Doctors, lawyers, dentists, and other professionals may run their practice through a professional corporation. Upon a divorce, the value of this professional corporation may need to be divided as family property. Additionally, the salary received from the professional corporation and value of the professional corporation may be relevant for determining a payor’s Guideline income for child or spousal support. The professional practice may also be highly valuable and may be the primary source of wealth in the family. As a result, it is important to know how a professional practice may be valued, as it can affect issues arising from a divorce.

This blog post will discuss how a professional practice may be valued, depending on what assets it holds. For instance, if the primary asset is the services provided by the professional, then the valuation process may be different than if the professional corporation also owned other property such as real estate to operate the practice. We will examine a case example, Hoffmann v De Baene, which provides some helpful insights on how the court will treat a professional practice as family property for division purposes and income for support purposes.

Assets of the professional corporation matter for valuation

In order to properly value a spouse’s professional corporation, it is important to consider what assets the corporation holds. Depending on the type of practice involved, it may include only the services provided by that professional. Other corporations may own the building in which they operate as well, which would need to be included in the valuation. In other cases, the corporation may be expanded to further locations and the value of the business needs to consider this as well.

Property division

The types of assets held is important when determining the appropriate method of valuation for the purposes of property division. For instance, if one’s professional skill is the only asset of the professional corporation, then it would not be considered a saleable business and the value may only be available upon winding up the corporation. A court may, therefore, consider a liquidation approach, which is discussed further in the case example below.

For any buildings and other real estate owned by the corporation, expert appraisals will likely be necessary to determine the value.

Also, goodwill and an existing client base may also be relevant assets to be incorporated in the valuation, depending on the type of practice involved. For instance, this may not be relevant for a medical practice, as discussed in the case of Hoffmann v De Baene.

Child and Spousal Support

For support purposes, a court will need evidence of the spouse’s salary drawn out of the company as a starting point (i.e. the payor’s line 150 income on their tax return). If the starting point is not a fair determination of income, a court can also consider pre-tax income of the corporation to establish the payor’s Child Support Guidelines income for support purposes.

According to section 18 of the Federal Child Support Guidelines, if a spouse is a shareholder, director, or officer of a corporation, a court can consider their pattern of income or non-recurring losses to determine if some or all of the pre-tax income of the corporation should be included as Child Support Guidelines income. A court can also consider an amount that is appropriate given the services the spouse provides to the corporation as long as it is not more than the pre-tax corporation income.

A court can consider the following factors for determining if pre-tax corporate income should be included in Child Support Guidelines income:

1. What role the payor plays in the corporation;
2. If the payor is the corporation’s sole shareholder;
3. The extent of control that the payor has over the corporation;
4. If retained earnings are available to pay child support; and
5. If retained earnings are necessary to continue to operate the business and ensure its financial viability.

Section 4 of the Child Support Guidelines also includes additional factors for consideration when the payor’s annual income is more than $150,000. A court has to decide whether child support should be the table amount, or a different amount, given the condition, means, needs, and other circumstances of the child. The court may also consider the ability of each spouse to financially contribute to the support of the children.

Valuing a doctor’s professional corporation

In Hoffmann v De Baene, the spouses were both educated professionals. The wife was a medical doctor, and the husband was a veterinarian. Neither had contributed to the other’s professional degree before they married in 2006.

They were both originally from Belgium but relocated to Fort McMurray, Alberta after the marriage. In 2008, the parties had a child together and by 2009, they had relocated to Medicine Hat, Alberta before divorcing in 2021.

Value of wife’s medical practice was significant part of matrimonial property

Regarding property division, there were competing methods of valuation for the wife’s medical practice. One expert used a liquidation approach, as the wife’s medical skill was the only asset of the professional corporation. Therefore, the expert opined that her business was not saleable on the market and the value could only arise upon winding down the practice. According to the liquidation approach, the value of the corporation was approximately $1.71 million.

A different expert took another approach. He agreed that there was no goodwill in the corporation and that medical practices as professional corporations are typically not sold. He valued the business on a going concern basis, as there was no evidence that the wife would leave the practice of medicine. Therefore, the expert understood the fair market value of the practice on the open market to be approximately $3.1 million.

Ultimately, the Court agreed with the first expert who used the liquidation approach, as the only asset of the corporation was the wife’s medical skill and there was therefore no goodwill or client base that could be transferred to a new owner. Therefore, the value of the corporation could only arise from winding up the corporation rather than a sale of the business.

Wife’s medical practice to be divided equally

The Court concluded that the professional corporation was to be equally divided after finding that the wife’s income earning potential was greatly supported by the parties’ relocation to Canada, specifically to Medicine Hat. Due to the relocation, the wife obtained opportunities to consistently practice in clinics and hospitals and to oversee the health region, which led to a higher income.

The Court found that due to the relocation, the husband gave up an opportunity to purchase an interest in the Fort McMurray Animal Hospital. The wife also did not assist with financing a buy-in for a different vet hospital in Medicine Hat, so the husband was not able to advance his career in such a manner.

Court includes pre-tax income of professional corporation when determining child support payments

The Court found that the wife was the sole shareholder and director of her professional corporation. After separation, she operated an investment portfolio in the corporation, which increased to approximately $3 million for her retirement. The Court found that she had complete control over her earnings and the salary she received.

The Court also noted that the wife had been diagnosed with cancer, which would affect her ability to work full time for a long period of time. The pre-tax earnings of the corporation were included, which would lead to a 10% increase in child support, which was considered to be appropriate given the lifestyle experienced by the child. Furthermore, the Court found that this would not significantly affect the wife’s retirement savings given her health condition.

Mincher Koeman Family Lawyers in Calgary Assists 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 and will be relevant to determining income for support purposes. The valuation and division of a professional corporation 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.