Divorcing Doctors in Ontario
By Mason Morningstar, Toronto Family Lawyer - 5 Minute Read
Divorcing Doctors in Ontario
Medical professionals (dentists, physicians, pharmacists, etc.) going through divorces in Ontario will face a few legal nuances that are not always applicable to other separating partners. They tend to earn higher incomes, own their own practices, own residential and/or commercial real estate, and may have separate business ventures, all of which trigger specific implications in Ontario family law. This article touches on issues relating to financial divorce only (there are different rules applicable to common law couples).
Property Division: Equalization of Net Family Property
Married spouses are entitled to equalize their “net family property” when separating, according to Ontario’s Family Law Act (the Act). A spouse’s net family property (NFP) is made up of their net worth accumulated during the marriage, with some exceptions (like inheritances or gifts).
Conceptually, equalization is simple: both spouses equally share any increase in their net worth during the marriage only. The complexity usually comes with determining the value of certain assets – like a medical practice – along with the appropriate notional discounts to be applied to those assets.
In practice, both spouses need to disclose all of their assets and debts as of the date of marriage and the date of separation, which will include things like bank accounts, RRSPs, TFSAs, mutual funds, vehicles, tools, jewellery, and business interests. Importantly, an ownership interest in a medical practice is considered property under the Act, which must be valued and equalized. Once each party has properly disclosed and valued all of their assets and liabilities, their respective NFPs will be calculated. The spouse with the higher NFP will pay the other one-half the difference. This will result in each spouse equally sharing the wealth that was accumulated during the marriage.
Valuing a Medical Practice
Two things are likely to complicate the divorce: (1) valuing your medical practice; and (2) determining your income for support purposes. While these issues are complex, they are manageable with sound advice and planning. You will generally need to coordinate with a team of financial experts, including a Chartered Business Valuator with expertise in family law, your accountant who is familiar with your business/finances, and a family lawyer well-versed in financial separation.
No two medical practices are the same, but valuation principles will generally revolve around the practice’s revenue, goodwill, patient base, location(s), equipment, competition, growth potential, and external market conditions. Equally important is a valuation of the practice’s debts or liabilities, including contingent liabilities (also called “notional disposition costs”). For example, while your practice may be worth $2 million, you may have $500,000 of contingent liabilities (i.e. taxes owing from the sale of the practice, commissions paid to real estate agents, and broker fees paid to advisors that sell the business), which would bring the net value down to $1.5 million.
Once you determine the appropriate equalization payment, you will need advice about how to finance this payment most advantageously. This could mean obtaining appropriate financing, selling property, selling a part of your practice, rolling over RRSPs, or structuring payments over several years, for example.
Support Issues – Child and Spousal Support
Child Support
The Child Support Guidelines (the Guidelines) governs child support, which has a standardized table that determines how much child support you must pay based on your income; this is called the “Table” amount of child support. There are limited exceptions to this Table.
One of the rare exceptions is found in section 4 of the Guidelines, which provides that where a payor’s income is over $150,000, the court may deviate from the Table amount. A lot of complex case law has developed on this issue. One takeaway is this: judges will not seriously consider this section unless a payor’s income is significantly higher than $150,000. Depending on the jurisdiction, the payor’s yearly income should generally be around the $1 million mark for this section to be considered (though this is a loose, general rule). Additionally, courts are more likely to consider this section where a payor’s income has increased dramatically sometime after separation. While some unique situations call for the application of Section 4, courts have been consistently reluctant to deviate from the Table amount.
Spousal Support
Spousal support (what many people call “alimony”) is a trickier area of the law. The starting point requires a determination of whether a spouse is entitled to support. There are a few ways this can happen: (1) needs-based support; (2) compensatory support; or (3) contractual (i.e. you previously signed a marriage contract setting out your spousal support obligations).
Once entitlement to spousal support is established, we calculate the amount of support payable under the Spousal Support Advisory Guidelines (SSAGs). The SSAGs produce ranges of support: low, mid, and high, which depend on factors like your income, your spouse’s income, and whether children are involved. The closer a claim resembles a “needs-based” claim, the more likely you are to fall in the lower end of the range; the closer the claim resembles a “compensatory” claim, the more likely you are to fall in the higher end of the range.
Both child support and spousal support depend heavily on a calculation of your income for support purposes, which could also be a complicated endeavour.
Income For Support Purposes – The Professional Corporation
The definition of “income” found in the Guidelines (which applies to both child and spousal support) differs dramatically from the one found in the Income Tax Act, which mostly affects self-employed spouses. Many medical professionals operate their practices through professional corporations, which triggers nuances in family law.
One major area of scrutiny revolves around pre-tax income, and expenses deducted from revenue. The CRA permits a broad range of deductions from gross revenue which are not necessarily accepted in family law. In addition, many personal expenses may be run through the corporation which artificially lowers pre-tax income. Any such deductions might be added back to your income for support purposes, and subject to an income tax gross-up.
The second major area of scrutiny revolves around retained earnings in the corporation. Medical professionals generally hold significant funds in their corporation, and only remove what is necessary to meet their living expenses. The balance of their after-tax dollars then accumulates in their corporations’ investment portfolios. This is generally sound tax planning.
Some of this money will be legitimately held in the corporation to help meet ongoing monthly expenses or act as a reasonable safety net, but if money is being retained in the corporation solely for tax purposes, some or all of that money may be attributed as personal income for support purposes and subject to an income tax gross-up.
The end result is typically that your income for support purposes will look dramatically different than your income for tax purposes. In practice, this means that the higher your income is, the more support you will pay. As above with the business valuation, you will generally need the same team of financial experts to help navigate through this.
While these issues are complicated, they are manageable with sound advice and planning. Moreover, the most efficient way to address these issues would be through a marriage contract, long before any talks of divorce are on the table. If that’s not possible, then get advice from a family lawyer who is well-versed in financial separation at the earliest opportunity, as proactive planning could lead to a much smoother separation. Conversely, if you have been caught off guard by your spouse’s decision to separate, then even more reason to speak to a lawyer as soon as possible.
As always, none of the above is legal advice; it is information only. If you have questions about your situation, speak to a knowledgeable family lawyer for assistance.
Written by Mason Morningstar, Toronto Family Lawyer