Family law seeks to define the rights and obligations of individual family members based on societal interests at large. Similarly, an objective of corporate law is to reflect broad societal interests in the rights and obligations of the separate legal entity known as a corporation. Family law lawyers and corporate lawyers alike may wonder: what happens when the legal aim of the family law and corporate law worlds collide?
This paper considers the circumstances where family law and corporate law meet following the breakdown of a spousal relationship. While the "corporate veil" often protects individuals in liability and enforcement issues, our legal system recognizes that the corporate veil may be "pierced" where equity requires it. While veil "piercing" and "lifting" are often used interchangeably, the writer opines in Part V of this paper that the veil is "pierced" when only one spouse has a corporate interest and is "lifted" when both spouses have an interest in the same corporation. Unless otherwise indicated, this paper will focus on corporate veil "piercing."
Family law procedure and/or substantive law operates to pierce the corporate veil in order to characterize and value property and income on relationship breakdown, force documentary disclosure so that the family law litigant may properly advance his/her claims, bring a claim against a corporation or corporate participant, and enforce orders that impact a corporation's separate legal personality.
First, this paper provides the legal tests for piercing the corporate veil in the family law context. Next, the paper investigates the characterization and valuation of a spouse's interests and when corporate disclosure is required for same. It then explores potential claims relating to family law and corporate interests, and how orders arising from those claims may be enforced. Finally, the paper provides recommendations for advisors who address corporate law issues that arise for family law litigants in Ontario.
II. LEGAL TESTS FOR PIERCING THE CORPORATE VEIL
Canadian jurisprudence has yet to establish a single test for determining when courts can pierce the corporate veil.1 Instead, judges consider a combination of statutory provisions (where applicable) and common law factors in their determination.2 In the family law context, the statutes and case law increasingly allow parties to access business assets to advance their claims.3
(i) Piercing the Corporate Veil in General
Canadian judges have offered a host of considerations when determining whether the corporate veil should be pierced. The "alter ego" test prohibits individuals from using the corporation for an "illegal, fraudulent or improper purpose."4 Under this test, the corporate veil can only be pierced if the corporation's separate legal personality is being used as a "conduit....to avoid liability."5 The broader "flagrantly unjust" test allows judges to exercise their discretion if failing to pierce the corporate veil would be "flagrantly opposed to justice."6 This test applies if those in control of the corporation "expressly direct a wrongful thing to be done."7 In Canada, the "alter ego" test is the predominant one and some disagreement exists as to whether the "flagrantly unjust" test provides discretion that is too broad.8
The leading Ontario case applying the tests for piercing the corporate veil is 642947 Ontario Ltd. v. Fleischer, which was decided by the Ontario Court of Appeal in 2001.9 Justice Laskin considers when the corporate veil ought to be pierced and found that the determination is largely fact-specific: These authorities indicate that the decision to pierce the corporate veil will depend on the context. They also indicate that the separate legal personality of the corporation cannot be lightly set aside. Yet, however restrictive corporate law principles for piercing the corporate veil may be, in the context of an undertaking to the court, the trial judge's findings support going behind Sweet Dreams and imposing personal liability.10
In Fleischer, the Court found the trial judge made no error in piercing the corporate veil to hold shareholders personally liable for damages that flowed from the breach of an agreement.
More recently in 2012, the Alberta Court of Appeal in Elbow River Marketing Limited Partnership v. Canada Clean Fuels Inc. summarized the circumstances where courts and academics have found that the corporate veil may be pierced in a variety of legal contexts:
- where express and clear statutory provisions permit it;
- where a corporation is formed for the express purpose of doing a wrongful act;
- where once incorporated, those in control expressly direct a wrongful thing to be done (including criminal activity);
- where there is fraud or manifestly improper conduct akin to fraud;
- where one entity acts as an agent of another;
- where two seemingly separate entities are in fact one common enterprise (but the veil will be lifted only to benefit third parties);
- where the corporation is a mere agent, or "alter ego", of the controlling shareholder or other party (as noted above, control is not enough; requires wrongful, unlawful, fraudulent or improper conduct);
- where there is a trust relationship;
- where shareholders disregard the corporate form (especially in their dealings with others, as in when persons hold themselves out to the public without identifying their corporate status);
- sometimes, where it can be shown the corporation was too thinly capitalized to conduct the business for which it was formed (but this has been doubted);
- in certain family law cases to provide for child support, etc.;
- in certain tax cases; or
- in the interest of national security, such as in time of war, if the corporation is controlled by persons resident in the enemy territory.11
At trial, Justice Tillman referred to piercing the corporate veil as a "vivid but imprecise metaphor."12 The Court in Elbow River ultimately agreed with Justice Tillman that at trial it was too soon to determine whether the corporate veil should be pierced.13
While the legal tests for piercing the corporate veil have undergone significant developments in Canadian jurisprudence, the precise nature and scope of the doctrine remains unsettled.14 In each case, the corporation's separate legal personality will be disregarded depending judge's discretion and the facts of the case.
(ii) Piercing the Corporate Veil in Family Law
Family law jurisprudence has refined the Court's approach for piercing the corporate veil to take into account specific obstacles of the family law litigant vis a vis the corporation. In 2006, the Ontario Court of Appeal released three family law decisions that consider piercing the corporate veil: Wildman v. Wildman, Debora v. Debora and Lynch v. Segal.15 Together, these cases have created a list of factors for courts to consider:
- the history of the spouse's business affairs;
- the purpose and use of the corporation;
- whether third party interests will be affected;
- injustice in the context of family law; and
- consistency with family law and corporate law legislation.16
A court is likely to find that the corporate veil should be pierced if the spouse has control over a corporation that it uses to defend and/or avoid a legitimate family law entitlement.
In Wildman v. Wildman, the Ontario Court of Appeal upheld a trial judge's order requiring all amounts owed to the wife to be secured and enforceable not only against the husband personally, but also against his businesses.17 In this case, the wife sought spousal and child support from her former husband, who owned several construction and landscaping companies and earned about $700,000 annually. The Court found the corporate veil could be pierced because the husband was the sole owner and controller of the businesses and that he diverted assets through his businesses for his own personal use.18 Writing for a unanimous court, Justice MacPherson wrote that it would be "flagrantly opposed to justice to allow the appellant to hide behind a corporate veil that he does not himself respect."19 Although the businesses themselves were not given notice of the litigation, the Court found the businesses were indirectly given notice by virtue of being the husband's "alter ego".20
In Debora v. Debora, the Ontario Court of Appeal also upheld the trial decision, which allowed the corporate veil to be pierced. The husband was ordered to pay an equalization payment of $3.3 million, as well as retroactive and ongoing support. The trial judge found that although the husband's company purchased a cottage property, it was nevertheless a matrimonial home within the meaning of the Family Law Act ("FLA") and subject to the net family property calculation.21 Relying on Wildman v. Wildman, Justice Weiler held that the company was the husband's "alter ego," especially given that the husband was the corporation's sole shareholder and controlling mind.22
The Ontario Court of Appeal's decision Lynch v. Segal refers to both Wildman v. Wildman and Debora v. Debora when it finds that the husband was the beneficial owner of certain companies for the purpose of calculating the property and support claims.23 The husband attempted to conceal his involvement with lucrative land development by requiring his lawyer to act as the sole shareholder, director and officer of certain corporations.24 Justice Blair upheld the trial judge's finding that the husband and the companies were "one and the same" and that it was an appropriate case to pierce the corporate veil.25
Wildman v. Wildman, Debora v. Debora and Lynch v. Segal confirm that family law litigants will not be permitted to hide behind corporations in an attempt to avoid family law claims. Courts tend to inform themselves of the corporation's underlying purpose and tend to consider the spouses' actions throughout the litigation. In each of these cases, counsel and judges were required to consider corporate law legal tests and apply them to address family law objectives.
III. CORPORATE INTEREST CHARACTERIZATION AND VALUATION FOR PROPERTY AND SUPPORT DETERMINATION PURPOSES
One of the first steps in addressing claims related to the breakdown of a spousal relationship is for the parties to characterize and value their interests. For equalization claims under Part I of the FLA, the parties establish which interests are considered "property" and the value of that property. For support claims under the Divorce Act or Part III of the FLA, the parties must establish what amounts to "income" in order to calculate their support rights and obligations.26
(i) Characterizing Corporate Interests
(a) Characterizing Corporate Interests in Property Claims
"Property" for the purpose of equalization under Part I of the FLA is defined broadly and may include shares in a corporation, an interest in a partnership and commercial goodwill. Section 4(1) of the FLA defines "property" as "any interest, present or future, vested or contingent, in real or personal property."27 Since the FLA recognizes marriage as a form of partnership where each spouse holds an equal position, the equalization scheme views family property as assets that were accumulated during cohabitation and shared by the family unit.28 In order to ensure an equitable settlement between spouses, the FLA gives the courts broad power to make decisions affecting the family business.29
When corporate shares are characterized as property, the corporation is viewed as the "alter ego" of the owning spouse. As a result, the corporate veil is pierced despite the fact that the corporation has not been used for an improper or unjust purpose. Similarly, a spouse's interest in a law practice, dental practice or medical practice will be deemed property for the purpose of Part I of the FLA, whether or not his interest therein is related to a corporation.
Moreover, commercial goodwill will be characterized as a family asset if the business can be transferred with relative ease without requiring important employees to leave the company.30
(b) Characterizing Corporate Income in Support Claims
Corporate interests are involved in support claims to the extent that a spouse's income is at issue. The Federal Child Support Guidelines ("FCSG") and the Spousal Support Advisory Guidelines ("SSAG") set out what is to be included in and excluded from a spouse's annual income for support purposes.31 While the FCSG are binding legislation, the SSAG are advisory and not binding. However, in Fisher v. Fisher the Ontario Court of Appeal endorsed SSAG and found that it was a reversible error on the part of the trial judge not to consider SSAG.32 In practice, both the FCSG and SSAG are consistently used to characterize corporate income in child and spousal support claims.
While a spouse's taxable income (listed at Line 150 of their tax return) is the starting point for the determination of income available for support, corporate income not included on a spouse's tax form may also be taken into account in the calculation of their income available for support purposes.33 Sections 16 to 18 of the FCSG set out the initial calculation of income and adjustments to that amount:
Calculation of annual income
16. Subject to sections 17 to 20, a spouse's annual income is determined using the sources of income set out under the heading "Total income" in the T1 General form issued by the Canada Revenue Agency and is adjusted in accordance with Schedule III.
Pattern of income
17. (1) If the court is of the opinion that the determination of a spouse's annual income under section 16 would not be the fairest determination of that income, the court may have regard to the spouse's income over the last three years and determine an amount that is fair and reasonable in light of any pattern of income, fluctuation in income or receipt of a non-recurring amount during those years.
(2) Where a spouse has incurred a non-recurring capital or business investment loss, the court may, if it is of the opinion that the determination of the spouse's annual income under section 16 would not provide the fairest determination of the annual income, choose not to apply sections 6 and 7 of Schedule III, and adjust the amount of the loss, including related expenses and carrying charges and interest expenses, to arrive at such amount as the court considers appropriate.
Shareholder, director or officer
18. (1) Where a spouse is a shareholder, director or officer of a corporation and the court is of the opinion that the amount of the spouse's annual income as determined under section 16 does not fairly reflect all the money available to the spouse for the payment of child support, the court may consider the situations described in section 17 and determine the spouse's annual income to include
(a) all or part of the pre-tax income of the corporation, and of any corporation that is related to that corporation, for the most recent taxation year; or
(b) an amount commensurate with the services that the spouse provides to the corporation, provided that the amount does not exceed the corporation's pre-tax income.
Adjustment to corporation's pre-tax income
(2) In determining the pre-tax income of a corporation for the purposes of subsection (1), all amounts paid by the corporation as salaries, wages or management fees, or other payments or benefits, to or on behalf of persons with whom the corporation does not deal at arm's length must be added to the pre-tax income, unless the spouse establishes that the payments were reasonable in the circumstances.34 Income may be adjusted based on a pattern of income if the spouse's income fluctuates greatly from year to year and an average of those years is a more accurate and reasonable representation of income.35 Moreover, income available for support purposes may be reduced if the spouse owns a business that has incurred a non-recurring capital or investment loss.36
In addition to income adjustments, income may be imputed in a variety of ways relating to a corporation.37 Section 19 of the FCSG provides a list of circumstances where income may be imputed:
19. (1) The court may impute such amount of income to a spouse as it considers appropriate in the circumstances, which circumstances include the following:
(a) the spouse is intentionally under-employed or unemployed, other than where the under-employment or unemployment is required by the needs of a child of the marriage or any child under the age of majority or by the reasonable educational or health needs of the spouse;
(b) the spouse is exempt from paying federal or provincial income tax;
(c) the spouse lives in a country that has effective rates of income tax that are significantly lower than those in Canada;
(d) it appears that income has been diverted which would affect the level of child support to be determined under these Guidelines;
(e) the spouse's property is not reasonably utilized to generate income;
(f) the spouse has failed to provide income information when under a legal obligation to do so;
(g) the spouse unreasonably deducts expenses from income;
(h) the spouse derives a significant portion of income from dividends, capital gains or other sources that are taxed at a lower rate than employment or business income or that are exempt from tax; and
(i) the spouse is a beneficiary under a trust and is or will be in receipt of income or other benefits from the trust.38
The SSAG explain how income can be imputed in the context of spousal support using section 19 of the FCSG:
The income imputing provisions of section 19 are, if anything, even more important than in child support cases. In every spousal support case, two incomes are in issue. Income may need to be imputed to a payor spouse, but in addition a spousal support case may also require that an income be imputed to the recipient spouse, because of self-sufficiency issues. In these cases, income is imputed to the recipient under s. 19(1)(a), for under/unemployment.39
The SSAG discuss imputing issues in detail in a section regarding "self-sufficiency" as well as distinctive income issues in the spousal support context, such as tax credits and non-taxable incomes.40
According to the Ontario Court of Appeal in Brophy v. Brophy, courts have "discretion to include corporate profits in the income of the paying spouse for support purposes."41 Courts may choose to exercise that discretion where no business reason exists for retaining the earnings in the company and spouse had substantial control over the corporation.42 A spouse's income may include income from dividends, capital gains or other sources if a significant amount is derived from those sources.43
Double recovery or "double dipping" occurs when property included in the equalization payment is also characterized as income for spousal support purposes. The two regimes of equalization and spousal support can result in one spouse giving up a portion of the same asset twice. Generally, double recovery is not permitted because each spouse should only be expected to give up an asset once.44 Exceptions to this rule exist, but are beyond the scope of this paper.45
1 Thomas G. Heintzman and Brandon Kain, "Through the Looking Glass: Recent Developments in Piercing the Corporate Veil" (2013) 28 B.F.L.R. 525 [Heintzman]. See Kosmopoulos v. Constitution Co of Canada,  1 SCR 2 (SCC) at 10 [Kosmopoulos], where Wilson J. observed that the law on piercing the corporate veil "follows no consistent principle."
2 Heintzman, supra note 1 at p. 539.
3 Statutory provisions that allow the corporate veil to be pierced are discussed below in the sections regarding disclosure, orders and enforcement.
4 642947 Ontario Ltd. v. Fleischer (2001), 56 OR (3d) 417 (ONCA) at para 68 [Fleischer]; Transamerica Life Insurance Co. v. Canada Life Assurance Co.,  O.J. No. 1568, upheld in  O.J. No. 3754 (ONCA) at para 434 [Transamerica].
5 Gregorio v. Intrans-Corp, (1994) 18 OR (3d) 527 (ONCA) at p. 536.
6 Kosmopoulos, supra note 1 at para 12; Elbow River Marketing Limited Partnership v. Canada Clean Fuels Inc., 2012 ABQB 277 at 176 [Elbow River ABQB].
7 Clarkson Co. Ltd v Zhelka Et al,.  O.J. No. 1054 (ON HCJ) at 158.
8 Heintzman, supra note 1 at p. 539; Dougalas T. Yoshida and Lyndsey S. Delamont, "Piercing the Corporate Veil: A Canadian Overview and Risk Assessment" Annual Review of Civil Litigation (Toronto: Thomson Carswell, 2014) at p. 413 [Yoshida & Delamont]; Howard J. Feldman,, "Piercing the Corporate Veil in Family Law Cases," unpublished manuscript (prepared for the Law Society of Upper Canada Continuing Legal Education Program, April 5, 2007) at p. 5 [Feldman].
9 Fleischer, supra note 4 at para 73. Recently, in Shoppers Drug Mart Inc. v. 6470360 Canada Inc., 2014 ONCA 85, the Ontario Court of Appeal emphasized that the motions judge should have referred to the test in Fleischer to determine when to pierce the corporate veil in Ontario.
10 Fleischer, supra note 4 at para 68.
11 Elbow River Marketing Limited Partnership v. Canada Clean Fuels Inc., 2012 ABCA 328 at para 182 [Elbow River ABC
12 Elbow River ABQB, supra note 6 at para 184, citing Re Polly Peck International plc,  B.C.C. 486 at 497 (Eng. Ch.).
13 Elbow River ABCA, supra note 11 at para 17.
14 Yoshida & Delamont, supra note 8 at p. 410. See also Kosmopoulos, supra note 1 at para 10, citing Solomon v. Solomon & Co.,  A.C. 22 (H.L).
15 Wildman v. Wildman,  O.J. No. 3966 (ONCA) [Wildman v. Wildman]; Debora v. Debora,  O.J. No. 4826 (ONCA) [Debora v. Debora]; Lynch v. Segal,  O.J. No. 5014 (ONCA) [Lynch v. Segal].
16 Debora, supra note 15 at para 22; Lynch v. Segal, supra note 15; Wildman v. Wildman, supra note 15 at para 49.
17 Ibid note 15 at para 14.
18 Wildman v. Wildman, supra note 15 at para 43-44.
19 Ibid at para 46.
20 Ibid at para 47 and 48.
21 Family Law Act, R.S.O. 1990, c F.3 [FLA].
22 Wildman v. Wildman, supra note 15 at para 28-29.
23 Lynch v. Segal, supra note 15 at para 63.
24 Ibid at para 11.
25 Ibid at para 20 and 38.
26 Divorce Act, R.S.C., 1985, c. 3 (2nd Supp.) at s. 15.1 and s. 15.2 [Divorce Act].
27 Ibid at s. 4(1).
28 FLA, supra note 21 at "Preamble."
29 Robert M. Halpern, Advising the Family-Owned Business, loose-leaf (consulted on February 2, 2015), (Toronto: Carswell Canada Law Book, 1999) at A6.20 [Halpern 1999].
30 Walters v. Walters,  O.J. No. 872 (Ont Gen Div); McLean v. McLean,  O.J. No. 4261 (SCJ) at para 42 and 46.
31 Federal Child Support Guidelines, SOR/97-175 [FCSG]; "Spousal Support Advisory Guidelines", Department of Justice (2015) online: < http://www.justice.gc.ca/eng/fl-df/spousal-epoux/ssag-ldfpae.html> [SSAG].
32 2008 ONCA 11 at para 113.
33 FCSG, supra note 31 at s. 16; SSAG, supra note 16 at s. 6.1, which states that the starting point for the determination of income under SSAG is the definition of income under the FCSG.
34 FCSG, supra note 31 at s. 16-18. Note that s. 15(2) of the FCSG states that "Where both spouses agree in writing on the annual income of a spouse, the court may consider that amount to be the spouse's income for the purposes of these Guidelines if the court thinks that the amount is reasonable having regard to the income information provided under section 21."
35 Ibid at s. 17(1); see also Dickson v. Dickson, 2009 MBQB 273.
36 FCSG, supra note 31 at s. 17(2).
37 Ibid at s. 19(a)-(i); Lorne H. Wolfson and Sara Mintz, "Piercing the Corporate Veil in Family Law" in Barry Lipson (Ed.), The Controlling Mind: Exercising legal Control (Toronto: Carswell, 2012) at p.15 [Wolfson].
38 FCSG, supra note 31 at s. 19.
39 SSAG, supra note 31 at s. 6.1.
40 Ibid at s. 6.3, s. 6.4, s. 6.6 and Chapter 13.
41  O.J. No. 3658 at para 37 (ONCA).
42 Ibid at para 36; See also Arsenault v. Arsenault,  O.J. No. 1423 (ONSC), where the corporate veil was pierced to impute income to the husband after he redirected his salary to a numbered company.
43 Kowalewich v. Kowalewich,  BCJ No. 1406 (BCCA).
44 The leading case on double recovery is Boston v. Boston, 2001 S.C.R. 43 (SCC) [Boston], where the Supreme Court of Canada found that pension funds equalized as property could not also be considered income for spousal support. However, the pension funds that were generated after the equalization payment were considered income for spousal support since those funds were not previously provided to the payee spouse.
45 Ibid at para 65, where Justice Major wrote: "Double recovery may be permitted where the payor spouse has the ability to pay, where the payee spouse has made a reasonable effort to use the equalized asset in an income-producing way and, despite this, an economic hardship from the marriage or its breakdown persists. Double recovery may also be permitted in spousal support orders/agreements based mainly on need as opposed to compensation, which is not the case in this appeal."
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