Ontario’s property equalization scheme under the Family Law Act (FLA) is called a “deferred community-of property” regime. This means that when two people enter into a marriage, each spouse becomes automatically entitled to an equal share of the profits of that marriage. (See our article: The Equalization of Net Family Property for more information on this point.)
That right to equalization is triggered when the marriage dissolves or one spouse dies. Each partner then becomes entitled to one half of the value of property accumulated during the marriage (not one half of the property itself). The court orders one spouse to pay the other an “equalization payment,” in order to equalize the value of each spouse’s net family property.
The general process for equalizing net family property is the following:
- First, determine the value of each spouse’s property at the valuation date. Include all assets, except for those assets specifically excluded by the FLA, s. 4(2). Add all of these figures together to obtain a total value of assets. (For more information on determining the valuation date, and on what assets are excluded from the valuation date assets under the FLA, see our article: Calculating the Division of Property.)
- Subtract all debts from the total assets. This creates a total value for each spouse on the valuation date. If a spouse has more debts than assets at the valuation date, consider their total at valuation day to be zero for the subsequent calculation.
- Next, determine the value of all assets that each person brought into the marriage (the value of their assets at the date of marriage). Do not include the value of the matrimonial home if it was owned at the time of marriage. If a person’s net worth at marriage was negative (that person had more debts than assets), maintain that negative number for the purposes of the next step.
- For each spouse, subtract the date of marriage assets from the valuation date assets. (If a spouse’s date of marriage net worth is negative, you will subtract the negative, resulting in an addition.) This gives a figure that is each spouse’s “net family property” (NFP). It includes the value of assets acquired during the marriage as well as the increase in value of assets brought into the marriage. One spouse will almost always have a higher NFP than the other.
- Subtract the lower NFP from the higher one, and divide the difference in half. This is the amount of the equalization payment, which the spouse with the higher NFP must pay to the spouse with the lower NFP.
Resulting or Constructive Trusts – Who Owns What?
Ownership of each asset must be determined before the equalization payment can be calculated. Sometimes, the ownership of a piece of property may be a source of dispute between the spouses. The court may, upon application, solve these disputes under s. 10(1) of the FLA by making a declaration of ownership for a specific piece of property, ordering one spouse to compensate the other spouse for that property, or ordering the property sold and the proceeds from its sale divided.
One spouse will sometimes try to claim an interest in a property owned by the other spouse through a resulting or constructive trust. A resulting trust occurs when one person transfers property to another, but is presumed to still retain ownership of the property. If a husband, for example, purchased an asset such as a car, but put that car in his wife’s name, the Family Law Act presumes that a resulting trust exists, and the husband remains the owner of that car. However, it could be argued that the car is a gift, and in fact belongs to the wife, and therefore should be included with her assets rather than his.
A constructive trust arises to remedy unjust enrichment, where one spouse has contributed to the value or acquisition of an asset owned by the other spouse (through labour or financial contribution, for example), and he or she was not compensated for the deprivation incurred in making that contribution. For more information on constructive trusts, see our article: Common-Law Relationships and Division of Property. Constructive trusts are more commonly litigated between common-law spouses, who are not entitled to an equalization of net family property.
Trust arguments are difficult and highly case-specific issues. If you do want to pursue a trust claim, you would be well served to speak to a lawyer experienced in family trust litigation in Ontario, who will be able to examine the facts of your case and inform you of the potential strength of your trust claim.
Treatment of the Matrimonial Home
Note that the FLA provides for unique treatment of the matrimonial home in the equalization process. The matrimonial home is not included in a spouse’s date of marriage assets, even if it was owned at the time of marriage. In contrast, the value of the matrimonial home is always included in the valuation date assets of the spouse who owns it (or its value is divided between the spouses, if it is jointly owned). This is the case even if it was purchased with money inherited after marriage, or it was a gift given to one of the spouses after marriage. (Such gifts or inheritance would normally be excluded from valuation date assets.)
Married spouses should be aware of the unique treatment of the matrimonial home when organizing their affairs. The FLA’s provisions regarding the home mean that decisions spouses might undertake rather lightly–such as whose home to live in, whose name to put on the title to the home, or whether or not to use money from an inheritance as a down payment for a home–can have a dramatic impact on the entitlement of each spouse upon equalization. For example, if you and your spouse both owned homes at the time of marriage (a common occurrence with second marriages), and you move into one of those homes together and rent out the other home, whose home is used as the matrimonial home and whose is rented will be of great significance upon the dissolution of that marriage. You should seek the advice of a lawyer to help you determine how to best organize your property and protect each of your rights in the event that the marriage dissolves.
For more information on the unique treatment of the matrimonial home, and the spouses’ rights in regards to it, see our article: The Matrimonial Home.
Applying for Equalization
If spouses are applying for equalization as the result of separation, death, or divorce, they must apply to the Superior Court or Unified Family Court for equalization before the earliest of: 6 years from the date of the separation; 2 years from a declaration of divorce; or 6 months from the other spouse’s death.
A spouse may apply for equalization after the death of the other spouse, even if the surviving spouse is named as a beneficiary in the deceased’s will, if the surviving spouse determines that his or her entitlement in the will amounts to less than he or she would receive through equalization. If the spouse opts to apply for equalization, he or she forfeits the right to any entitlement under the will, unless the will specifies that the surviving spouse should receive an equalization payment in addition to what is gifted in the will.
It is also possible to apply for equalization even in the absence of death of a spouse or marriage breakdown. Section 5(3) of the FLA states that if, while the spouses are cohabiting, there is a risk that one spouse will “improvidently deplete his or her net family property,” the other spouse can apply for equalization. A spouse might seek to apply for equalization under s. 5(3) if his or her partner is in deteriorating health and has diminished mental capacity, or is suffering from a gambling or substance addiction problem. Note that if you apply for equalization under s. 5(3), the court will not grant further or subsequent equalization, upon later marriage breakdown, for example. If the spouses wish to allow for a second equalization payment, they must specify that in a separation agreement.
The courts also have power under s.12 of the FLA to make a preservation order, if they find such an order necessary to protect the interests of the applicant spouse. A preservation order would restrain the spouse from depleting any assets.
Possible Variation from Equalization
There are certain very limited situations in which a court has discretion to depart from equalization to award an amount that is either more or less than half the difference between the two spouses’ net family properties.
The court must find that equalization would be “unconscionable” (meaning patently unfair – a very high bar) as a result of one of the following:
- One spouse failed to disclose debts or liabilities that existed at the time of marriage.
- One spouse incurred debts or liabilities recklessly or in bad faith, and these debts are now claimed in reduction of that spouse’s net family property. (An example would be a spouse who incurred debt by consistently living beyond his or her means, or gambling, or making rash investment choices).
- A large part of one spouse’s net family property is made up of gifts from the other spouse.
- One spouse intentionally depleted his or her family property in order to avoid paying the other spouse a large equalization payment.
- The spouses cohabited for less than five years, and under equalization one spouse would receive a disproportionately large equalization payment.
- One spouse incurred a disproportionately large proportion of debts or other liabilities for the support of the family.
- The existence of a written agreement between the spouses that does not constitute a domestic contract. (If a domestic contract exists, its provision will be respected by the courts.)
- The existence of “any other circumstance relating to the acquisition, disposition, preservation, maintenance or improvement of property.”
Note that none of these criteria refer to conduct during the marriage, except as it relates to property. Conduct such as cruelty, adultery, or a spouse’s role in bringing about the dissolution of the marriage is not relevant to property division.
Method of Equalization
Courts can order the equalization payment to be made in a variety of ways. It can be as a lump sum, or paid in installments (over a period of time not to exceed 10 years). The court can order property partitioned or sold in order to meet the payments, and it can order property transferred to the recipient spouse, or held in trust for that spouse.
It is important to understand how equalization will affect your property in the event of a divorce or separation. To learn more, call an Ontario divorce lawyer at (905) 581-7222.