Divorce: Equalization of Family Property

The calculation of equalization is based on the “Net Family Property (NFP)” of each spouse.

• NFP = All property minus spouse’s debts (liabilities) and value of property owned pre-marriage.
• The matrimonial home is going to be split 50/50 anyway.
• NFP cannot be less than zero; if less than zero, then it is deemed equal to zero.

Example of “properties” included in NFP calculation:

• Real estates
• Company and Business Benefits
  • Partnership interests and business or professional goodwill Corless v Corless
  • Accounts receivable Corless v Corless
  • Shareholder loans AB v LB
  • Book of business Cosentino v Cosentino
  • Accrued real-estate commissions Cosentino v Cosentino
• Life Insurance Plans and Wills 
  • Cash surrender value of life insurance policies Blais v Blais
  • Beneficial interests under a will or a trust Brinkos v Brinkos
• Employment benefits
  • Pensions in accordance with s.10.1
  • Severance pay Marsham v Marsham
  • Worker’s compensation Kelly v Kelly
  • Stock option rights Ross v Ross

Debt / Liabilities

• Per s.4(1)(a), debt can be reduced from a spouse’s NFP, regardless of whether debt incurred for family or personal benefit 
• Debts that are old and having no repayment demand made until after spouses were separated may be substantially discounted in value. 
  • For example, in a debt scenario, the loaner testified not asking for repayment, so the debt was discounted to 5% of value. Cade v Rotstein 
  • Debts not required to be paid due to bankruptcy are totally excluded. Radlo v Radlo 

Income Tax and Prospective Liabilities:

• s.4(1) allows for the reduction of spouse’s liabilities including contingent tax liabilities on property, from his/her NFP value on the valuation date. 
  • However, the reduction is not available where the taxed amount is speculative because it is not clear when and if the sale of the property will occur. McPherson v McPherson 

s.4(2 -3) and case law authorities outline the following exclusions from NFP:

• Gift/Inheritance
  • Any property acquired by either spouse from a third party as a gift or inheritance is excluded, unless it forms a portion or has been invested in a matrimonial home. 
• Life Insurance Policies
  • This is excluded from NFP, but it can be considered in other payments, such as spousal support.
• Property excluded by valid Domestic Contract
  • s.4(2).6 provided: property that the spouses have agreed by a domestic contract is not to be included in the spouse’s net family property.
    • This clause allows spouses to exclude any property from NFP.
  • s.2(10) provides that a domestic contract dealing with a matter that is also dealt with in this Act prevails unless this Act provides otherwise.
    • This means the contract between spouses prevails.
  • The Contract must be fair
    • The court asks if the circumstances of parties at the time of separation were within their reasonable contemplation when the contract made, and whether they made adequate arrangements to address anticipated circumstances. Generally, courts respect private arrangements regarding the division of property, especially where a party obtains independent legal advice. Hartshorne v Hartshorne

Property equalization should always occur before a spousal support application because sometimes the division of assets or property will accomplish the goals of spousal support per s.15.2(6) Divorce Act.

• In the case Halliwell v Halliwell [2017], it was held that, when awarding spousal support, the court must take into account the sizeable equalization payment that the spouse received and the continued benefit she would receive from its interest. In this case, the wife has received $3 million as an equalization payment, this should go a long way to compensate her, thus the spousal support payable to her should be significantly reduced. 

There are reasons why the divide of NFP may not be exactly equal:

• Duration of cohabitation
  • s.5(6)(e) permits the court to award unequal division if equalization would yield disproportionately large allocation to a spouse cohabiting for less than 5 years. This means: 
    • Marriage of 1-2 years usually leads to unequal division Murray v Murray
    • Marriage close to 5 years or longer leads to an equal division based on the period of cohabitation Linov v Williams
      
• Unconscionability
  • s.5(6) permits the court to award an amount up to the whole of the offending spouse’s net property to compensate for unconscionable conduct Von Czieslik v Ayuso
    
  • Unconscionability can arise out of a cumulative effect of factors listed in s.5(6) even if no single factor in isolation would give rise. Heal v Heal
  • Proving unconscionability falls to the spouse claiming it, and the meaning of the act will be given a strict interpretation. Roseneck v Gowling
  • When there is reckless depletion of NFP by one spouse
    • s.5(6)(d) provided: The court may award a spouse an amount that is more or less than half the difference between the NFP having regard to a spouse’s intentional or reckless depletion of his or her net family property
  • Debts incurred recklessly or in bad faith
    • s.5(6)(b) permits the court to award unequal division when, for example, a husband is addicted to gambling and has $200,000 in debts. This $200k will not be included in the equalization calculation.
• Interspousal gifts 
  • s.5(6)(c) permits the court to award unequal division if unconscionable results would ensue from equalization having regard to the nature and value of the interspousal gift.

Let’s walk through an example to understand this better with a simple arithmetic exercise.

• Years ago, Karen and Kyle, both recent graduates from the University of Waterloo, got married. Each had student loans of $100,000.
• Five months before their wedding, Karen’s parents gifted her a house in London, Ontario, valued at $600,000.
• After getting married, Karen and Kyle moved into Karen’s house in London. Over the next five years, they had three children, and Karen became a full-time mother.
• Meanwhile, Kyle started his own tech company and became increasingly busy. Over a decade later, the couple separated.
• On the day of their separation:
  • Karen had personal savings of $200,000
  • Kyle had savings of $2 million and a sailboat worth $400,000.
  • Kyle, who enjoyed playing Texas hold’em, had accumulated gambling debts of CAD 200,000, which Karen knew nothing about.
  • The value of Karen’s house had appreciated to $1 million.

How will equalization be determined?

Answer:

Karen’s NFP:

• Karen’s marriage value:
  • Items:
    • Student debt: -$100k
    • Gifted house: $600k
  • Marriage date value: $500k
• Karen’s separating value:
  • Items:
    • Saving: $200k
    • Marital home: $500k (meaning she lost $100k as to the house)
  • Separation date value: $700k
• Karen’s NFP:
  • $700k – $500k = $200k

Kyle’s NFP:

• Kyle’s marriage value:
  • Items:
    • Student debt: -$100k
  • Marriage date value = -$100k
• Kyle’s separation value:
  • Items:
    • Saving: $2 million
    • Jet boat: $400k
    • Marital home: $500k
    • Gambling debt: $200k
  • Separation date value = $2.9 million
• Kyle’s NFP = $2.9 million – (-$100k) = $3 million 
  

Equalization:

• Kyle needs to pay Karen ($3 million – $200k) = $2.8 million ÷ 2 = $1.4 million