How Does Equalization Work ?
In Ontario, equalization is a process where spouses share the value of their property acquired during the marriage when they separate or divorce. The Family Law Act governs the equalization and here is a general overview of how it works:
1. Determine Each Spouse’s Net Family Property (NFP)
• This is done by determining the value of all assets owned on the date of separation (aka the valuation date) and subtracting any debts and liabilities.
• From this amount, each spouse subtracts the value of the assets they brought into the marriage (after deducting any debts and liabilities at that time), except for the matrimonial home, which is treated differently.
2. Calculate the Equalization Payment
• The spouse with the higher NFP pays the other spouse half of the difference between their NFPs. This payment is known as the equalization payment.
Key Considerations
• Matrimonial Home: The value of the matrimonial home is treated differently. If it was owned by one spouse before the marriage, its value on the date of marriage is not deducted from that spouse’s NFP.
• Exclusions: Certain properties are excluded from NFP calculations, such as inheritances or gifts received during the marriage, provided they were not used towards the matrimonial home.
• Debts and Liabilities: Both assets and debts are considered in the calculation of NFP.
Example
1. Spouse A:
• Assets on separation date: $500,000
• Debts on separation date: $100,000
• Assets on marriage date: $200,000
• Debts on marriage date: $50,000
• NFP: ($500,000 – $100,000) – ($200,000 – $50,000) = $250,000
2. Spouse B:
• Assets on separation date: $300,000
• Debts on separation date: $50,000
• Assets on marriage date: $100,000
• Debts on marriage date: $20,000
• NFP: ($300,000 – $50,000) – ($100,000 – $20,000) = $170,000
3. Equalization Payment:
• Difference in NFP: $250,000 – $170,000 = $80,000
• Equalization Payment: $80,000 / 2 = $40,000
• Spouse A pays Spouse B $40,000.
What Assets Can Be Excluded From Equalization?
Certain assets can be excluded from equalization in Ontario under the Family Law Act. The following types of property are generally excluded:
1. Gifts and Inheritances: Property received as a gift or inheritance from a third party after the date of marriage, provided it has not been co-mingled with other family property.
2. Damages for Personal Injury: Compensation received for personal injuries, unless it has been used to acquire or improve family property.
3. Proceeds of Life Insurance: Proceeds from a life insurance policy, unless they have been used to acquire or improve family property.
4. Property Excluded by a Domestic Contract: Property that spouses have agreed to exclude in a valid domestic contract (e.g., a prenuptial agreement).
It’s important to note that the increase in value of these excluded properties during the marriage may still be subject to equalization. It is paramount to get the advice of a trained professional when it comes to property division as this area of the law is extremely complex and worth the value of legal advice.
How Are Family Loans Treated?
In Ontario, family loans can play a significant role in the equalization process during a divorce. Sometimes, the accuracy and/or existence of family loans is contested since they can have a significant factor in calculation a spouse’s net family property.
Family loans can be recognized as debts and if found to be valid are deducted from a spouse’s net family property. This means that the loan will reduce their net family property.
The spouse claiming the loan must provide evidence that the loan exists. This can include loan agreements, repayment schedules, and any other documentation that proves the loan is legitimate and not a gift.
Courts will look at the circumstances surrounding the loan including the intention of the parties involved in the loan. If the loan was intended to be repaid, it will be considered a debt. If it was intended as a gift, it will not be deducted from the net family property.
At Sudano Law PC, our extensive expertise equips us to provide invaluable assistance in handling complex property issues. We are here to guide you through the process and excel in providing practical strategies to our clients to ensure that their rights and assets are protected in the final settlement or litigation.
