Factoring Taxes into a Divorce Settlement

In Ontario, when a married couple goes through the divorce process there is normally an equalization payment required from one spouse to the other spouse. In the absence of a valid marriage contract that states otherwise, the spouses would be entitled to 50% of the increase in the total net family property value from the date of marriage up to the date of separation.

When contemplating the equalization payment there are some very important tax consequences to consider.

Simple example:

If it is determined that at the separation date Harold had $400,000 in net property and Susan had $200,000 in net property, then Harold would have to pay Susan $100,000 so that they each end up with $300,000 in value.

You'll notice in the example that Harold would have to provide Susan $100,000 in order to equalize the net family property value. To be clear though, if Harold provides $100,000 in cash to Susan that would NOT be the same as providing her with investment real estate that is appraised at $80,000 + $20,000 in cash. Why is that? Because of taxes. More on this later.

What is the property that is normally dealt with in a divorce? Let's examine the table below, which outlines the property that Harold and Susan each own at the separation date. Let's assume that they do not own a home, that they rent.

 

Business Valuation for Tax & Estate Planning

This blog post will discuss the concept of an estate freeze, which is a commonly used tax and estate planning tool. We will also discuss how an independent business valuation is an important part of that process.

What's an estate freeze?

Section 86 of the Income Tax Act allows for the tax-free exchange of shares in specific instances. It is commonly used for estate planning purposes. Section 86 generally allows for the transfer of one's shares to be done at fair market value, tax free. Generally, the owner of an operating company can exchange their common shares for preferred shares at fair market value and then issue new common shares to a person (such as a child) and then the child's common share value would be based on the growth in value of the company. At a high level, this is what is referred to as an estate freeze.

A simple example –

Suppose a single mother (Mrs. Smith) is the sole shareholder of her company that she started up from scratch over 20 years ago using her hard work and sweat (BusinessCo Inc.).  BusinessCo Inc. is now a highly successful service company and Mrs. Smith's shares are worth $1 million today, according to a recent business valuation she had. Based on the company's

Taxation Issues in Business Valuation

A business valuation engagement triggers many questions about how taxes may impact the valuation. This blog post will touch on some of the more common tax considerations that arise in a business valuation engagement.

The first important question is -- what is the valuation approach? Is the business a going concern or is it a liquidation situation?

Going Concern Approach

If the business is viable and is a going concern, the following are some more common tax issues that come up in a business valuation:

What is the type of corporation?

Is the business a partnership, a joint venture, a Canadian Controlled Private Corporation (CCPC), private corporation, public corporation, and so on..? The type of corporation it is will impact the level of taxation.

There could be a situation where the business was incorporated as a CCPC and is entitled to the small business deduction and therefore would be taxed at a lower rate. However, it may be determined that after a purchase that it would no longer be a CCPC and not entitled to the small business deduction and therefore the tax rate would be higher. If this is known in advance then the tax rate used in the valuation should not include the small business deduction. If it is not known with a high degree of certainty then the business valuator would have to apply the most reasonable income tax rate to the valuation.

Tax implications in an income-based valuation approach

In an income approach business valuation, the future cashflows of the business are forecasted and discounted to the present value using a discount rate to account for risk and the time value of money. This is referred to as the income approach. Sometimes a cashflow at a single point in time is capitalized (with a growth rate