When a couple separates or divorces, one of the first steps is determining the division of assets or equalization payment. Determining the equalization payment can be complicated and include contentious issues, such as the ownership and value of certain assets. This blog explores some of the basic principles of how equalization payments are calculated under Ontario’s family law.
How does the Family Law Act calculate an equalization payment for married couples?
Determining the valuation date
In the Family Law Act, when a married couple separates, one spouse may owe the other an equalization payment. The first step in calculating the amount owing is determining the valuation date, which is the earliest of the following dates:
- Date of separation;
- Date the divorce was granted;
- Date the marriage was declared a nullity;
- Date a spouse starts an improvident depletion application that is granted; or
- Date of a spouse’s death.
Each spouse determines their net family property by adding up their own assets and subtracting any debt they have as of the valuation date. If an asset, including the matrimonial home, is jointly owned, each spouse uses half its value in their net family property calculation. When only one spouse owns the matrimonial home, only that spouse includes it in their valuation date calculation.
The Family Law Act excludes some assets from the net family value. The spouse claiming the exception is responsible to prove a particular exception applies. The exclusions are:
- Property besides the matrimonial home that a spouse received as a gift or inheritance after the marriage began;
- Income from the excluded property that was a gift or inheritance if it was stated that the income should be excluded when it was given to the spouse;
- Damages or right to damages from settlements for personal injuries, nervous shock, mental distress, or loss of guidance, care and companionship;
- Money received from a life insurance policy;
- Property that can be traced back to one of the above exceptions;
- Property excluded by a domestic contract signed by the spouses; and
- Unadjusted pension earnings under the Canada Pension Plan.
What about assets acquired before the marriage?
For property owned before the marriage, spouses only share the increase of its value after the date of marriage. Each spouse is therefore required to calculate their assets and debts as of the date of marriage (the “marriage valuation”). If only one spouse owned the matrimonial home before the date of marriage, it is not included in the equalization amount.
Calculating the total net family property value
To calculate the total net family property’s value, each spouse subtracts their marriage valuation amount from the value of their family property as at the valuation date. The difference is then divided in half, and the resulting value is the equalization payment. The spouse with the higher net family property value pays the equalization payment amount to the other spouse.
When might a court alter an equalization payment?
A court might alter the equalization payment if the amount is unfair or unconscionable under the Family Law Act. Examples of situations where this may occur include:
- there is a lack of disclosure of debts by one partner at the time the couple married
- a spouse claimed exemptions for their debt recklessly or in bad faith
- a spouse intentionally or recklessly depletes their property
- some of the property included in the net family property was gifted by the other spouse
- the couple has lived together for less than five years, so the equalization payment is disproportionately large given the relatively short length of the relationship
- one couple has a significantly larger amount of debt while trying to support their family
- property is dealt with in a written contract (besides a domestic contract)
These are only examples of instances that may change the equalization payment. Any other circumstances that may show unfairness relating to the “acquisition, disposition, preservation, maintenance or improvement of property” may be grounds for modifying the equalization payment.
Can you opt out of the Family Law Act’s equalization requirements?
Couples can agree on arrangements outside of the requirements of the Family Law Act regarding equalization payments. This can be done through a domestic contract, like a marriage contract or separation agreement. These contracts can set out what amount, if any, is required for an equalization payment. It may also list assets that are not to be included in the spouses’ net family property calculations.
Can a spouse challenge a domestic contract after it has been made?
A spouse may sometimes challenge the validity of a domestic contract and argue that it cannot be enforced. There are some situations in which a court may choose to invalidate the contact, including:
- There was a lack of full financial disclosure between the parties when it was made;
- The parties did not understand the contract;
- There was pressure or duress by one spouse on the other to sign;
- The contract is so unconscionable it cannot stand.
Courts will consider whether the party challenging the contract had a lawyer assisting them when it was signed. It is therefore important that spouses obtain independent legal advice to lessen the risk of a signed domestic contract being invalidated by a court.
Contact Bortolussi Family Law for Advice on Property Entitlement
Bortolussi Family Law is based in Vaughan and helps clients across the Greater Toronto region navigate complicated issues relating to family property and equalization payment calculations. Contact us at 416-987-3300 or online for advice on your family matter, including the creation of domestic contracts and division of family property issues.