What Is a Spouse Entitled to In a Divorce in Ontario? – Part 1 – Property

You are contemplating a separation from your spouse, and you are worried about your financial future. Who gets what? Having an answer to this question could influence when, or if, you separate. In any event, it will relieve the considerable anxiety that you may experience from not knowing where you might land once the dust arising from a separation has settled.

Knowledge allows you to plan strategically for a sound financial future after separation or divorce. So, when considering a separation, your first stop should be for a consultation with a capable family law lawyer or divorce lawyer, for information and advice as to property division, and other financial aspects of separation and divorce.

To begin, it is important to understand that there is a difference in the handling of property division for legally married spouses and common-law spouses. In this blog, we will address the handing of property division for legally married spouses. However, please look out for our blog on property division for common-law spouses.

Equalization Payment: What is it?

On the separation of legally married spouses in Ontario, property rights are governed by our Family Law Act. The Act includes a formula for the treatment of property in the event of separation. Subject to some clearly identified adjustments, the formula seeks to roughly equalize the value of property that has been accumulated during the marriage between the spouses. If you don’t like the idea of working with a formula, don’t worry. Simply seek the guidance of a capable family law lawyer, who will readily walk you through the evaluation. And, by way of this blog, I will give you a straightforward guide to understanding key property questions.

Pursuant to Section 5 of the Family Law Act, an equalization payment is made from one spouse to the other to resolve property concerns arising on separation. An equalization payment is an adjustment of the spouses’ respective “net family properties”. Whichever of the spouses has the greater “net family property” will owe a payment to the spouse who has the lesser net family property, of one-half of the difference between the two net family properties.  This has the effect of roughly equalizing the value of the net family property held by each.

What is Net Family Property?

You may be familiar with the concept of “net worth”. Your net worth is the value of all of your assets, minus the value of all of your liabilities /debts. Net family property is simply a variation on this concept. It is your net worth at the date of your separation, adjusted for certain deductions and exclusions. I will identify and discuss those deductions and exclusions as we go.

Equalization Payment: How is it Calculated?

To identify their net family property, each spouse has to collect financial information. A Financial Statement is a Court form which requires spouses to set out their income, expenses, assets and debts in a straightforward format. In Ontario, where a family law case dealing with property is before a Court, a Financial Statement [Form 13.1 Financial Statement (Support and Property)] is required to be served and filed by both spouses in accordance with Rule 13 of the Family Law Rules.

Even if spouses are working to achieve a settlement of their property issues outside of Court, it is prudent for them to exchange sworn Financial Statements, irrespective of whether they wish to proceed with an equalization payment as required by the legislation or they are making their own agreement. Why?

Family law judges have authority to overturn separation agreements in cases where full financial disclosure was not made by the spouses at the time the agreement was signed, per Section 56(4) of the Family Law Act.

You will have to identify the value of your assets and debts as of two key dates: (1) the date of your separation and (2) the date of your marriage.

1. Assets

For the purposes of calculating equalization, all assets owned solely, or jointly, with another person, on the date of separation, are included in the calculation. Assets include, but are not limited to:

• registered and nonregistered bank accounts, such as chequing accounts, savings accounts, TFSAs, RRSPs, stocks, GICs, and other investments;

• pensions through employment;
  • A family law value of  any pension(s), should be obtained. The family law value is not necessarily the entire value of the pension, just the amount that accrued during the marriage.

• all real property (land), whether inside or outside of Ontario or Canada;
  • Oftentimes, spouses will hire a real estate appraiser local to the jurisdiction to value real property.

• cars, trucks, and other vehicles, such as recreational trailers or boats
  • If a separation is recent, I will often encourage new clients to complete a free valuation from CarFax for their car or truck, however, if there is a significant dispute with respect to the value of a vehicle, a more formalized valuation as of the date of separation may need to be obtained.    

The list, above, includes some of the more significant assets to be equalized. I emphasize that it is not a complete list of all assets to be valued for equalization purposes. As discussed above, a Form 13.1 Financial Statement (Support and Property) should be completed by both spouses. It provides an excellent road map for assets included in the equalization calculation.  However, your family law lawyer or divorce lawyer, will guide you as to all necessary property for consideration.

1. Debts/Liabilities

For the purposes of calculating the equalization payment, the value of each spouse’s debts at the date of separation are subtracted from the value of their assets at the date of separation. Common examples of such debts are mortgages, credit card debt, vehicle loans and student loans. As above, this is not an exhaustive list.

If a spouse has more debts than they do assets, their net family property is deemed to be $0.00. Pursuant to Section 4(5) of the Family Law Act, a spouse cannot have a Net Family Property that is less than zero.

Because the spouse with the larger net family property pays an equalization payment to the spouse with the smaller net family property, debts are very significant. Oftentimes, a spouse who has accrued significant debt during the marriage will be entitled to the equalization payment because they have so depleted their net worth through their debts, to the displeasure of the spouse who has less debt. Generally speaking, unless a debt was accrued surreptitiously or in bad faith, the equalization rules still apply. In extremely narrow circumstances, Section 5(6) of the Family Law Act allows a Court to diverge from the standard approach, where to apply that approach would be shocking to the conscience, due to the debt circumstances of a party. Being a ‘saver’ married to a ‘spender’ is not enough. A person considering marriage to another with different financial viewpoints, habits, or philosophies, would be well-advised to obtain a marriage contract for this reason, amongst others.

1. Deductions and Exclusions

So now we have established each party’s net worth at the date of their separation. As previously mentioned, what distinguishes net family property from net worth is that net family property is subject to some additional:

• deductions; and
• exclusions.

Deductions – Because the equalization calculation is only intended to equalize property accumulated during the marriage, generally speaking, each spouse’s assets and debts held at the date of marriage are deducted from each spouse’s net worth. Again, assets such as bank accounts, pensions, land and vehicles, are deducted.  A notable exception is the matrimonial home – the home the spouses have ordinarily occupied as their family home. This means that, in most circumstances, the value of a matrimonial home from the date of its purchase to the date of separation is shared, and the owing spouse gets no deduction for the portion of that value that they brought into the marriage.  Again, your family law lawyer will help you in identifying relevant date of marriage property.

Debts and liabilities that existed on the date of marriage should not be overlooked when calculating date of marriage deductions. Net Family Property is a measure of each spouse’s increase in wealth from the date of marriage to the date of separation, and if one party had debts on the date of marriage that were paid off over the course of the marriage, this needs to be accounted for, by a deduction of those debts at the date of marriage.

Exclusions – Section 4(2) of the Family Law Act identifies property that is excluded from the equalization calculation. The most common types of property that are “excluded” from net family property are property received during the marriage by way of gift or by way of inheritance. There are other exclusions. Please refer to Section 4(2) of the Family Law Act and Form 13.1 Financial Statement (Support and Property) for other exclusions. Again, exclusions attributable to a party are subtracted from the net family property held by him or her. Again, they should not be overlooked, as they can have a significant impact on the respective net family properties of the parties. A good evaluation of the existence, nature and value of any exclusions can be made with your family law lawyer.

It is important to note that, for a gift or inheritance received by one spouse during the marriage to be excluded from the net family property, it must be traceable to an asset that existed on the date of separation in the recipient’s name. Oftentimes, inheritances are used to purchase or renovate a jointly owned matrimonial home, pay off joint debt, or take a family vacation. Unfortunately, if the inheritance is used toward the matrimonial home, invested in a jointly held asset or directed to an expense, the recipient – while well-intentioned – has probably lost the ability to avail themselves of the exclusion.

1. Completing the Equalization Calculation.

So, we have:

• established the net worth of each party at the date of separation,
• deducted the value of their respective date of marriage assets and debts;
• subtracted the value of their respective excluded property,

arriving at the net family property of each party. The party with the larger net family property then owes to the party with the smaller net family property one-half of the difference between the two values. Please note that the Family Law Act does not call for a reallocation of assets. It calls for a payment from one party to the other, to roughly equalize the value of the parties’ net family properties.

As you are reading this blog you may be thinking, this may all sound somewhat complex. Remember, you don’t have to make this evaluation on your own. You should seek the advice of an able family law lawyer, who can readily perform a calculation that will help you to understand your prospects in relation to property claims.

Equalization Payment: How is it paid?  

Once the amount payable for an equalization has been determined the next step is to ascertain how an equalization payment will be satisfied.

As addressed above, there is a popular misconception amongst family law clients that assets and debts are divided in specie (“in their actual form”). Spouses usually keep the assets and debts that they hold in their own names, subject to the satisfaction of the equalization payment.

The equalization payment can be satisfied in any number of ways, and each case will turn on its own facts. In practice, the most common way that equalization payments are satisfied are as part of the final settlement of the matrimonial home, or as a pension rollover.

1. Matrimonial Home – Jointly Owned

It is often the case that the most valuable asset spouses own on the date of separation is the matrimonial home.

If the matrimonial home is jointly owned by the spouses, then the value of the home will be allocated 50/50 between the spouses as part of the equalization calculation described above. Likewise, if a jointly owned matrimonial home is financed jointly, the balance of the mortgage as of the date of separation will be allocated 50/50 between the spouses as part of the equalization calculation described above.

However, since the equalization calculation requires a comparison of the respective net family properties of the parties, which includes consideration of all of their assets and debts, despite the equal allocation of the matrimonial home between the parties, one spouse will almost certainly still owe the other spouse an equalization payment.

A jointly owned matrimonial home can be used to satisfy the equalization payment, in one of two ways.

• The first and most straightforward way is that the house is sold, and the net sale proceeds divided equally between the two joint owning spouses, less or more the equalization payment owed by one party to the other under Section 5 of the Family Law Act.
  • Example – Each party is entitled to $50,000.00 in equity from the jointly owned home. H owes W an equalization payment of $30,000.00. H will pay to W $30,000.00 from his $50,000.00 in equity.
• The second way a jointly owned matrimonial home can be used to satisfy the equalization payment, subject to limitations at Part 2 and 3 of the Partition Act, is by one spouse transferring their one-half interest in the matrimonial home to the other spouse in satisfaction of all or part of the payment. Each case will turn on its own facts:
  • It may be the case that there is a significant enough equalization payment owed that the equity in the home is not enough to satisfy the payment and more money is owed on top of the property transfer.
    • Example – Each party is entitled to $50,000.00 in equity from the jointly owned home. W owes H an equalization payment of $100,000.00. W’s transfer to H of her share of the jointly owned home will only satisfy ½ of the $100,000.00 owing to him.

• It may also be that the value conferred by the transfer of the home is greater than the equalization payment owed. In which case, the person owed the equalization payment would have to adjust for an overpayment arising from the transfer.
  • Example – Each party is entitled to $50,000.00 in equity from the jointly owned home. W owes H an equalization payment of $20,000.00. W transfers to H her share of the jointly owned home to H in satisfaction of the $20,000.00 equalization payment but he must compensate her for the $30,000.00 overpayment.

• If the spouse who must pay the equalization payment wishes to buy out the recipient spouse, they would have to find funds to buy-out the recipient spouse’s one-half share of the equity in the home, plus pay the equalization payment.

• If the spouse entitled to the equalization payment wishes to buy the home from the spouse who must pay the equalization payment, sometimes, an adjustment is made against the paying spouse’s one-half share of the equity in the home for the equalization payment owed.

If a client is interested in purchasing their spouse’s one-half share of a jointly owned matrimonial home, I always recommend they investigate financing options available to them before commencing family law negotiations, as the former is necessary to inform the latter.

1. Matrimonial Home – Solely Owned

If the matrimonial home is solely owned by one spouse, then the value of the home at the date of separation will be allocated solely to that spouse as part of the equalization calculation described above, subject to the important caveats that:

• No Deduction – If the matrimonial home was owned on the date of marriage, then, subject to certain circumstances (including whether it continued to be the matrimonial home at the date of separation,) its value on the date of marriage cannot be deducted as a ‘date of marriage deduction’ for equalization purposes. 
• No Exclusion – If the matrimonial home was gifted or inherited by the owning spouse during the marriage, subject to certain rare circumstances, its value cannot be subtracted as an exclusion.

If the spouse who owns the matrimonial home is also the spouse who owes the equalization payment and they can pay their equalization from a source other than the home itself, they are free to do so. However, in some circumstances a solely owned home will need to be refinanced or sold to fund the equalization payment owed. In the case of refinancing, a good family law lawyer will advise a party to investigate one’s ability to finance their family law obligations prior to engaging in negotiations.

1. Pension Rollover

For the purposes of calculating the equalization payment, an employment pension is treated the same as any other asset on the date of separation. It must be valued and the value at the date of separation will be allocated to the pension holding spouse as part of the equalization calculation described above, subject to exclusions and deductions.

Often pensions are higher value assets that are the “difference maker” in terms of which spouse owes the equalization. Certain pension programs, like OMERS and HOOP, are quite robust, and subscribers to these pension programs and others like it who are in long-term marriages are often surprised to learn of the family law value of their pension.

The second most common method that spouses utilize to satisfy the equalization payment owed from one to the other comes in the form of a pension rollover. Subject to certain requirements of the Family Law Act and relevant pension legislation, at times, a portion of the value of the pension holder’s pension can be rolled over to a party entitled to an equalization payment, in satisfaction of some or all of the payment. Your family law lawyer will advise you as to when this is the case, how it can be effectuated and whether the use of the pension for this purpose is prudent.

Pensions are a taxable asset and therefore if an equalization payment is to be paid from a pension, the payment to the recipient spouse ought to be ‘grossed up’ to account for the fact that, when the recipient spouse draws from the asset, a percentage of the asset will be clawed back for tax purposes.

Conclusion

This article represents a broad overview of how an equalization is calculated and paid in Ontario. It is not a comprehensive evaluation of the subject, and it is essential to obtain advice from a family law lawyer on your unique circumstances before agreeing to settle a claim for family property, in or outside of court. This is a complex area of law and most self-represented litigants will not have a full appreciation of their rights and obligations without independent advice from a family law lawyer concerning their specific circumstances.  The good news is that skilled family law lawyers are here to help. We would be pleased to assist you. Contact Bair Family Law today for a consultation.