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Jul

14

Equalization of Net Family Property

Toronto business lawyerEqualization of Net Family Property: what’s it all about?

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to cohabitation, prenuptial or marriage contracts and agreements, you should seek professional assistance (e.g. make a post on Dynamic Legal Forms). We have Toronto, Ottawa, Hamilton, Brampton, Mississauga and other Ontario lawyers registered to help you. You can contact me directly if you need a lawyer.

When a marriage breaks down, the Ontario Family Law Act kicks in with an EQUALIZATION OF NET FAMILY PROPERTY REGIME.

Note: the Act says that this regime applies when a divorce is granted or a marriage is declared a nullity, or when the spouses are separated and there is no reasonable prospect that they will resume cohabitation.

What about a “community of property” regime? Well, on breakdown of the marriage, there is no “community of property” scheme that applies (which I previously blogged about). This means that one spouse does not have an interest in the other spouse’s property. Rather, the spouses are left with a judgment for a specific dollar amount. Either spouse can do as they please with their own property. If one spouse fears that the other will squander or waste their property and be unable to pay the equalization payment, then an application can be made to the court to try to stop that spouse from doing so.

The idea behind equalization of net family property is that the net wealth of a couple during their marriage is divided equally between them. There are certain things that will generally be excluded from this calculation (e.g. life insurance proceeds, gifts and inheritances from third parties, and things excluded in a prenuptial agreement or marriage contract). So the NET INCREASE IN WEALTH of a couple is shared, not specific ASSETS.

Now does that mean that the “community of property” doctrine is dead? Not necessarily. Why? Because the Family Law Act allows couples to have private agreements (such as pre-nups and marriage contracts) that allow parties to create community of property regimes. These are private contracts, the breach of which may be enforced through court. Now creating a community of property regime is not easy. There are lots of nuances and problems which can arise. For example, if a couple has immediate and equal rights to own and possess property acquired during the marriage, then how will they manage that property? How will disputes be resolved? It can get very thorny. Another problem arises when proceeds from selling “community of property” assets are used to improve only one spouse’s situation. Is the community of property entitled to the benefits from that spouse? What if a spouse has improved community of property assets? See how it can get very complicated…

In this day and age, most couples go with an easier route: a modified version of the Family Law Act‘s EQUALIZATION OF NET FAMILY PROPERTY regime. The couple simply indicate, through a pre-nup or marriage contract, that they want to include or exclude certain things when calculating their net family property. An example could be to exclude real estate, antiques, or other things owned by one of the spouses. Things like RRSPs, professional licenses, or ownership interests in businesses (e.g. securities, partnership equity, etc) could also be excluded from net family property. The spouses could also agree that such assets WILL NOT BE SOLD or otherwise encumbered (e.g. mortgaged) in order to satisfy any equalization judgment owing to the other party.

In the next few blogs, I’ll get into how property and support (spousal and child) can be addressed in a pre-nup or marriage contract.

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