Friday, November 25, 2016

Dividing and Equalizing Marital Property in Ontario

BY SIMRAN BAKSHI, ASSOCIATE LAWYER

The process behind “consciously uncoupling” can be overwhelming, particularly when it comes to the division and equalization of family property.

Perhaps the most common point of frustration we hear from our clients is just how daunting and confusing it can be to complete Ontario's financial statement forms and financial disclosure, generally, that is required in family law litigation.

As one client aptly described, family law litigants are often left scratching their heads wondering who actually owes whom how much and for what...

Here is our cheat sheet to simplify the process of the division and equalization of marital property in Ontario:

KEY LEGAL TERMS TO KNOW FOR THE EQUALIZATION OF NET FAMILY PROPERTY:


Net Family Property (NFP):

This is a defined term in the Family Law Act.

In the most general of terms, it is a number that represents the net worth of a spouse as accumulated from the date of the marriage to the date of the separation;

Equalization Payment:

The party who has accumulated a greater amount of wealth during the marriage, that is the one with the higher NFP, will provide payment to the other to equalize their financial positions.

Mathematically, this is simply the difference between both party's NFP, divided in half.


Valuation Date:

Again, this term has been defined in the Family Law Act, which sets out several different possible dates to be considered.

Most commonly however, the valuation date tends to be the date on which the parties' separated without any reasonable prospect of reconciliation.

It is important to note that it is possible for parties to be separated even if they continue to reside together in the same household, so long as there is a clear intent by one or both spouses for the marriage or relationship to be ended;

WHO IS ENTITLED TO SEEK THE DIVISION AND EQUALIZATION OF PROPERTY?

Spouses who are or were married are entitled upon separation to seek an equalization of the wealth they have collectively accumulated over the course of the marriage, so long as there is no prenuptial or marriage contract that provides otherwise.

This is premised on the notion that by entering into a marriage, the spouses are essentially entering into an economic partnership. As with commercial arrangements, if this partnership comes to an end, the spouses are entitled to divide the value of the partnership itself.

It is important to note that common law spouses do not have similar, automatic statutory entitlements to the division of property accumulated during the relationship [which frankly we find to be quite unfortunate, but we'll leave that discussion for another day]

WHAT IS THE GENERAL PROCESS?

Ontario's Family Law Act provides a detailed framework governing the equalization and division of property between spouses upon marital separation.


The process in theory is actually quite simple, and can be broken down in the following steps:
  1. Determine the value of both parties' assets and liabilities as of the date of separation; 
  2. Determine the value of both parties' assets and liabilities as of the date of the marriage (do not include the value of matrimonial home owned on the date of marriage if it continues to be the parties' matrimonial home as at the date of separation); 
  3. Determine whether either party holds any assets that are excluded under the Family Law Act;
  4. Once you have set out your respective financial positions, it is just a matter of doing the math: 
  5. Add all of your assets as of the date of separation; 
  6. Subtract your liabilities as of the date of separation; 
  7. Subtract your net worth as of the date of your marriage, or add-back the debt that you held at that time; 
  8. And finally, subtract the value of any property that is subject to exclusion; 
And there you have it, you have just computed your NFP!

Simply repeat the process to determine your (former) spouse's NFP, and you are well on your way to calculating the equalization payment that may be owing from one party to the other.

WHY ACCOUNT FOR A PARTY'S FINANCIAL POSITION AS OF THE DATE OF MARRIAGE?

The parties' respective financial positions going into the marriage provides context as to the degree to which they have financially benefitted during the course of the marriage.


For example, if you entered into the marriage with significant debt, your financial position may have improved considerably during the marriage even if your net worth seems quite modest upon separation.

Conversely, if you entered into the marriage with substantial assets, it is possible that your financial position may not have improved all that much or at all during the marriage, even if you continue to have an impressive net worth of assets.

WHAT PROPERTY IS SUBJECT TO EXCLUSION FROM THE NET FAMILY PROPERTY:

The Family Law Act recognizes that certain property should not subject to sharing between spouses, and accordingly should not form part of the spouse's net family property. 

Such exclusions include:
  1. Any gift or inheritance received after the date of marriage from a third person, so long as the donor or testator expressed stated that the transaction was to be a gift for the spouse, rather than for the family as a whole, that was to be excluded; 
  2. Any income derived from such gifts or inheritances, again, so long as the donor or testator has expressly stated that this is to be excluded; 
  3. Damages awarded or compensation otherwise paid for claims relating to personal injuries, nervous shock, mental distress or loss of guidance, care and companionship; 
  4. Proceeds of a policy of life insurance paid or payable on the death of the life insured; 
  5. If the above-mentioned excluded property is sold or divested, and the proceeds are used to purchase or invest in another asset, the traced property is subject to exclusion as well. This is subject to restriction however where the traced property is the matrimonial home, if the property becomes intermingled with family assets and/or if it can be proven that the parties intended to share the benefit of the excluded property; 
  6. Property that the spouses have agreed by a domestic contract is not to be included in the spouse’s net family property; and 
  7. Unadjusted pensionable earnings under the Canada Pension Plan. 
SPECIAL TREATMENT FOR THE MATRIMONIAL HOME:

The matrimonial home is given special status and protection in Ontario's Family Law system.

In the context of our discussion on the equalization, the value of the matrimonial home as a general rule is not accounted for as of the date of marriage. In other words, while one spouse may have purchased the home on his or her own prior to the marriage, both spouses will nonetheless equally share the equity accrued in the property upon separation or upon its eventual sale.

Keep in mind however that there is an important exception to this general rule. Where a home was owned by one spouse on the date of marriage, occupied by the parties as a matrimonial home thereafter, and sold prior to separation, the spouse owning the property can actually claim a deduction of its value as of the date of the marriage.

It should also be noted that a spouse's interest in the matrimonial home is not actually affected by the way in which the property is legally owned between the parties. For example, both spouses will usually have equal interests in the matrimonial home, even if title is held solely by one of them. In such circumstances, it is often assumed that title is held in trust by the one spouse for the benefit of the other.  

This can be a quite complicated question, however, particularly when there has been a significant change in the value of a home that is solely owned by one spouse.  

This post is by no means intended to be a comprehensive discussion of the various protections afforded in relation to he matrimonial home, which should be reviewed in detail with your lawyer.I t is critical to seek legal advice on this issue.  

IS IT POSSIBLE FOR A PARTY TO HAVE AN ENTITLEMENT TO MORE OR LESS THAN HALF OF THE DIFFERENCE OF NFP:

The default provision in our family law system is to equalize the party's net family property.

While there are exceptions that provide for an unequal division of property, it is only applicable in limited and extraordinary and unfair of circumstances.

Pursuant to section 5(6) of the Family Law Act:
The court may award a spouse an amount that is more or less than half the difference between the net family properties if the court is of the opinion that equalizing the net family properties would be unconscionable, having regard to: 
(a) a spouse’s failure to disclose to the other spouse debts or other liabilities existing at the date of the marriage;
(b) the fact that debts or other liabilities claimed in reduction of a spouse’s net family property were incurred recklessly or in bad faith;
(c) the part of a spouse’s net family property that consists of gifts made by the other spouse;
(d) a spouse’s intentional or reckless depletion of his or her net family property;
(e) the fact that the amount a spouse would otherwise receive under subsection (1), (2) or (3) is disproportionately large in relation to a period of cohabitation that is less than five years;
(f) the fact that one spouse has incurred a disproportionately larger amount of debts or other liabilities than the other spouse for the support of the family;
(g) a written agreement between the spouses that is not a domestic contract; or
(h) any other circumstance relating to the acquisition, disposition, preservation, maintenance or improvement of property.” (Emphasis added)
A detailed review of the exceptional circumstances in which an unequal division or equalization of property may be appropriate is beyond the scope of this article.

It is a good reminder however that while the process of dividing and equalizing property may seem extremely technical in nature, the underlying focus must always be on the practical financial consequences of a separation.

Each case will of course be subject to its own nuances, complexities and exceptions. 

It is accordingly very important that you consult with a lawyer to properly assess your position in the division and equalization of family property.

- Simran Bakshi, Associate Lawyer, Toronto


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