What’s an equalization payment?
Ontario’s Family Law Act sets out a default position for how property is to be dealt with when spouses separate. In a nutshell, the net growth in value of the assets of each party during the marriage is calculated. That value is called the spouse’s “net family property” (NFP) and the spouse with the larger NFP must make a payment to the other party for half the difference to even things out. That payment is called an “equalization payment”.
Ontario regards a marriage as an economic partnership, and when it ends the parties should share equally in the benefit that either party acquired during that period. In those cases a common law relationship is treated the same as a married relationship.
Because property rights are a matter of provincial responsibility, the different provinces have different ways of dealing with property and not all use the equalization approach, or the same equalization approach Ontario uses. In Ontario, the right to an equalization payment only applies to married spouses and not to those in a common law relationship. This isn’t the case in all provinces.
Do we have to equalize our property?
No. The provisions in the Ontario Family law Act are there in case the parties don’t make some other arrangement.
Over the years, the concept of equalizing the family’s net family property has become the most common way of dealing with property. But spouses have the right to make other arrangements if they want. Alternate arrangements need to be set out in a separation agreement, marriage contract, or cohabitation agreement.
Who owns the property during our marriage?
In Ontario the fact that a person is married doesn’t change any of the basic property rights. So if you owned a property before marriage, or had some property put into your name during the marriage, it’s yours when the marriage breaks up and you separate. What’s yours remains yours unless there’s some court order affecting it.
The laws about what is commonly called the division of assets or the division of property in Ontario deal with the value of the property, not the ownership of it. You get to keep what you own, and the value of any increase in it’s worth after you separate.
So far, that’s pretty straightforward. The matter gets complicated when one party says that even though the property or asset is in one person’s name, both spouses contributed to it financially so it should be considered as jointly owned. Or, there are complications when it the party owning it always said that this property was to be for “us”. In these cases, the non-owner will want to get a share of the increase in value of the property after the date of the separation.
And it gets even more complicated if a person got ownership during the marriage by way of a gift or inheritance or certain other means.
Obviously, when there is an issue about this, you really need to speak with a family law lawyer.
How does our property get divided?
It doesn’t. In Ontario, property isn’t divided. You keep whatever’s yours. The courts divide “value” not “property”.
The concept of the equalization payment is based on “net family property” (NFP), which is that value of what you acquired during the marriage, after you deduct what you owe, subtract what you brought into the marriage, and exclude certain things received during the marriage such as gifts, inheritances, etc.
The equalization payment is meant to result in each person having the same NFP at the date of separation.
What makes up my Net Family Property?
This is fairly easy to begin with but gets complicated along the way. You start with the value of everything you own at the date of separation and subtract everything you owe at that same date. Then you calculate the net value of whatever you brought into the marriage, using the values at the date of marriage, and subtract that value from the net separation date value. You then exclude certain things, as discussed in the next paragraph. That will give you a value for the net increase in your worth during the marriage.
If at the date of separation you owned something you received during the marriage as a gift or inheritance, or from the proceeds of certain kinds of lawsuits or insurance proceeds, you can exclude them from your calculations. Also, there’s a special arrangement for the matrimonial home.
People can disagree on the value of assets and whether something should be excluded, so there are often be serious legal fights over the value of a person’s NFP.
Everything is valued at the date of the marriage and at the date of the separation. Occasionally there’s a problem if the value of some asset goes up or down after the separation but before the equalization payment is made.
Who’s entitled to an equalization payment?
A legally married spouse. Equalization payments are only paid by one married spouse to the other. It’s not available to common-law spouses in Ontario, unless those people entered into an agreement saying that they wanted the equalization law to apply to them.
You have to make your claim for equalization within 2 years of a divorce or within 6 years of separation, whichever comes first, or you lose the right.
What determines the value of my Net Family Property?
This can be a problem for some people. For household items the value is what a person could get for them if they were to be sold. Think of garage sale prices. It’s not a question of the cost to replace, or the original cost to acquire, the thing – just what you could actually get if you tried to sell it to a stranger.
Some items may have a high sentimental value, or the owner may feel that if they hold on to it the value will increase. Then is it only worth what a stranger would pay?
If you own art, or jewellery, the value might only be what you get if you sold it to a dealer, not what the item was insured at, or what you paid for it, or even if you had to buy it again on the open market.
There are all sorts of cases outlining how to value a spouse’s share in a family business. In one way it might be very valuable. But, what stranger would want to buy a 25% interest with a group of brothers and sisters who may not always agree? What’s a share in a business worth if you can’t control the business?
And what about stock options, that may or may not have any value in a few years?
In big money cases, where the valuing of assets is really important, parties will need to have experts testify. These may be business or asset valuators, real estate appraisers, or other people with knowledge of the field. Very often the court is faced with two reputable valuators with drastically different valuations becuase they take different things into consideration.
So while valuing assets is usually pretty straightforward, there are lots of times when that’s not the case. In those instances you really need to have an experienced lawyer helping you out.
What’s the effect of bringing debt or savings into the marriage?
Your NFP is calculated by subtracting the value of what you brought into the marriage from the net value of what you own at the date of the separation. But how do you account for debt, such as a student loan, which is a negative value? Marriage date debt is subtracted from marriage date assets, which lowers the value of what you brought into the marriage and, in turn, will increase the value your NFP if you are the spouse that entered the marriage with debt.
Keep in mind that if owe more than you own at the time of your marriage, so that your net worth is less than zero, the “net value” of your marriage date assets is a negative number. When you subtract a negative number from a positive number, the value increases. This makes sense, because it was during the marriage that you used money to pay off that previous debt. If you didn’t have to do that you’d have ended up with saving that money, or being able to buy an asset with it. So by having to pay off a debt during marriage that you incurred before marriage you took money away from the growth of assets during the marriage.
Take three examples:
Example One: Your partner has a net value of $100,000 at the date of separation and you have a net value of $40,000. Neither of you brought anything into the marriage. Subtract your $40,000 from your partner’s $100,000 and there’s a difference of $60,000. Your partner has to pay you an equalization payment of $30,000 so you each end up with $70,000.
Example Two: Same as Example One, but you brought $10,000 in savings into the marriage. You get to deduct that from your separation date value and end up with an NFP value of $30,000 (The $40,000 from the date of separation less the $10,000 from the date of marriage). Subtract that $30,000 from your partner’s $100,000 and there’s a difference of $70,000. Your partner has to make an equalization payment of $35,000. Your partner ends up with $65,000 and you end up with $75,000, because you get to keep the $10,000 you brought into the marriage.
Example Three: Same as Example One, but you brought $10,000 in student debt into the marriage. You show that as a minus figure (-$10,000) so that when you subtract it from the separation date net value you end up adding that $10,000 in debt to the date of separation value of $40,000, which increases your NFP to $50,000. Your net worth at separation actually grew by $50,000 during marriage but you keep $40,000 there because you used $10,000 to pay off the pre-marriage debt.
In the case of Example Three, you have to deduct $50,000 from your partner’s $100,000. That’s a difference of $50,000, so you’d receive an equalization payment of $25,000.
See? It’s not as straightforward as it looks.
How does the value of the matrimonial home fit into the equalization payment?
A “matrimonial home” is the home the parties ordinarily occupied at the date of separation. If the parties actually lived in more than one home at the date of separation – such as having a primary home and a cottage or a condo in Florida – then each is a “matrimonial home”.
Section 18 (1) of the Family Law Act says that every property in which a person has an interest and is/was ordinarily occupied by the couple as their family residence at their date of marriage is their matrimonial home. Any home you used as a family that has been sold, or you no longer use now for the family, can’t be a “matrimonial home”.
Figuring out what is the matrimonial home isn’t often the problem. The problem is that when calculating your net family property, you deduct the value of what you brought into the marriage but NOT the value of a matrimonial home. If you’re still living in, or using, the home as a family home that you used when you got married (your partner and you moved into the other person’s home or condo, or you had a cottage from before marriage and still have and use the same cottage for the family), then that property is a matrimonial home, and its value at marriage isn’t deducted a a marriage date asset. But if you sold it and moved into another home or cottage, then it is just an asset you owned at marriage and its marriage date value can be subtracted.
If you and your spouse were living in a home you owned before the marriage (the two of you moved in together sometime before the marriage so you were both there at marriage) with a net equity value of $60,000, and were still living in that same home at the date of your separation (the valuation date), you can’t count the value of the home in what you’d deduct in value brought into the marriage.
But if you had moved from that home to another one by the time of your separation, that first home is no longer the “matrimonial home” (only what you ordinarily occupy at separation can be a matrimonial home), so you could deduct the $60,000 as the value of an asset you bought into the marriage.
This means that in some cases you can and in other cases you can’t deduct the value of a home you owned at the date of marriage. It depends upon whether you’re still living in it at the date of separation.
There aren’t many lawyers or judges who consider this to be fair, but it’s what the Family Law Act says, and until that provision is amended, that’s the law.
What rights does a party have to the matrimonial home after separation?
If the parties home own a matrimonial home jointly, they each have a right to remain in it.
Even if the matrimonial home is in the name of one person, the other spouse still has some serious rights. The Family law Act says that both spouses have an equal right to possession of a matrimonial home. That right continues until the couple officially divorces – or a court orders otherwise. So, even if the matrimonial home is in your name and you’re the one who paid for and maintained it, you can’t throw out your spouse without a court order.
The non-owner spouse has a right to remain living in the matrimonial home until the divorce, unless different arrangements are made in the separation agreement.
If the owner of a matrimonial home dies while the other spouse is living there, the remaining spouse only has the right to remain there, rent free, for 60 days after the spouse’s death.
There are more regulations about the matrimonial home and you should check with a lawyer for clarification.
How do we deal with pensions when we separate?
The law dealing with pensions in Ontario changed quite dramatically effective January 1, 2012. Pensions under provincial legislation – and in certain cases some that aren’t – have a Family Law Value calculated by the pension plan administrator and that value is to be evenly split between the parties by the creation of a separate pension plan for the non-member spouse. The non-member spouse can ask for his or her share to be paid out to them by the member-spouse, but that requires a court order if they don’t agree, and doesn’t happen very often.
The Family Law Value of a pension is the value of the growth of the pension during the period of the cohabitation of the parties. To calculate, you take the value of the pension at the date of separation and deduct the value at the beginning of the cohabitation. Of course, if a person starts earning the pension after starting to live with his or her spouse, then all of it’s value would be included in the Family Law Value.
But there’s a problem dong the calculations. The figures your pension plan sends out every year aren’t the figures used for valuing a pension in the event of a marriage (or common law marriage) breakdown. For that purpose there’s a separate valuation calculated called the Family Law Value. This is done upon request by your pension administrator in accordance with very specific government requirements. Many actuaries are unhappy with those requirements and say that they’re not fair or produce a wrong valuation. But that’s the law. So there’s no way you can figure out the value of a pension upon separation on your own. You need to send in the proper forms and have the proper valuation provided by the pension plan administrator directly.
If you want to make a different financial arrangement, you can choose not to divide the Family Law Value evenly. Also, the non-member spouse can agree that it not be divided at all.
If a pension is already in pay (being paid to the member spouse) at the date of separation, then there’s no need to value it. The income is treated as income just as any other income and not as an asset to be divided. The non-member’s survival benefits can be treated as an assets for that person to be valued for equalization purposes.
See the section dealing wiht Financial Services Commission of Ontario in the Resources listed below to get the forms and information you need.
Separation and Divorce or Death of a Spouse: Property Division
This resource explains the basic rules for property division between separating married spouses, their rights and obligations with respect to the matrimonial home, and what happens to property if one spouse dies. It also explains the different situation of common-law spouses. There are sections on responsibility for debts, division of CPP credits, and written agreements. The publication closes with detailed information on where to find legal assistance.
Financial Services Commission of Ontario (FSCO)
The government has tried to make dealing with pensions as easy as possible. It has a series of Questions and Answers and a Users Guide for each of the forms, including for Family Law Value.