Thinking to Hide Personal Assets Behind a Corporate Structure? Think Again!
Under Canadian law, a corporation is considered a separate legal entity, in-and-of-itself. Conceptually, it has ownership of its own assets; these are kept separate from those individual who run or have a financial interest in the company, such as directors, officers and shareholders.
As legally sound as this principle may be, it can pose a problem in divorce cases, when one spouse runs a company and mis-uses the “corporation as separate entity” concept to try to shelter personal assets from the other spouse.
This was the scenario facing the Ontario court in a case called Jamieson v. Jamieson. The husband had full control over the assets of a corporation, Anexxa Tech. Those corporate assets included two bank accounts and some investment accounts, as well as about $2.2 million in real estate holdings across eight properties, that could earn over $112,000 in yearly rental income.
When the husband and wife started their divorce proceedings, the husband assumed he could keep those assets “untouchable” because they were shielded behind the corporate structure. With this in mind, he did not even bother to file an answer to the wife’s legal claims in connection with them, and did not file a Financial Statement as required. He also did not provide financial disclosure to the extent needed for a fulsome exploration of the wife’s claims.
Using an equitable concept called “piercing the corporate veil”, the court allowed the wife to seize the company’s assets in order to enforce court orders in her favour arising from her various Family Law claims – Russell Alexander, Founder & Senior Partner
However – in light of the particular facts – the court refused to let the husband shelter funds behind the Anexxa Tech corporate structure. In a two-part judgment, and using an equitable concept called “piercing the corporate veil”, the court allowed the wife to seize the company’s assets in order to enforce court orders in her favour arising from her various Family Law claims.
Before doing so, the court made some pivotal findings of fact: It concluded that the husband treated these assets as if they were his own, and often ran personal expenses through the company. As such, the corporation was not a separate legal entity, but rather was the husband’s “alter ego” – i.e. an extension of himself.
With these conclusions in mind, the court went on to find that the relevant tests for piercing the corporate veil were met in this case, namely:
- The husband exercised complete control of all aspects of the corporation;
- He was using that control to commit a fraud or wrong (i.e. protecting himself from the wife’s claims) that operated to deprive the wife of her rights; and
- His misconduct was the reason for the wife’s loss.
The husband therefore was not allowed to shield assets within the corporation to try to keep them beyond the grasp of the wife in her Family Law claims.
The court added that in the Family Law context, the decision to pierce the corporate veil of one spouse’s business enterprises may be an essential mechanism through which the other spouse and the children can receive the financial support to which they are legally entitled. This accords with a more flexible approach that is merited in such cases, particularly where – as here – the corporation is completely controlled by one spouse, for his own benefit, and there are no third parties involved.
The court also noted that the husband had refused pay any support at all (prompting the wife’s recourse to the Family Responsibility Office), and he had refused to even contribute to the carrying costs of the jointly-owned matrimonial home or cottage. This meant that if the corporate veil was not pierced, the wife would continue to suffer financial losses because there would be no way for her to enforce any court orders in her favour. Nor could the husband claim the proceedings were unfair, because he had wholly abandoned his right to participate in them when he failed to file Financial Statements and other disclosure documents as required.
In the end, the court granted a vesting order over Anexxa Tech’s corporate assets; it also ordered that the financial institutions at which the corporate accounts were held must liquidate and transfer a total of $1.7 million to the wife. The husband was also required to pay costs of about $21,500, which were to be enforced against the corporation’s assets as well.
For the full text of the decisions, see:
Jamieson v. Jamieson, 2020 ONSC 5173
Additional reasons:
Jamieson v. Jamieson, 2020 ONSC 6935
