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Net Family Property and Equalization: An Introduction

Equalization is a payment from one spouse to the other at the end of a marriage.  This equalization payment ONLY applies to married spouses, not to common law spouses.  S. 5(1) of the Family Law Act (“FLA“) provides for Equalization when:

  1. A divorce is granted;
  2. Marriage is declared a nullity;
  3. When (married) spouses are separated and there is no reasonable prospect they will resume cohabitation.

One thing I often hear clients ask is whether they have to split 50% of everything.  While somewhat true, it is not entirely accurate.  The real definition of division according to s. 5(1) of the FLA is as follows: “the spouse whose net family property is the lesser of the two net family properties is entitled to a one-half difference between them”.

In simpler terms, separated spouses are entitled to 50% of the value of the marriage.  So how is that value determined?

 

Marriage and Valuation Date

First we need to understand what Net Family Property (“NFP”) is and how to calculate it.  S. 4(1) of the Family Law Act defines NFP as all property that a spouse owns on the valuation date (i.e. separation date) after deducting:

  1. Debts and other liabilities; and
  2. Value of property OTHER THAN A MATRIMONIAL HOME owned on date of marriage.

Therefore we have two dates that are important in determining equalization:

  1. The valuation date; and
  2. The date of marriage.

The date of marriage is simply the date you got married and does not include any cohabitation before marriage.  Spousal support may factor in cohabitation periods before marriage however.  See our post on spousal support for more info by clicking here.

The Valuation date is essentially the date the marriage ended, or the date the parties separated.  It is defined under s. 4(1) of the FLA as:

  1. The date you separate;
  2. Date the divorce is granted;
  3. Date marriage is a nullity;
  4. Date one of the spouses commences an application based on improvident depletion that is subsequently granted; or
  5. Date before the date on which one of the spouses dies leaving the other spouse surviving.

Once we have those two dates, we can begin figuring out how much your Net Family Property (“NFP”) is.

 

Calculating Net Family Property for Equalization

When determining the Net Family Property (“NFP”) of persons who are ending their marriage, we need to look at two important dates: the marriage date and the valuation date.

Let’s pick two dates to help figure out the NFP:

  1. Jane and John married on October 1, 2010;
  2. Separated on February 1, 2018.

That’s almost 8 years of marriage.  You’ll see here that February 1, 2018 is the date of separation, which fits under the definition of Valuation date in s. 4(1) of the FLA.

Now, we take the value of all assets that both parties own on the valuation date, subtract their debts owned at valuation, and finally subtract the value of any property owned on the marriage date.

JOHN

John’s Assets on Valuation Date Car – $25,000

Personal Bank Account – $3,000

$4,000 in Joint account with Jane (50%) – $2,000

Investment Account ending in 1010 – $170,000

 Total = $200,000

John’s Debts on Valuation Date Loan from Friend – $50,000

Total = $50,000

Property Owned at Marriage Investment Account ending in 1010 – $100,000

Total = $100,000

Calculate Final Total

Assets

– Debts

– Property at marriage

 

$200,000

-$50,000

-$100,000

John’s NFP $50,000 

JANE

Jane’s Assets on Valuation Date Car – $20,000

Personal Bank Account – $2,000

$4,000 in Joint account with John (50%) – $2,000

RRSP – $6,000

Matrimonial Home – $320,000

Total = $350,000

Jane’s Debts on Valuation Date Line of Credit – $50,000

Mortgage – $100,000

Total = $150,000

Property Owned at Marriage Matrimonial Home – $220,000

Total = $220,000

Calculate final total:

Assets

– Debts

– Property at marriage

 

$350,000

-$150,000

can’t subtract Mat Home

Jane’s NFP $200,000 

So, something interesting happened here.  Jane’s name is the only one on title to the home and it was valued at $220,000 when they got married.  She should be able to deduct that home from the valuation date value right?

Wrong.

Remember, you subtract property owned at the date of marriage from your valuation date EXCEPT for the matrimonial home.  So Jane has to include the entire value of the home regardless of how much it was worth at marriage.

We’re almost there.  The language of the equalization rule is: “the spouse whose net family property is the lesser of the two net family properties is entitled to a one-half difference between them.”

 

EQUALIZATION

Jane’s NFP

– John’s NFP

$200,000

-$50,000

$150,000
Difference divided by 2 $150,000/2
Equalization Payment or, the one half difference $75,000

In this instance John, who is the lesser of the two net family properties, is entitled to the one half difference between them, $75,000.

Therefore Jane makes an equalization payment of $75,000 to John.  With that, John would have $125,000 and Jane would have $125,000.  They are equalized.

 

Additional Exclusions

You also have the ability to exclude other property on the valuation date other than just debts under S. 4(2) of the Family Law Act.

These include things such as:

  • Property acquired by gift or inheritance after marriage date
  • Income from property that was gifted or inherited if donor EXPRESSLY stated it is to be excluded from NFP
  • Damages from a settlement resulting from personal injuries, nervous shock, mental distress, or loss of guidance care and companionship
  • Proceeds or right to proceeds of life insurance policy payable on death of insured
  • Property OTHER THAN MATRIMONIAL HOME into which property above can be traced
  • Property both spouses agree not to include as a result of a domestic contract (see our post on separation agreements for more info)
  • Unadjusted pensionable earnings under Canada Pension Plan

If you’re thinking of separating and want help to ensure you are properly protected, contact Rabideau Law to see how we may assist.