The breakdown of a marriage is difficult to work through. Apart from parental concerns, the most contentious issues tend to revolve around valuing and dividing property. This can be challenging enough when it’s about bricks and mortar, but can be especially problematic when the nature of the property is unclear.
Take for example an investment advisor’s book of business. Is it property? Is it property that is subject to matrimonial division? And if so, what value should be placed on it?
These are the key questions raised in LMJ v. RGJ (2015 SKQB 136), a recently reported case from the Saskatchewan Queen’s Bench Family Law Division. While these issues are not entirely novel, the element of this case that caught my attention was the role that tax played – or arguably did not play – in the valuation.
Nature of a book of business
The definition of “family property” in the Saskatchewan Family Property Act is quite broad. This is not unlike its provincial counterparts, which are also expansively drafted.
The judge in LMJ v. RGJ did not have to look back more than a handful of years to find a number of family cases in other provinces dealing with valuation of an investor’s book of business. Consistently it was found that there was goodwill of significant value associated with the client contact, knowledge of investment objectives, and familiarity with historic investments.
As to whether an advisor may not have the contractual right to take the clients, such a limitation may reduce value but does not detract from the fact that the goodwill is a marketable asset. In support, a passage is quoted from a 2008 Supreme Court of Canada decision that refers to the “cultural reality” of the investment industry where advisors “frequently change employers”.
RGJ led evidence from representatives of his dealership to the effect that he had no financial ownership in the book of business, did not own the list of clients and could not sell it. Though the judge acknowledged the dealer’s regulations, no written contract was produced that explicitly prevented RGJ from taking the clients. As well it was noted that RGJ’s Will refers to the “proceeds raised from the sale of my client accounts” being held for the benefit of his children, and that the dealer’s business succession plan (to which he was not yet subscribed) paid compensation based on a retiring advisor’s three most recent years of commissions.
Bottom line: the book of business was subject to matrimonial division.
Gross valuation
RGJ took the position that there should be no value attributed to the book of business.
By contrast, LMJ offered an expert for determination of the value of the book. The expert’s report considered the most recent three years of RGJ’s gross commissions, recommending a valuation range from $1.8M to $2.1M.
The judge accepted the three-year approach of the expert, but began one year earlier than suggested, arriving at a value of $1.6M. This contributed $800,000 towards the ultimately ordered equalization payment of $641,775 from RGJ to LMJ.
And taxes?
RGJ’s counsel argued that the valuations in the LMJ expert report should be discounted for taxes (and other inconsistencies). Unfortunately for RGJ, there was no evidence for the court to consider in order to make such a ruling.
The judge referred to a case from the Saskatchewan Court of Appeal stating that it is not sufficient to merely raise an issue of potential tax liability. Evidence is required to support a tax discount; in the context of determining capital gains, that would at least require the adjusted cost base and marginal tax rates. In fact, the SKCA suggests that this evidence combined with the proposed calculation may be sufficient, without the need to bring forward an expert.
At the extreme assuming a nominal ACB on the $1.6M valuation on RGJ‘s book, that could have been a tax discount nearing $400,000. Alternatively, depending on the nature of the dealer’s business succession program, it is possible that those future payments could be treated as regular income, meaning that close to half could be lost to taxes.
And finally, consider that the book is not actually being sold presently, presenting a further challenge for RGJ to find the liquidity to fund the equalization payment.