Mitigating the cost of Covid-19 on business and marriage
Small businesses play an essential role in employing Canadians across the country yet have been particularly impacted by Covid-19. In addition, the pandemic has been wreaking havoc on marriages and, for business owners, this jeopardizes not only their family but potentially many others who depend on the business for their livelihoods.
Dividing assets during COVID
Separating couples go through a process called equalization to divide their net family property. Their respective net assets on the date of separation are calculated, less the assets they each brought into the marriage and any excluded assets such as inheritances received during the marriage. The spouse with the higher net family property gives the other spouse half of the difference between the two net amounts.
But if a business is the main asset for the spouse who owes an equalization payment, how do they pay without impacting its operations? Often, the equalization obligation has adverse consequences on cash flow, cash reserved for research, expansion, or ‘rainy day’ expenses.
When a business owner’s livelihood is impacted, so is his/her ability to support the children and former spouse (when there is a legal obligation to do so), along with employees, suppliers or other shareholders.
There are things couples can do to minimize financial strain on the business. While payments must be made as soon as they have been calculated, it is possible to extend the payment for 10 years post-separation under the Family Law Act if real hardship can be demonstrated. Families could also consider deferred payments, usually with interest and secured in some way, borrowing, or issuing non-voting shares in the business.
If there is a change in the value of your assets
During economic turmoil, it is difficult to value business because the points of reference often used, including past incomes or expected future performance, are not available or can no longer be relied upon. Business valuators are unable to predict the pandemic’s impact on the valuation of businesses for determining spouses’ net family properties.
A spouse whose assets declined in value since the date of separation may end up having to share the separation value even if it is more than what they have today. Case law is to use the value on the date of separation unless the circumstances fit a very narrow and hard to prove definition of “unconscionability”. This is an exceptionally high threshold, beyond circumstances that are merely unfair, harsh or unjust.
While the pandemic has created an economic situation that no one could predict, it is not a given that it meets the threshold and depends on the totality of the circumstances of each case.
Cost of conflict
With heightened anxiety from the pandemic, couples can mitigate the impact on the business and their family relationships through cooperative methods like collaborative negotiation and mediation.
Now is not the time to stay in protected legal conflicts. Families need to work cooperatively to preserve their financial resources and find creative solutions that benefit the entire family system.