So what happens to your dental practice if you’re going through a divorce? What happens to their license and practice?
Assume There’s No Domestic Contract
Well first let’s assume there’s NO domestic contract that says anything about your dental practice. Why? Because domestic contracts can modify the typical rules that apply under Ontario’s Family Law Act (“FLA“). Section 2(10) of the FLA says that a domestic contract that deals with a matter that is also dealt with in the FLA prevails (meaning the domestic contract governs over the legislation) UNLESS the FLA says otherwise.
In the context of getting divorced, a “domestic contract’ includes contracts that couples enter into before or during their marriage (they can be cohabitation agreements that turn into marriage contracts or prenuptial agreements or actual marriage contracts that the couples enter into after they’re married).
So again: assume NO domestic contract that says otherwise.
Net Family Property
Under section 5(1) of the FLA, when a married couple is separated and there is no reasonable prospect that they will resume cohabitation, then their “NET FAMILY PROPERTY” (the couple‘s net increase in wealth during the course of their marriage – with a few adjustments) is divided in half. This translates into an “EQUALIZATION PAYMENT” which each spouse is entitled to. Let’s look into the details of this, shall we?
Separation: Valuation Date
The first step to calculating net family property involves looking at the end of the marriage. And I mean a particular date: the “Valuation Date” is the day when the married couple is separation and there’s no reasonable prospect that the married couple with resume cohabitation.
The Ontario Superior Court in Al-Sajee v. Tawfik, 2019 ONSC 3857 looked at the following non-exhaustive list of factors to determine WHEN this day happens, including:
- physical separation (e.g. living in separate residences, but they may still be “separated” while living in the same roof!)
- an intention to live separate and apart
- clear statements or clear acts made by one or both spouses
- no physical intimacy (this is not a conclusive factor, mind you)
- discussions of family problems
- sharing household chores
- romantic involvement with other parties;
- a change of expectations as to each other’s role in the relationship
- a change of management of the couple’s finances
- a change in the couple’s accountability to one another for daily activities or routines (e.g. sharing meals, sharing household chores, participating in social / religious activities)
- whether the couple celebrated special occasions together
- a withdrawal of matrimonial obligations with the intent of destroying the matrimonial consortium or repudiating the matrimonial relationship
- steps taken to legally terminate the relationship and resolve issues relating to their separation.
The court has the discretion to decide the actual separation date. And in no-fault divorces, the parties can actually come to an agreement on when the separation date occurred.
Determine the Value of the Property on the Separation Date
Once the separation date has been determined, the Court will look at what property did each spouse own at the end of the marriage. Property will include things like real property (e.g. land, buildings, homes, cottages, condos, etc.) or personal property (e.g. money, securities, RRSPs, paintings, chattels, cars, boats, collectibles, etc.).And again for our purposes, we’re only going to be looking at the dental license and the dental practice as possible properties that forms part of the Net Family Property (which needs to be equally divided).
License to Practice Dentistry: Property? NO!
Importantly, Ontario courts have consistently held that a license to practice dentistry does not constitute property which can be valued and added to net family property. In Caratun v. Caratun, [1992] O.J. No. 1982, the Ontario Court of Appeal held that a dental license is not property because it doesn‘t fit the definition of property in various ways: the license is not transferable (whereas property is), the license requires the personal efforts of the dentist in order to be of any value in the future (and work to be performed by either spouse in the future is not included in the definition of net family property), and the only difference between the license and any other right to work is in its exclusivity (but any such attainment should not be considered ―property‖ under the Act). Apart from these difficulties, the Court of Appeal also noted the inherent difficulty of trying to value a dental license:
22 It is clear from the considerations referred to above, that there are substantial difficulties, both practical and conceptual, in treating licences as ―property‖. In addition, the valuation of such a right would be unfairly speculative in the matrimonial context. A myriad of contingencies, including inclination, probability of success in practice of the profession, length of physical and mental capability to perform the duties of the profession, competition within the profession, and many others, all render a fair valuation of the licence unusually difficult. But a further potential inequity arises: support orders may be varied if circumstances change, but no amendment of an equalization payment is possible regardless of changed circumstances.
…
25 For all of the above reasons it is my view that a professional licence does not constitute property within the meaning of s. 4 of the F.L.A.
The Court of Appeal‘s view that a dental license is not “property” for the purposes of calculating net family property was reiterated by Ontario Courts in Clegg v. Clegg, 2000 CanLII 22636 (ON SC), David v. David [2004] O.J. No. 5022 and Thompson v. Thompson, [2005] O.J. No. 1038.
Value of the Property
Once each spouse puts together a list of their property, they need to determine the VALUE of that property. So in our case, when we’re looking at a dentist’s practice, it IS something that can be valued. Determining VALUE requires two things: (1) a valuation method and (2) a date on which to value the property (i.e. the day when the married couple separated with no reasonable prospect of resuming cohabitation).
The valuation method is typically FAIR MARKET VALUE. In other words, what would a willing dentist buyer (at arm’s length from the selling dentist) pay for the dental practice from the willing dentist seller? Remember: there can’t be any undue influence, duress, or unconscionable bargain here. It must be based on what fair deal strangers would make. We don‘t care about the book value (i.e. what was the original cost of the property) because this won‘t reflect the fair worth of the property.
It doesn’t matter who technically owns the dental practice. The value still gets equalized. For example, if both spouses own the dental practice (like they both own common shares, whether equally or not), half of the value of the dental practice is attributed to each spouse.
Now some assets are going to be hard to value (e.g. pensions, securities, business interests, etc.). You may need the assistance of a professional valuator / appraiser to figure this out.
In David v. David [2004] O.J. No. 5022, the Ontario Superior Court of Justice heard two different views from valuators about the asset value of a dental practice. The court ultimately fixed a midpoint value between the two opinions at $102,500 for the goodwill and a total value of the dental practice at $249,000 at the date of separation. In coming to that conclusion, the court took into consideration: the age and location of the dental practice, the patient base, the management style and office protocols of the dental practice, data from another similar practice which the dentist had previously sold, a common sense and market comparison capitalization rate (i.e. the yield of income to capital). To this valuation, the court added accounts receivable (i.e. money which was owed to the dental practice by patients) of $20,046.
Subtract The Debts of the Dental Practice on the Separation Date
Recall that we‘re looking for the NET INCREASE IN WEALTH in the dental practice for each spouse during the course of the marriage. That‘s why we need to subtract the total debts related to the dental practice as of the date of separation. This will give us a net amount owing for each spouse as of the Separation Date. This would include things like credit card debts, lines of credit, loans, and business expenses and liabilities (e.g. rent, leases, associate pay, employee wages, loans made to the dental practice by a spouse, etc.). In David v. David [2004] O.J. No. 5022, for example, the court deducted $164,605.71 worth of expenses related to a dentist‘s practice (e.g. for employee wages, associate payments, lab charges, taxes, condominium charges, equipment rental, etc.). The court also deducted a $51,281 line of credit which the dentist had used to finance the dental practice.
Once the net family property of the two spouses concerning the dental practice id determined, then the court equalizes that figure and one spouse would typically owe the other spouse an amount required to come to that equalization. The dentist would not necessarily have to sell their dental practice if they can make that equalization payment (through savings or a loan). But again: the dentist isn’t necessarily forced into selling their dental practice. They may just need to make the equilization payment.
Final Thoughts
If you need advice concerning a marriage breakdown, you should speak with a family law lawyer.
We at DMC LLP are dental-specific lawyers who help dentists – even in the course of a marriage breakdown – to prepare, market and sell their dental practices (and yes we market and run the open houses and then ask our dentists to join us on a dental outreach program in the Caribbean which we run every year). We don’t judge or cast shame or guilt on what people go through in their lives. Sometimes a divorce can be messy and contentious; sometimes it can be amicable. It doesn’t matter: people will get through it and live their lives. Remember: each day is important and we’re all only here for a limited time. So going through a divorce or sale process is just that: a process that’s part of a bigger picture. Remember to practice self-love everyday no matter what you’re going through!
