What Are Equalization Payments Under The Family Law Act?
Under the Family Law Act, R.S.O. 1990, c. F.3, each spouse is required to determine their net worth at the date of separation, subject to certain exceptions, and then either transfer property or receive property from the other spouse so that both spouses then have an equal net worth. This process is called Equalizing the Net Family Property.
When we talk about equalizing property, we don’t just mean real estate. We mean bank accounts, Canada Savings Bonds, cars, SeaDoos, jewellery, RRSPs, whole life insurance policy cash surrender value and other assets. Of course, we have to subtract our debts from those assets to determine our net worth, called net family property.
Certain items of property might be excluded from the calculation of net family property. For example, personal injury awards, proceeds of life insurance policies, and inheritances or gifts from third parties will generally be excluded. Also, if you can prove your net worth at the date of marriage, that could also be excluded (although any increase in the value of the property owned on the date of marriage is subject to division). The full value of the matrimonial home or homes is always included in the value of property owned at the date of separation and its value is not deductible, even if it was owned by one of the spouses before the marriage, or acquired by gift or inheritance after the marriage.
Note, however, that the spouse who owned a property prior to marriage is entitled to exclude the value of the equity in that property from the calculation even where that property was shared by the married couple but was later sold prior to separation because it is no longer a matrimonial home at the date of separation. What is or is not a matrimonial home can be confusing to non-lawyers, as can the fact that a couple can own more than one matrimonial home..
In certain limited circumstances, the Court has discretion to award one spouse more or less than half the difference as calculated above. However, the test is a stringent one and cannot be met in most cases.
It is the clear intention of the law that Judges are supposed to avoid making a Court Order that would result in the sale of an operating business to pay an equalization payment, unless there is no reasonable alternative. The Court therefore, may order that one spouse pay the other a share of the profits from the business, or order that one spouse transfer, or have the corporation issue to the other spouse, shares in the corporation. Thus, profits that would ordinarily be retained in the partnership to meet working capital requirements may have to be paid out to the spouse of a partner, and shareholders may have to share their power with an unwanted spouse.
Shareholder agreements should require that a shareholder be bought out in the event that their spouse makes a claim for an equalization payment under the Act. In this way, the separated shareholder would receive funds to help satisfy the spouse’s claim in exchange for shares in the business, and the remaining shareholders could continue operating the business free of interruption by the non-shareholding spouse.
The Family Law Act can also be triggered when one spouse dies but had a Will leaving the other spouse out as a beneficiary. The Act provides for the surviving spouse to trigger a marriage breakdown/separation the day before their spouse’s death, ensuring that they receive no less than an equal sharing of their combined net worth. However, the surviving spouse can also opt to receive under the Will (it it is more favourable) or an intestacy (where there is no Will) if that is more favourable. But there is a short time limitation involved so the need to consult with a lawyer is urgent.
The parties to a marriage are free to exclude the operation of the Family Law Act by entering into a marraige contract. For example, to prevent a spouse from becoming entitled to share of the profits of a partnership, or from becoming a shareholder in a corporation, all the partners or shareholders should sign marriage contracts in which the spouses have agreed to forego such rights.
The comments contained in this article provide a brief overview only and should not be regarded or relied upon as legal advice or opinion. Marie G. Michaels would be pleased to provide more information or specific advice on matters of interest to readers.