Divorcing spouses have a lot to consider throughout the process. Where significant assets are involved, property division is a major concern. Property refers not only to real estate and tangible items, but also intangible assets. This may include things such as bank accounts and shares in corporations. But how does property division actually work?
Equalization under the Family Law Act (FLA):
For married couples who are splitting up, property division doesn’t involve using a chainsaw. The law doesn’t require that everything be cut in half.
Unless the couple agreed to divide property a different way, the Family Law Act entitles both spouses to leave the marriage on an equal footing, in terms of sharing the net wealth accumulated over the course of the marriage. This calculation excludes the matrimonial home, which is treated separately.
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The “equalization formula” calculates the increase in net worth of each spouse over the course of the marriage. For each, it basically is as follows:
- Add up the value of that person’s assets on the date of separation/divorce
- Subtract that person’s outstanding debts on the date of separation/divorce
- Subtract third-party gifts and inheritances that person received during the marriage (if they still remain and have been kept separate)
- Subtract assets less any debt that person had on the date of marriage. I.e., subtract that person’s net worth on the marriage date).
The resulting figure is called that spouse’s Net Family Property (NFP). If one spouse’s NFP is higher than the other’s, the first spouse must pay to the other an amount equal to half of the difference between the NFPs. This “equalization payment” will leave both people with the same NFP.
Conceptually, the equalization payment is a once-and-for-all financial transaction. However, a court may allow the equalization payment to be made in instalments, over a maximum of 10 years.
Whose assets get divided?
Rules for property equalization in Ontario’s Family Law Act (the “FLA”) apply only to couples who were legally married but who’ve separated with no reasonable prospect of living together again, or who’ve divorced.
No statute requires unmarried couples who split up to do any sort of property division. They can voluntarily agree to divide things any way they want (or not at all). However, an unmarried spouse who contributed to the purchase or upkeep of an asset may have a trust claim for a beneficial interest in part of it, even if the other spouse has legal title to that asset. This may apply even to a valuable asset like a house.
A couple can agree to opt out of the FLA’s equalization rules:
A domestic contract — such as a Marriage Agreement (which many people call a “prenup”), or a Separation Agreement — may legally override the FLA’s equalization rules. However, a domestic contract may be invalid if the process leading up to it was seriously flawed. People leaving a marriage should have a lawyer review the contract and the circumstances in which it was made.
Valuation of assets:
To enable the equalization calculations to be done accurately and fairly, married couples who split up are legally required to fully disclose to each other the fair market value of all their respective assets. A court can make various orders to compel a divorcing spouse to do this, or to disclose the details of suspected, hidden assets.
Special rules govern certain asset types, notably the family home, CPP pension entitlement, RSPs, trusts, damages for personal injury, and life-insurance payouts. Some assets — like entitlements to private pensions, and shares in private corporations — may require special valuation processes.
If the assets include a business, you should seek the advice of a trusted tax professional to determine the most tax-effective way of dividing your business assets — before definitively separating or divorcing.
Protect yourself from surprises:
Whether legally married or not, if you are leaving a relationship, you should protect your assets and your credit rating by promptly taking steps to ensure that your ex cannot improperly drain a bank account or incur any new debt for which you will be liable.
If you have any questions, please feel free to contact Shulman & Partners at (416) 661-2777. We are always more than happy to help you.