Equalization of Net Family Property in Ontario
From the desk of:
Equalization of Net Family Property in Ontario
The Concept of “Equalization”
Contrary to a common misconception, married couples do not acquire an interest in each other’s property just by virtue of being married, and the law does not require division of individually owned property upon marriage breakdown. Instead, in Ontario, the Family Law Act entitles separating legally married spouses to seek an “equalization of net family property”. This means, broadly speaking, that increases in net worth of each spouse over the course of the marriage are equalized by a cash payment from one to the other. It is not assets that are shared, but rather the increase in net worth occurring during the marriage. Note that this applies only to legally married spouses. Common Law spouses, no matter the duration of their relationship, are not covered by the equalization of net family property provisions.
In a traditional marriage the Wife may be the primary care giver for the children and the Husband the primary breadwinner. If so, the Husband may acquire more assets: a business, a stock portfolio, a pension. The Wife is not entitled to a share of the business, the stock portfolio, or the pension directly. Instead she will be entitled to a cash payment from the Husband, to the extent that the Husband has achieved a larger increase in net worth than the Wife.
Note that it is not just the difference in net worth that is equalized, but rather the difference in net worths that occurred during the marriage. There could be a significant discrepancy in net worth at the time of separation but if there was a similar discrepancy in the net worth at the start of the marriage than there will be no equalization payment required.
An equalization of net property is not required by law. At separation the spouses are free to agree upon any terms they feel are fair. But an agreement to waive an entitlement to an equalization of net family property may not be enforceable unless it is done in a written Separation Agreement with independent legal advice.
Determining Ownership of Property
In the process of determining each parties’ net worth disputes may arise as to which spouse is the owner of any particular asset, and what assets are owned jointly. These are questions of fact, not law. The Husband and Wife are not automatically joint owners of any asset just by virtue of being married, or just because they may both use any given asset.
Where such disputes reach a Court, the Court has to try to resolve it by reviewing whatever evidence is available to determine what the parties intended at the time the asset was acquired.
For example, a home may be registered in the name of the Wife and she may claim to be the sole owner. The Husband may say they were really both “beneficial” owners and the house was just put into the Wife’s name to protect it from business creditors. The Court will decide such an issue by trying to determine, based upon whatever evidence is available, what the parties’ real intention was. For assets that have a registration of ownership, such as bank accounts, real estate, motor vehicles, etcetera, the registration of ownership creates a strong presumption of who the real owner is, but it is not absolutely conclusive. The Court will look at whatever evidence is available to make a determination. Who paid for it, or how any carrying costs were dealt with, are examples of evidence that might be tendered on that issue.
Jointly owned assets will not impact the equalization of net property calculation, since they will affect both the Husband’s and the Wife’s side of the equation equally. Of course, the separating spouses will still have to decide what is to be done with jointly owned assets. They could be sold and the money divided, one spouse could buy out the other’s interest, or they could be, where practical, physically divided, such as the contents of the matrimonial home. Alternatively, the spouses could decide to continue as joint owners, despite the marriage breakdown. All this, however, is separate and apart from the issue of equalization of net family property.
What Constitutes “Property”
In calculating net worth, both tangible and intangible assets are included. The terminology “net family property” is misleading in this respect. For example, business interests and pension entitlement have to be valued and included. These can pose a serious valuation issue for the parties, and the Courts, to struggle with. Problems also arise where a substantial portion of a spouses’ net worth is tied up in assets which cannot be easily liquidated to generate the money needed to make an equalization payment such as pension plans, RSPs or business interests.
Special Rules for Matrimonial Homes
There are several important special rules dealing with particular types of property, the most important of which pertain to matrimonial homes. These can have severe, unexpected consequences when only one of the spouses is the owner of the matrimonial home.
In calculating increase in net worth, the value of assets owned at the date of marriage are subtracted from the value of assets owned at the date of separation. However, there is an exception in the case of a matrimonial home owned on the date of marriage. No deduction is made for this. The result is that if only one of the spouses owned a home which became a matrimonial home on marriage, that spouses’ liability for an equalization payment will be increased. He or she will be sharing not just the increase in his or her net assets that occurred during marriage, but also the full value of the matrimonial home.
For example, if a spouse entered the marriage owning a home worth $200,000 which becomes the matrimonial home, and upon a marriage breakdown the home is worth $300,000, then the owning spouse would be liable for an equalization payment to the non-owning spouse of not just $50,000 (one-half of the increase) but $150,000 (assuming, for illustration purposes, that the house was the only asset of either spouse). Contrary to the usual rule, the value of the matrimonial home as of the date of marriage is not deducted from the value as of the date of separation in calculating net family property.
Compare this with a spouse who entered the marriage with $200,000 in a stock portfolio which, during the marriage, increased in value to $300,000. Upon breakdown of the marriage that spouse would be liable to the other for an equalization payment of only $50,000; one half of the $100,000 increase. (Although note that the equalization calculation is not done on an asset by asset basis, but globally.)
Exemption for Certain Types of Assets
Other types of property given special status under the Family Law Act include property acquired by gift or inheritance during the marriage, damages for personal injuries, and life insurance proceeds. Such assets are exempt. They do not have to be included in the net worth of the spouse owning them for the purpose of the equalization calculation to the extent they are still separate, or identifiable, at the time of the separation. Also, if assets derived from these types of sources can be “traced” they will retain their exempt status. For example, if during the marriage a spouse inherits $100,000 and that money is invested in a stock portfolio or used to buy a boat, the stock portfolio or boat will not have to be included in the calculation of the owning spouse’s “net family property”. The spouse claiming the exemption will have the onus of proving the boat was purchased with the inheritance, but if that can be done, the exemption applies.
However, once again there is an exception for matrimonial homes. If the $100,000 inheritance is invested in a matrimonial home, whether as part of the original purchase price, to pay down a mortgage, or for renovations, the exempt status is lost. It does not matter that there may be direct and uncontroverted evidence tracing the inheritance money into the home.
Spouses are free to contract out of the entitlement to seek an equalization of net family property (and most other provisions of the Family Law Act) by way of a Marriage Contract entered into either before or during the marriage. Such Contracts are particularly popular for second marriages. By way of a Marriage Contract the parties can devise their own plan for what would be fair in the event of a separation and get out entirely, or in part from the provisions of the Family Law Act, both with respect to property and spousal support. A Marriage Contract can also be used to stipulate the value of assets at the time of marriage, to avoid difficult valuation problems later, and in general agree upon their respective rights and obligations during the marriage and on separation.