In a recent decision of the British Columbia Court of Appeal, Sinai v. Mahmoud 2017 BCCA 155, the court looked at the issue of whether or not retained earnings in a corporation which represent income earned by the corporation which had not yet been distributed to the shareholders should be included in the value of the corporation.
The court determined that it should not be included because it had been taken into account to determine the Respondent’s income for child maintenance and spousal maintenance purposes. To also include this income in the valuation of the corporation would be “double dipping” or using it twice.
Regarding the issue of whether or not distributive tax should be deducted from the value of the corporation the court determined that distributive tax should be deducted even though the Respondent would not have to sell his corporation in order to pay his wife the amount of the judgment. This is a departure from previous cases which indicated that a sale of the company needed to be foreseeable.
The Sinai v. Mahmoud decision may however be restricted to corporations which are merely shells which hold professional income to delay paying tax until a later date. Also there must be clear evidence from an expert of the amount of tax which would be payable before the court will allow a deduction for distributive tax.
Deborah A. Todd