January 5, 2023 | Divorce

The Partition Of The Partnership Of Acquests

In the context of divorce proceedings, attorneys have a duty to properly advise their clients on all the consequences of the breakdown of their marriage, including the partition of their matrimonial property.

When divorcing spouses have a sizeable net worth, the nature of their assets may be diverse, and may include real estate or other types of immoveables, vehicles, furniture, collectibles, cash, investment portfolios, or shareholdings in private companies, only to name a few. With respect to certain assets owned by a spouse that are included in the partnership of acquests and that are qualified as acquests, it is settled law that debts which are intrinsically linked to an asset that is an acquest will be posted to the liabilities of the acquests and will be accounted for in determining the net value of the acquests for the purpose of partition.

However, imagine a scenario where a spouse owns an acquest to which no debt is specifically attached, but to which a fiscal debt may arise following a judgement in divorce. Would the Court need to account for this debt, and if so, what are the criteria that need to be weighed by the Court? Below you will find an example that illustrates this situation.

Monica and Louis have been married for 20 years, but no longer love each other and have decide to get divorced. Monica institutes divorce proceedings. The parties proceed with discovery. Monica discovers that the only asset that Louis owns are shareholding in a holding company that he constituted during the marriage for investment purposes, which are worth $ 50,000. These shares are qualified as acquest. Louis discovers that the only asset that Monica owns is the former family residence, which was bequeathed to her by her father. The family residence is excluded from the family patrimony. At the trial on the merits, Louis does not contest that the shares he owns in the holding company are worth $ 50,000 are subject to partition. In application of the dispositions of the Civil Code of Quebec, Monica would ordinarily have a claim of $ 25,000 against Louis for the partition of his acquest. However, Louis argues that he will be forced to sell $ 25,000 worth of shares in order to satisfy an eventual judgment of divorce, and in doing so that he will incur capital gains taxes since the value of the shares have increased substantially since he acquired them. Consequently, he argues that the Court must deduct the capital gains tax he will have to pay on these shares from the $ 25,000 he will owe Monica.

Although the Civil Code is silent on this issue, the Court has the discretion to deduct the contingent tax liability and a prevailing line of jurisprudence[1] sets out the criteria that the Court must consider which are as follows:

  1. The asset is clearly identifiable
  2. The existence of a latent tax consequence resulting from the disposition of the asset
  3. The applicable taxation rate(s)
  4. The necessity to dispose of the asset
  5. The imminency of the sale of the asset
  6. Alternatives that are available to reduce the fiscal burden

Based on the above criteria, in order for the Court to consider the tax consequencs, Louis will need to convince the Court that he will have no other choice but to sell off $ 25,000 worth of shares following the dissolution of the partnership of acquests, and he will need to adduce evidence that he will incur capital gains tax following the sale, make evidence of the applicable tax rate, and prove that the sale will occur imminently following the judgment of divorce.

[1] Rick c. Brandsema, [2009] 1 R.C.S. 295, para. 54-56; Voir aussi Droit de la famille – 192424, 2019 QCCA 2046, para. 30; Droit de la famille – 2182, 2021 QCCA 141, para. 1, 6 et 9; Droit de la famille – 16436, 2016 QCCA 376, para. 52-53 et 55; Droit de la famille – 081312, 2008 QCCA 1068, para. 3; J.-C.L. c. M.D., 2006 QCCA 655, para. 71; Droit de la famille – 172859, 2017 QCCS 5538, para. 54-57; Droit de la famille – 162647, 2016 QCCS 5217, para. 105-106; Droit de la famille – 151877, 2015 QCCS 3546.