Valuation Issues Take Centre Stage in BC Family Property Division Starting March 18, 2013.
British Columbia’s new family property legislation contained in the Family Law Act brings radical changes to family property division for British Columbia family law clients. The new law will be in effect on March 18, 2013 and will apply to married persons and- for the first time in BC- apply the same rights to spouses living in a marriage like relationship of more than 2 years in duration. Unlike the previous Family Relations Act the use of an asset is now irrelevant.
The stakes are very high in these situations. If you want specific questions concerning valuation and division of your family business, professional practice or real estate or commercial venture answered please contact Lorne MacLean, QC directly at at 604-697-2800.
The new Act requires our top rated lawyers and our clients to value assets and debts at two dates:
1. at the start of the relationship; and
2. at the end date of the relationship which is either the date of an agreement or the date of trial.
The reason we need to do these two valuations occurs because the new act instead focuses on dividing only the gain on all real and personal property owned by one or both spouses from the start of the relationship to the date of agreement or trial. Property acquired during the marriage can be excluded if it arises from a gift or inheritance or other limited class of assets. In cases of excluded assets received by one spouse during the relationship again only the gain on this asset will be shared.
These huge property changes impact strategies for separating couples as well as those who may wish to sign a premarital agreement a cohabitaion agreement or a marriage agreement. The key section for excluding property brought by each spouse to the marraige or marriage like relationship is:
85 (1) The following is excluded from family property:
(a) property acquired by a spouse before the relationship between the spouses
This means you need to talk to us before you commence a relationship to ensure you are protected as well as when you feel your relationship is in serious trouble. The new family property laws provide for a valuation date that, absent a contrary arrangement is either the date of an agreement or the date of a court order dividing the property. Making the valuation date clear in the statute was designed to make the rules easier to understand and to apply. Flexibility is ensured by allowing spouses to set a different valuation date by agreement.
The new FLA also states that Family debts are debts incurred during the relationship, or incurred to maintain family property after separation, and are presumptively shared equally between spouses. ou need to speak to us to see what debts fall in this category so you can ensure your rights are protected.
These new property law rule coupled with the new Supreme Court Family Law Rules that require the joint retainer of an expert make it mandatory that you hire a lawyer family with valuation issues and who knows how to effectively retain and instruct certified real estate and business valuators.
We believe that capital gains tax isues that affect valuation will also become more relevant as well a second type of taxes payable to remove money from a company which are called distributive taxes. Failure to consider these two taxes and options related to sharing and minimizing taxes can have devastating results to the parties.
As a simple example consider a commercial warehouse owned by a businesswoman which was bought before marriage and had a value of $500,000 at the date of marriage. In addition this warehouse was rented out and earned a very lucrative income. A business valuator would need to value the warehouse at the date of marriage taking into account not just its asset value but as well the cash flow that it generated. The reason for looking at cash flow is obvious because a purchaser would pay more than simply the real estate value of the building to obtain a fully rented building which produced a good profit to the buyer.
Further the business valuator then needs to value the commercial property at the date of the agreement or trial and consider disposition costs, capital gains taxes and distributive taxes. The cases go both ways on what if any deduction in value should be made for these “latent taxes”. In addition there are butterfly transactions which create two new companies and enhanced lifetime capital gains exemption opportunities that might exist for a qualifying Canadian small business. This are is extremely complex and fraught with danger and we can help guide you through these dangerous financial waters.
In brief there are 3 valuation methods that can be applied to a company, a professional practiceor a real estate venture:
- liquidation value being the lowest value-value used for a company that is not viable;
- going concern asset value being the middle value- assets less debts value used for most companies which produce a wage for the owner;
- and the highest value-capitalized earnings value for a company that earns substantial profits over and above a wage to the owner. This value would be used when an investor could buy the assets and pay a manager to run the company and STILL earn a very good profit on top of that. These companies may have commercial goodwill that is marketable and personal goodwill that would not remain if the owner left.
Valuations involve checking the accuracy of financial statements, valuing underlying assets, checking personal benefits and any non arm’s length salaries, assessing tax liability, assessing the viability and profitability of the company, determining whether there are long term contacts, looking at the company’s or professional practice’s economic prospects as well as dozens of other factors.
When hiring a certified business valuator who is a Chartered Accountant with additonal specialized training we need to consider the following issues:
Joint Retainer Checklist by Kim Jezior of CVPL
The following checklist is designed as a reference tool when preparing and/or reviewing a joint retention agreement.
- Has the purpose and scope of the valuation engagement been clearly defined?
- Have the parties agreed upon the valuation date and the value metric (i.e. fair market value or fair value)?
- Has the process for communicating with the expert been addressed? For example, are all communications received by the expert from one party to be distributed to all other parties?
- Is a Blind Draft report to be issued by the expert to the parties for review and comments?
- Has a Draft Comment Period been defined? If so, is the number of days specified for this phase of the engagement reasonable?
- Will each party be afforded the opportunity to provide written submissions addressing the comments of the other parties? If so, is the number of days specified reasonable?
- Once all submissions are due, what is that timeline for the issuance of the Final report?
- Have the arrangements for payment of the expert’s fees been clearly documented?
The stakes are very high in these situations and it is foolhardy to try to value these businesses without top flight legal representation. If you have specific questions concerning valuation and division of your family business, professional practice or real estate or commercial venture answered contact Lorne MacLean, QC directly at at 604-697-2800.