IS A BOOK OF BUSINESS FAMILY PROPERTY?

When married couples split up, they have to deal with how to divide their property (like a house or RRSPs bought during the marriage) and debts. Often, one spouse stays home and raises the children while the other builds up a business. The new B.C. law that came into effect in March, 2013 (the Family Law Act) makes clear that a business or an interest in a business, owned by one spouse when the couple splits, is also family property – so it’s an asset that has to be divided up. But what exactly counts as property?

Take a financial advisor who works at a brokerage firm. She looks after other people’s money and over the years builds relationships with her customers. If she decides to move to another firm, some of them (maybe most) will move their accounts and go with her. But of course they don’t have to, and the old firm may try to hang on to them. Good customer relationships are obviously valuable – but can personal connections like that be called property?

A just-released decision by our B.C. appeal court had to grapple with that question.

Here, Ralph (all names changed) and Ann had started living together in 1993. They got married in 2000 and split up in 2009. They had one child under four and another less than a year old when they broke up. Ralph worked at a brokerage firm as a financial adviser and had such a “book of business” at the time of the split.

When he first got into the investment business, he bought a retiring adviser’s book of business for $175,000. When he moved to his new firm in 2004, about 88% of his previous clients came along, though that wasn’t a condition of his move and there was no guarantee they would. He also faced a potential $400,000 legal liability related to his business in an unresolved customer law suit.

Though Ralph earned about $200,000 (and Ann made over $40,000 in dividend income) a year, the couple had little house equity and few other assets. So a great deal turned on how a “book of business” (and the potential related debt) should be treated.

The appeal court pointed out that a book of business may represent the most significant asset when a marriage breaks up. If it isn’t treated as property and a family asset, the spouse who built it up could sell it shortly after the break-up and keep all the money. Investment firms put a value on a new hire’s book of business (though the court wasn’t told here exactly how that’s calculated). And Ralph had paid for a book of business when he started out.

The court decided that a book of business is property like “goodwill,” in this case to be shared equally between Ralph and Ann (along with the related potential debt). There are other occupations – like real estate agents, mortgage brokers, lawyers – where a book of business may come into play when divvying up family property. And while the court dealt with this thorny question under the pre-2013 law, its approach in this case will no doubt have an influence under the new law too.

 

This column has been written by Janice Mucalov LL.B as part of “You And The Law”. It provides information only and must not be relied on for legal advice. Names of the parties in reported cases have been changed or removed to protect their identity. Lawyer Janice Mucalov is an award-winning legal writer.

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