When one member of a family owns shares in a corporation, these shares will usually be considered family property and will need to be divided between the spouses on separation.
If one spouse wishes to retain the shares they will be valued by a business valuator. The value of the shares may need to be reduced if it is probable that at some point in the future the spouse who is retaining the shares will sell them because at that time tax will have to be paid on the increased value of the shares. This tax is called Distributive Tax. A business valuator will be able to calculate the amount of Distributive Tax that will need to be paid and that amount can be deducted from the value of the shares.
Determining whether or not a sale of the shares is probable can be difficult. It is easy to foresee if one spouse needs to sell some of the shares in order to pay the other spouse the amount owed to equalize the value of family property or if one spouse intends to retire in the near future and will be selling the shares. In some cases however there may be no evidence of any intention to sell the shares. In this case it may not be appropriate to deduct Distributive Tax.
One way of avoiding Distributive Tax is to transfer one half of a spouse’s share to a corporation owned by the other spouse. The shares can be transferred without attracting any tax provided this is done before the spouses are divorced and it’s commonly referred to as a “butterfly transaction.” This will not be helpful however if one spouse wishes to retain all of the shares in the corporation.
Deborah A. Todd