets
• Financial disclosure and missing records
• Business income relevant to support discussions
• A possible buyout, sale or property offset
• Continued ownership or business restructuring
• Confidentiality and operational stability
• Tax and financing concerns requiring professional review

Ontario recommends exchanging information about income, property, assets and debts before mediation so that discussions can be fair and informed.

Does Owning a Business Prevent Divorce Mediation?

No. Business ownership does not make the couple unsuitable for mediation.

Nevertheless, this process can be more complicated in cases when the separation involves the couple’s business. The couple needs more preparatory work because the couple needs to provide information on their corporate documents, valuation reports, and so on before entering into an agreement.

It would be more helpful if the couple were ready to share relevant information and get professional advice.

What Does a Divorce Mediator Do?

A divorce mediator in Ontario helps spouses:

• Define the business-related issues
• Organize the negotiation process
• Identify information that may be required
• Explore settlement options
• Record terms reached through mediation

The mediator cannot establish the value of the business, choose which spouse gets to retain the property, or enforce any form of solution. Mediators should also not be involved in representing any of the spouses as their lawyer, accountant, or financial adviser in the business.

Both parties are still accountable for their own decisions, and they should consider the financial implications of the agreement before they agree on it.

Is a Business Considered Family Property in Ontario?

The business interest is one that could be considered when there is separation between a married couple. The rules governing the general property of Ontario include business as one property whose value can be determined within the course of the marriage.

This, however, does not mean that there is a need for the actual business to be split between the two parties.

The analysis can involve:

• Sole proprietorship assets
• Shares in a privately held corporation
• Partnership interests
• Professional practices
• Holding companies
• Minority shareholder interests
• Businesses owned with relatives or outside partners

Was the Business Started Before or During the Marriage?

The year in which the business was started could have an effect on the type of information and valuations necessary.

A business started while married is included as part of the owner’s net family property. In case the business was in operation prior to marriage, its value at the date of marriage would have to be determined to establish its value increase.

In Ontario, property appreciation from property owned by the spouse prior to marriage is taken into account when couples separate.

Records that may help establish the history of the business include:

• Incorporation and partnership documents
• Historical financial statements
• Tax returns
• Share registers
• Purchase agreements
• Prior valuations
• Marriage contracts
• Shareholder agreements

What Are Active and Passive Business Growth?

Active growth can be attributed to the efforts put in by the owner in terms of labor, management, business expansion, or investment.

Passive growth could relate to conditions in the market, rate of inflation, trends in the industry, or other such factors.

The use of these concepts can help the couple comprehend how the value of their business changed. But the relevance of these concepts will depend on various factors.

Does Legal Ownership Decide the Settlement?

Not necessarily. The company may have been incorporated in only one spouse’s name, but there may still be relevance of its worth for property conversations.

Legal ownership, corporate control, and how the value of a business will be viewed by Ontario family law are three different things. The shares need not necessarily be transferred just because the business has value.

What Settlement Options Can Spouses Discuss in Mediation?

A business does not automatically need to be divided or sold when spouses separate. Divorce mediation allows spouses to compare settlement options based on the company’s value, available financing, tax considerations and operational needs.

A mediator cannot impose an outcome. Both spouses must voluntarily agree to any proposed arrangement.

Can One Spouse Keep the Business?

One spouse may retain the company while addressing its value through the broader property settlement. Possible arrangements include:

• A lump-sum buyout
• Instalment payments over an agreed period
• An offset against the matrimonial home or other assets
• Refinancing to fund a payment
• A transfer or redemption of shares
• A combination of assets and future payments

Could the Business Be Sold or Restructured?

A sale may be discussed when neither spouse can afford a buyout or wishes to continue operating the company. Possible options include:

• Selling the company to a third party
• Selling one spouse’s interest to the other
• Transferring shares under an agreed arrangement
• Reorganizing the corporate structure
• Delaying a sale until a defined date or event

Can Former Spouses Continue as Co-Owners?

Continued co-ownership may be considered when an immediate sale or buyout is impractical. However, the arrangement requires clear rules for:

• Management authority
• Voting rights
• Salaries and dividends
• Access to financial records
• Major business decisions
• Future valuations
• Buy-sell procedures
• Deadlock resolution
• Exit dates or triggering events

Continued ownership may not be practical when communication has broken down or one spouse controls all business information.

What Should Business Owners Do Before Divorce Mediation?

Preparation can reduce delays and help spouses focus on informed settlement options. It can also identify areas where professional assistance is needed before negotiations begin.

Five Steps to Prepare for Mediation

1. Confirm the ownership structure.
   Identify shares, partnership interests, sole proprietorship assets, holding companies and related businesses.
2. Collect financial records.
   Organize personal and corporate tax returns, financial statements, bank records, shareholder documents and loan information.
3. Separate the main issues.
   Distinguish questions about property value, legal ownership, business income, support and daily operations.
4. Identify urgent business risks.
   Review payroll, financing, signing authority, contracts and relationships with employees, customers or partners.
5. List the professional guidance required.
   Determine whether the spouses need a lawyer, accountant, business valuator, tax professional or corporate adviser.

When Should Other Professionals Be Involved?

Divorce mediator assists in communication but is not a substitute for professional and independent guidance. The code of conduct for mediators in Ontario clearly states that mediators are not to give any legal advice and should encourage independent legal/other professional advice.

Depending on the issues, spouses may consult:

• Family lawyers for legal rights and agreement terms
• Chartered Business Valuators for value or income analysis
• Accountants for financial records and corporate transactions
• Tax professionals for potential tax consequences
• Corporate lawyers for share transfers or reorganizations

A CBV may be jointly retained by both spouses to complete a business valuation or income determination in a matrimonial dispute.

What Happens After Mediation?

A Mediator might choose to draft a Memorandum of Understanding that details all the points of agreement. This should never be considered a substitute for professional legal advice.

It would be wise for each individual to get his/her own attorney to review the settlement proposal. Attorneys will draft a formal Separation Agreement, while others execute the rest.

Frequently Asked Questions

Can My Spouse Claim Part of a Business I Owned Before Marriage?

The marriage-date value and later growth may be relevant. A lawyer and business valuator can assess the specific circumstances.

Do I Have to Sell My Business During a Divorce?

No. Spouses may discuss a buyout, property offset, restructuring, delayed sale or another arrangement that preserves the business.

Can a Divorce Mediator Value My Company?

No. A mediator facilitates negotiations. A qualified business valuator may provide an independent opinion about the company’s value.

 

Assad Bajwa, Founder of Smart Separation, provides a structured setting in which spouses can discuss business interests and other separation issues. Where specialized questions arise, the spouses can obtain guidance from independent lawyers, accountants, Chartered Business Valuators and tax professionals.