Archive for the ‘Family Business’ Category

Businesses engaged in a single undertaking may, in the interest of minimizing their legal risk or tax planning, conduct their business using separate legal entities. For example, a business may hold its assets in one corporate entity but hire and pay employees using a separate corporate entity that does not hold any assets or has only very limited assets. Rarely, if ever, will the employee have any say in how the business organizes itself or what corporate entity it will hold its assets in. While this may leave the employee vulnerable if she is employed by the corporate entity that does not hold assets if she needs to pursue the latter for outstanding wages or termination pay, common law and employment standards statute offer some protection to the employee in such case.

At common law, the common employer doctrine allows the court to treat separate legal entities, in appropriate cases, as a single employer for the purposes of attaching liability for such things as outstanding wages or termination or severance pay. In Sinclair v. Dover[1], the BC Supreme Court delineated the following justification for common employer determination:

As long as there exists a sufficient degree of relationship between the different legal entities who apparently compete for the role of employer, there is no reason in law or in equity why they ought not all to be regarded as one for the purpose of determining liability for obligations owed to those employees who, in effect, have served all without regard for any precise notion of to whom they were bound in contract. What will constitute a sufficient degree of relationship will depend, in each case, on the details of such relationship, including such factors as individual shareholdings, corporate shareholdings and interlocking directorships. The essence of that relationship will be the element of common control.

In British Columbia, the common employer doctrine has been codified in section 95 of the Employment Standards Act (“ESA”):

Associated employers

95 If the director considers that businesses, trades or undertakings are carried on by or through more than one corporation, individual, firm, syndicate or association, or any combination of them under common control or direction,

(a) the director may treat the corporations, individuals, firms, syndicates or associations, or any combination of them, as one employer for the purposes of this Act, and

(b) if so, they are jointly and separately liable for payment of the amount stated in a determination, a settlement agreement or an order of the tribunal, and this Act applies to the recovery of that amount from any or all of them.

The legislative objective underlying section 95 is the same as the justification of the common employer doctrine at common law; namely, to protect the employees and ensure their “wage claims are not defeated by niceties of legal form”.

In a recent decision, the Employment Standards Tribunal, after comprehensively reviewing both court and Tribunal decisions, delineated the following, non-exclusive criteria or considerations when determining if two or more entities are common or associated employers under section 95 of the ESA:

• There must be at least two separate entities that are being “associated”;
• The nominal employer is not particularly relevant and there is no need that a formal contract of employment subsist as between the employee and the entities that are being “associated”;
• The entities must be jointly carrying out some business, trade or other activity although the business, trade or activity in question need not necessarily be the only one that each entity is carrying on;
• “common control or direction” may be determined based on financial contributions from one entity to another (although this factor, standing alone, is not determinative); the fact that one entity is economically dependent on another entity, interlocking shareholdings and directorships; common management principals (e.g., corporate officers and other key employees): sharing of resources (including human resources) among the various entities; asset transfers at non-market transfer prices; operational control by one entity over the affairs of another entity; joint ownership of key assets and operational integration.[2]

If you are or contemplating to operate a business through two or more separate legal entities, particularly with a view to curtailing or minimizing the exposure of one or another of your legal entities from legal liability, it is important that you understand what will constitute indicia of associated or common employer so that you do not inadvertently expose yourself to a common or associated employer determination under the ESA or at common law. Conversely, if you are an employee of an impecunious company and owed wages or termination pay that you cannot collect from the company, you may want to investigate if there is any basis at law to properly associate the company with another related company with a view to obtaining a common employer or associated employer determination to successfully collect on your claim. You may also want to consider lodging a claim under section 96 of the ESA, which makes directors, and officers of a corporate employer personally liable for up to two months unpaid wages. Section 96 is the subject of a separate article in our Business Blog.

[1] 1987 CanLii 2692,

[2] Re: 0708964 B.C. Ltd., BC EST #D015/11

Tags: associated employer, common employer, director liability, employment relationship, legal risk, seperate legal entities, termination, unpaid wages

In companion rulings made February 18, 2011, the Supreme Court of Canada clarified the law relating to property division resulting from the breakdown of a common law relationship: Kerr v Baranow; Vanasse v Séguin, 2011 SCC 10.

The Court first noted that common law partners’ rights were traditionally based on the principles of resulting trust and unjust enrichment.

Under the traditional analysis, a resulting trust can arise in two situations: the gratuitous transfer of property from one partner to the other, or a couple’s joint contribution to the acquisition of property, where title has been registered in the name of only one of them. An unjust enrichment claimant must traditionally establish three distinct elements: an enrichment, a corresponding deprivation, and the absence of a juristic reason for the enrichment.

The Supreme Court rejected common past practice where courts have required the claiming partner to show a direct connection between his or her own financial or other efforts and the acquisition of the property that came to be in the other’s name. It was held that this “fee-for-service” calculation fails to reflect the reality of the lives of many domestic partners and is inconsistent with the inherent flexibility of unjust enrichment and with the courts’ approach to equitable remedies.

The court substituted a more “common sense” analysis for this rigid approach to quantifying compensation, stating at para. 69: “[T]he legal consequences of the breakdown of a domestic relationship should reflect realistically the way people live their lives. It should not impose on them the need to engage in an artificial balance sheet approach which does not reflect the true nature of the relationship”.

The courts should, however, continue to consider if a share of the property should be awarded (using the principle of constructive trust) or whether a monetary award is sufficient. Where a monetary award is to be made, the courts’ “common sense” analysis now requires a consideration of whether or not there was a “joint family venture” to which both partners contributed.
. When examining whether a relationship is a “joint family venture”, the courts are to review the evidence under four broad headings: mutual effort; economic integration; actual intent; and priority of the family. Once the “joint family venture” is established, the courts can then consider the net wealth that has accumulated proportionate to the claimant’s contributions. Thus, there must be a link between contributions and the accumulation of wealth.

In the Kerr case, the plaintiff was unsuccessful in establishing an entitlement to one-half of the wealth accumulated during the relationship. She was not able to show that the defendant had been unjustly enriched at her expense, that their relationship constituted a joint family venture, and that her contributions were linked to the generation of wealth during the relationship.” The parties kept their financial affairs separate.

In the Vanesse case, however, the couple had been working collaboratively towards common goals. They jointly raised children together and acquired wealth together. The court took into account, among other things, their economic integration evinced by a joint bank account and by the property being jointly registered in their names.

Tags: common law relationships, family law, property division, unmarried couples

The assistance of articled student Richard Sehmer is gratefully acknowledged. 

In October 2010, the Supreme Court of British Columbia released its judgment in Ladner v. Wolfson [2010] BCSC 1408, which extended the application of the “good conscience” constructive trust remedy as pioneered by the Supreme Court of Canada in Soulos v. Korkontzilas [1997] 2 S.C.R. 217.

In Soulos, the court had held that even where there is no “unjust enrichment” in the traditional sense, on some occasions “good conscience” still requires the imposition of a trust.  It was ruled that before a “good conscience trust” is imposed, the defendant must have been, amongst other things, under an “equitable obligation” in favour of the person asserting the trust.

The Ladner case arose after a Vancouver man failed to name his ex-wife as a beneficiary under his $400,000 life insurance policy contrary to the agreed terms of their divorce settlement. After his death, she brought an action for breach of contract, but due to the estate’s insolvency she was unable to recover the full amount of her judgment. She then successfully sued her lawyers who neglected to pursue an alternative trust claim that would have given her priority over the estate’s other creditors.

The B.C. court turned to Soulos to determine whether a trust claim would have been successful had her lawyer advised her to pursue it.  It was held that despite the deceased having committed only a common law breach of contract which would not traditionally have given rise to equitable remedies, a “good conscience” constructive trust had arisen dictating that the proceeds of the insurance policy were nevertheless held in trust for the ex-wife.

In Soulos the Supreme Court of Canada had decided that a constructive trust may apply to a breach of fiduciary relationship “absent an established loss to condemn a wrongful act and maintain the integrity of the relationships of trust which underlie many of our industries and institutions.” The B.C. court in Ladner extended this concept by deciding that although the relationship between former spouses is not a fiduciary one, the relationship may be “trust-like,” giving rise to similar protection.

Tags: constructive trust, equitable obligations, fiduciary duties, fiduciary obligations, good conscience trust, trust, unjust enrichment

According to Statistics Canada, divorce is on the decline but for those who are divorcing, nearly three-quarters of them are using lawyers to help them resolve their marital issues.  In B.C. there were nearly 21,000 active divorce cases in 2008/2009 but only 16% had a statement of defence on file.  This means that only 16% of the active divorce files were litigious or specifically, the other spouse did not agree to the proposed resolution of the marital issues.  However, of those active divorce files in B.C., only 2% of them actually proceeded to a trial in 2008/2009.

Lawyers often act as negotiators or mediators to assist clients with resolving the division of assets, custody of children, access to child, spousal and child support.  Once settled, the agreement is documented in a Separation Agreement, signed by the divorcing couple.  When they get around to filing for a divorce, that is all they will ask for as all other issues have been resolved.  They will obtain an undefended Divorce Order only.  Hence, the low percentage of active divorce files with a statement of defence.

Read the rest of this entry »

Tags: Asset Division, Divorce, Role of Lawyers, Seperation Agreement

Q:  I live in Canada and am a Canadian citizen.  If I purchase a property in the United States will I be subject to United States taxes?

A: Yes.  If the US property which you own is rented, you will be subject to US income taxation on the rental income.  Even if you use the US property exclusively as a vacation residence, any US property owned at death will be subject to US estate taxation.

Q: How can I be subject to US income taxation when the expenses I am paying (for example, real property taxes, maintenance and upkeep, and mortgage interest) exceed the rental income I receive?

A: Absent special election, rents received by a person who is not a citizen or resident of the United States are subject to a withholding tax imposed at a 30% rate on the gross rental income (without reduction for otherwise deductible expenses associated with the property).

Q: How can I avoid the 30% withholding tax?

A: The United States revenue laws allow owners of US real estate who are not citizens or residents of the United States to elect to be treated as engaged in a US trade or business.  The election creates an annual obligation to file a US income tax return but allows the non-US investor to compute his or her US income tax liability on a net basis (reducing gross rental income by deductible expenses including depreciation).

Q: If I do not lease or rent my property to others, do I have any US tax obligations?

A: Yes.  If at your death you own US real estate, you will be subject to a US estate tax.

Q: How is the US estate tax different than the tax which I pay to Canada at my death?

A: US estate tax is different in many respects from Canada’s deemed disposition at death tax.  Two of the most important differences are, first, the rates at which US estate taxes are imposed: Federal rates range from 18% to 45%, plus the state in which the property is located may also impose a state estate tax.  Second, US estate taxes are assessed on the entire fair market value of the property.  In contrast, Canada’s deemed disposition at death tax only taxes the gain that would be realized if the property were sold.

Q: I can avoid the taxes that I would otherwise pay to the Canada Revenue Authority at my death simply by leaving the property which I own to my spouse.  Will this avoid US estate taxes, as well?

A: No, unless your spouse is a US citizen.

Q: Are there any strategies which will allow me to avoid US estate taxes?

A: Yes.  However, taking advantage of these strategies requires planning.  In order for that planning to be successful, in many cases it must be undertaken before the US property is purchased.

Q: How can I find out what I should do to avoid US income taxes and US estate taxes?

A: It is imperative that you consult a tax advisor experienced in US tax matters, preferably a lawyer or accountant with a practice based in the United States that advises non-US persons regarding ownership of US real estate.

Tags: United States property, United States taxation, US property, US taxation