Dividing a Professional Corporation During a Divorce

In the event of a divorce, one of the issues is how to divide the matrimonial property. One or more parties may be self-employed and own a professional corporation, which will be divided into matrimonial property. This includes doctors, lawyers, dentists, and other professionals. The process of determining the value of the professional corporation can be complex and often involves expert valuations and significant disclosure concerning the professional corporation. Some of this disclosure may also be required to determine the party’s income for child and/or spousal support. 

In this article, we will discuss the types of information that a court may consider when provided with an expert valuation of the professional practice and the disclosure required for the valuations and income determination for support purposes. This post will provide key takeaways for professionals going through a divorce or parties with an ex-spouse who owns a professional practice. 

Expert Evidence for Professional Corporation 

A party’s professional corporation may be considered matrimonial property and must be included in the property division. An expert valuation of the professional corporation is often necessary to provide the court with evidence of its value. Typically, a qualified business valuator conducts an expert report of this nature. 

An expert may consider the fair market value of the shares of the professional corporation. If the professional’s practice operates out of a building also owned by the corporation, there may also be rental revenue to be included in the corporation’s overall value. 

The expert can also consider the business’s cash flow as set out in the corporation’s financial statements and other related documents. This can include examining years of significant expenses and the reasons for doing so. 

Another factor that affects the value of the business is the corporation’s goodwill, which may increase the value of the corporation. 

Finally, an expert may also consider whether or not there are any offers to purchase the professional corporation as another factor to determine the corporation’s fair market value. 

What disclosure is required regarding a professional corporation?

Proper disclosure of the financial information of the professional corporation is necessary for the expert to produce a report. Specific disclosure forms are also required under the Alberta Child Support Guidelines (the “Guidelines”) to determine the professional’s income for support purposes. 

Sections 18-21 of the Guidelines state required disclosure for a self-employed party or solely controls a corporation, which often encompasses professional corporations. The Guidelines emphasize that if a party is a shareholder, director, or officer of a corporation or business, that party’s taxable income from the corporation claimed on their tax return may not be a fair reflection of their income for child support purposes. In particular, the court can consider some of the income of the corporation or income in proportion to that party’s professional services provided to the corporation. Also, the court must consider whether the expenses or reduced income claimed by that party are reasonable. 

A professional party must disclose when they have received personal benefits from the corporation. For example, they may have personal use of corporate devices, vehicles, or other travel, promotional, or entertainment expenses. The party must disclose deducted expenses that led to a personal benefit for that party. If the deduction did not lead to a personal benefit, then that party must explain why should not be included in their income for child support purposes. According to s. 21(1)(d)(ii) of the Guidelines, the professional party must disclose “a statement showing a breakdown of all salaries, wages, management fees or other payments or benefits paid to, or on behalf of, persons or corporations with whom the parent does not deal at arm’s length.” If the expenses incurred are not considered reasonable by the court, they may be added back to the party’s income for determining child support. 

Notably, even if expenses are properly deducted from a tax perspective (ie. the Canada Revenue Agency takes no issue with the expenses), this may not satisfy the court that all expenses or reductions in income are reasonable. However, when determining whether expenses are reasonable, the court will also consider the professional party’s degree of control over the corporation. For instance, in Cunningham v. Seveny, 2017 ABCA 4, one of the parties was part of a law partnership. The court found that the party likely had limited control over the partnership’s expenses, which also were unlikely to have been a personal benefit to him, as they were primarily for leasing, staffing, and other day-to-day business expenses to run the law firm. 

Also, the court noted in Cunningham that it is optional to conduct a line-by-line examination of how money is spent in the corporation, as it would be significantly time-consuming and costly to do so (para 35). However, it is the professional party’s responsibility to provide the required disclosure. 

Considerations on how to divide a professional corporation 

Given the information provided through disclosure and expert evidence, the court is better positioned to weigh the factors in dividing a professional corporation. 

To determine how to divide matrimonial property, including a professional corporation, the court must consider: 

1. Each of the parties’ contributions to the marriage and welfare of the family;
2. A spouse’s direct or indirect contribution to the acquisition or operation of the professional corporation; 
3. A spouse’s direct or indirect contribution to the acquisition, conservation, or improvement of property; 
4. Each of the party’s income, earning capacity, liabilities, obligations, and other financial resources at the time of marriage and at the time of trial; 
5. The length of the marriage; 
6. Any property acquired after separation; 
7. Whether a spouse has dissipated or reduced the value of assets to the detriment of the other. 

Concerning a professional corporation, the court can consider whether a spouse had contributed to the success of the other spouse’s professional practice by caring for the household and children. By attending to the household and children, that spouse would be supporting the professional in building up their practice and may be entitled to part of the value of the professional corporation. 

Mincher Koeman Family Lawyers In Calgary and Canmore Can Assist with Property Division Involving Professional Corporations

If one spouse operates a professional corporation, it may be included in the division of matrimonial property upon divorce. Certain disclosure obligations are needed to determine the business’s value and how it may impact that spouse’s income for support purposes. The valuation and division of this asset is a complex matter that is highly specific to the circumstances of the case, so you should speak with one of our family law lawyers at Mincher Koeman, who are experienced in assisting business professionals and entrepreneurs with issues involving property division and income determination for child support. Our Calgary family law lawyers are dedicated to finding the best resolution for you after your divorce.

To book a consultation, please contact us online, or by phone at 403-910-3000.