If you think that you get “half” of your spouse’s property when you separate, you are not going to like this article. Many of our first time separated clients come to our offices thinking that property is physically divided and shared half-and-half upon separation. To make matters worse, many think that “property” refers only to real property, i.e. land. Whoever invented the English language did not help the situation as we sometimes use the word property in this way and other times we use it in a much more general and inclusive way to apply to all kinds of assets.
How Property Is Divided In Ontario
In Ontario, property division and child support are governed by laws that contain formulas. For married spouses, property division is governed by the Family Law Act, Part I. That part contains a formula known as “equalization of net family properties”. We don’t physically divide property unless it is jointly owned. Title is important. Generally speaking, you continue to own what is in your name. You continue to owe debts that are in your name. So does your spouse. Property that is in both names is owned by you and your spouse equally unless there are unusual circumstances.
“Property” has a very wide definition. It goes far beyond land to include virtually any kind of asset. Among them, cash in the bank, pensions, RRSPs, shares in corporations, unincorporated businesses, stock options, cars, jewellery, life insurance policies with cash value, future rights, tools, air miles…the list is endless.
Rather than physically divide property, the formula for equalization involves identifying and valuing each spouses’ assets and debts as at two dates: the date of separation and the date of marriage. It asks who did “better” in terms of increasing their wealth during the marriage? The person who did “better” will owe a compensatory payment to the other spouse which is called an “equalization payment”.
Let’s Take A Closer Look
Let me illustrate with the following simple example:
Assume: Neither party had assets or debts on date of marriage.
EQUALIZATION PAYMENT (Husband to wife)
$249,500 – $186,000 = $63,500 /2 = $31,750
Under this example, the husband will owe the wife an equalization payment of $31,750.00 cash. He had a higher Net Family Property (NFP) mainly because he holds a pension that was professionally valued. Even though he will not receive the pension until retirement, it forms part of his NFP. Sometimes, if a jointly owned home is being sold, he can make payment of this equalization payment out of his half share of the proceeds. It is also possible to extract and transfer a portion of his pension to the wife in payment of the equalization payment if she agrees.
One must be very cautious in providing and receiving the necessary financial information in order to properly use this formula. Assets and debts both on the date of separation and the date of marriage need to be identified and valued. In a previous blog, I have written at length about a quirk in the formula that leaves a spouse who brings in a “matrimonial home” into the marriage particularly vulnerable. One must also be extremely careful about gifts from third parties, inheritances and damage awards for personal injuries received during the course of the marriage. Consider getting legal advice for a marriage contract if you are in any of these situations.
Equalization in Ontario
Equalization has been used by Ontario Courts since 1985 without much change in the scheme. We spend a good deal of time and energy obtaining and assembling the necessary financial information to plug into the formula. Once we do so, it is relatively easy to determine who owes whom the equalization payment.
The formula is used if you are in court but if we often use it in non court negotiations. Sometimes, we even trade off assets or debts and modify the numbers. It can be complicated especially if we are working with businesses, investments, pension or significant debts.
If you are in court and if you are common-law spouses, you cannot use this formula. Our legislature has never extended the equalization formula to common-law spouses. Unfortunately, the rights and obligations of common-law spouses to property are less predictable and more difficult to settle.
Other Things To Know If You’re Separating
May I offer a few other tips:
- Title is very important to the formula. If you put title in the other spouse’s name or in joint names just “to make him/her happy”, you may not realize that you are giving them half ownership.
- Don’t sweat the small stuff. Separated spouses sometimes over emphasize household contents, whether tables, chairs, knick knacks, or other furnishings. The division of contents is usually pretty minor and we rarely value them. They are usually divided in kind.
- Don’t confuse the division of property with support issues. Although they may be related, a spouse with a spousal or child support obligation does not escape that obligation merely because they have made an equalization payment under the formula.
- Conduct during the marriage, including “who paid for what,” does not make a difference. I often hear from a client “I did all the hard work, brought in the income to support the family while he/she just banked their salary.” I tell them that if that is the case, their spouse may have accumulated a fair amount of savings as part of their NFP. The client will have a smaller NFP because their income was spent. That may be good for the client.
- We don’t “equalize assets”. People sometimes make the mistake of taking specific assets one at a time and comparing them. Sometimes they agree to split the difference in value. Other times they take them right out of the settlement. For example, I often hear “I don’t want part of his pension and he doesn’t want part of my pension”. I have to tell them that you don’t ordinarily get part of the other’s pension to begin with. However, dealing with each asset and debt on a piecemeal basis, can produce a result different than the formula, which pools a person’s assets and debts into a net worth calculation.
Again, this is the Ontario model. Some provinces and states do things differently. I often wonder how they manage to slice a car in half!