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Family businesses are a source of pride and a potential legacy to be passed along, especially family farms that have been passed down from one generation to the next.
Often, however, these transfers of family businesses are done in ways that create contrary results—the family breaks down as disputes arise over who is entitled to what. This unfortunately happened in the case of McDonald v. McDonald, a 2015 British Columbia Supreme Court case currently under appeal that involves a multi-generational dairy farm.
Much like other farming families, the parents had inherited the farm from the previous generation. Over time, land and other farming assets were added. The McDonald children all contributed their “sweat equity” to the farm, often putting the best interests of the farm ahead of their own personal interests. For the children this meant less time for school and recreational activities as well as sacrificing opportunities in their childhood and beyond.
In this particular case, the McDonald children worked alongside their parents on the farm for little or no compensation, eventually helping to transform the modest farm into a large, contemporary dairy operation. Early morning milking of cows before school, haying and maintaining the farm property and constructing buildings all contributed to the continued success, modernization and expansion of the farm.
Unfortunately, the parents decided to secretly transfer all their ownership shares in the farm company to the eldest son, and the three of them agreed to not inform the other children. When the patriarch passed away, the eldest son’s ownership of the farm was still kept secret until a family dispute revealed the truth. Not surprisingly, this gave rise to divisions within the family and litigation ensued. The younger children, now adults, had reasonable expectations of sharing an inheritance of the farm based on promises to them made by their father.
At the trial, the judge found that the children were performing work equivalent to hired farmhands except these children were not paid. Notably, the services provided by the children had occurred several decades earlier, but this did not impede the three younger children’s claims pursuant to the Court’s equitable jurisdiction.
The Court relied on the flexible principles of unjust enrichment to provide remedies to the three younger (now adult) children. It held that the parents were unjustly enriched for having benefitted from the unpaid labour of their own children when they were in their high school years. The Court declined to award outright ownership of farm assets. Instead, the remedy was a monetary award based on the value of the farm around the time the elder brother secretly obtained ownership.
This case has broad ramifications. Most importantly, the Court fashioned a remedy for children who performed labour on the farm decades earlier only to discover that they would not inherit it. While the Court heard evidence that many farms operate using family labour, it found that this practice was not justified in these circumstances and the three younger McDonald children ought to be compensated as it was clear they would never inherit a share of the farm.
As this matter is currently under appeal, the McDonald case will provide the B.C. Court of Appeal the opportunity to determine if the Trial Court’s judgment will be upheld, or whether an award of farm assets, instead of a monetary award, should have been granted to the other children.
Each particular family business has its own unique qualities and considerations. In some instances, a comprehensive estate trust and succession plan will allow for children and parents to effectively transfer the family legacy in an orderly, tax-efficient fashion. Incorporating the family business and distributing shares as part of a comprehensive shareholders’ agreement may also be an effective strategy for family businesses.
Ultimately, there are a variety of ways in which intergenerational disputes can be avoided and the family legacy maintained. This is all the more important where, as McDonald has demonstrated, the equitable claims of children in the family business may go back decades.
For more information about addressing concerns relating to your family business, please contact Mark or Wei.
Kelly Ann Maw assisted with the research and writing of this article.
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