Jul

17

Prenup | Prenuptial Agreements (Part 1): Equalization of Net Family Property

Toronto business lawyerPre-nups | Prenuptial Agreements (Part 1)

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.

This is the first of a series of blog posts about prenup or prenup agreements in Ontario. Here, I’m going to talk about how property is normally divided when a married couple separates. It’s called an Equalization of Net Family Property Regime. Now a prenup or marriage contract can change how this regime operates. But if you don’t know how it operates, you won’t understand how to change it!

So the basic idea is that, under section 5(1) of the Ontario Family Law Act, when a married couple gets a divorce (or through a court order declaring the marriage a nullity) or is separated and there is no reasonable prospect that they will resume cohabitation, then their NET FAMILY PROPERTY is divided in half. This reflects an “EQUALIZATION PAYMENT” which each spouse is entitled to. OK so what is NET FAMILY PROPERTY and how do you calculate the EQUALIZATION PAYMENT? That’s where this blog comes into play. I’ll discuss these two things in 8 steps.

Step 1: Determine value of property on Separation Date
You need to understand where we’re going in order to get there. We are going to end up figuring out the NET ACCUMULATION of wealth of each spouse DURING the course of the marriage. Once we have this figure (and make certain adjustments) for each spouse, then we’ll be able to compare one spouse’s with the other. The difference between the two will then be divided in half, resulting in an “EQUALIZATION PAYMENT” being owed to each spouse.

So the first step to getting there means looking at the end of the marriage. What property did each spouse own at the end of the marriage? Property will include things like real property (e.g. land, buildings, homes, cottages, condos, etc.) or personal property (e.g. money, securities, RRSPs, paintings, chattels, cars, boats, collectibles, etc.). Once each spouse puts together a list of their property, they need to determine the VALUE of the property. Determining VALUE requires two things: (1) a valuation method and (2) a date on which to value the property. The valuation method is FAIR MARKET VALUE. In other words, what would it cost to go out in the market and buy this piece of property from a complete stranger (instead of a friend or family member who would give you a deal)? We don’t care about the book value (i.e. what was the original cost of the property) because this won’t reflect the fair worth of the property. The DATE on which the property is being valued is the earliest of the following dates:

  • date of separation (where there is no reasonable prospect that the couples will resume cohabitation);
  • the date a divorce is granted;
  • the date the marriage is declared a nullity; or
  • the date that one of the spouses dies, leaving the other spouse surviving.

Now there are no doubt going to be some assets that are hard to value (e.g. pensions, securities, business interests, etc.). You may need the assistance of an accountant. If both spouses own property together (e.g. joint bank account), then you attribute half of the value of that property to each spouse. Finally, it’s important to keep in mind that not all property is to be included in this calculation. There is some property (e.g. pre-marital assets, gifts or inheritances received during the course of the marriage, life insurance proceeds, etc.) that are NOT TO BE INCLUDED – but I’ll get into this below. It’s just a good idea to keep in mind.

So, lets say, for arguments’ sake that here are the values of the two spouse’s property as of the date of separation:

  • Husband: $200,000
  • Wife: $100,000

Step 2: Subtract debts on Separation Date
Recall that we’re looking for the NET INCREASE IN WEALTH for each spouse during the course of the marriage. That’s why we need to subtract the total debts of each spouse from their property values as of the date of separation. This will give us a net amount for each spouse as of the Separation Date. This would include things like credit card debts, lines of credit, loans, etc. So, in our example above, let’s assume that the husband had debts of $100,000 and the wife had debts of $50,000. That means that each of their net asset value as of the date of separation would be as follows:

  • Husband: $100,000
  • Wife: $50,000

Step 3: Determine value of property on Marriage Date
By this stage, we now have the final figure to be used in determining what the NET INCREASE IN WEALTH for each spouse was during the course of their marriage. Now we need to do the same thing AT THE BEGINNING OF THEIR MARRIAGE! So we start off by listing the property and determining the value of that property at the beginning of the marriage. We would use, however, the FAIR MARKET VALUE of the property on the DATE OF MARRIAGE (not the current date). So lets assume the following values can be attributed to each spouse at the beginning of their marriage:

  • Husband: $150,000
  • Wife: $25,000

Step 4: Subtract debts on Marriage Date
As with when you’re trying to find the NET WEALTH of each spouse on the date of separation, you must also do the same for each spouse on the date of their marriage. That means you must subtract their debts and liabilities from their assets as of that date. So let’s assume that the husband had debts of $50,000 and the wife had debts of $100,000. Taking into consideration their assets (Step 3), that would mean that the husband and wife were worth the following at the beginning of the marriage, respectively:

  • Husband: $50,000
  • Wife: -$75,000

Now, just to clarify, how is it that a person can have a negative net worth at any given point? Well, they can have assets (e.g. car, home, money in bank account). But their debts and liabilities are simply greater than their assets. Perhaps they have lots of credit card bills. Or maybe they borrowed money to acquire some of their assets. Or maybe they spend more than they earn so they don’t have disposable income. That explains why the Wife, in this example, had a negative net worth of $75,000 at the date of the marriage.

Step 5: Determine Net Family Property
Now that we have a starting figure (net wealth of each spouse at beginning of marriage) and an ending figure (net wealth of each spouse at end of marriage), we can find out the difference. This figure represents the net family property of each spouse. Now don’t get ahead of yourself: you still need to make certain adjustments (Step 6), but this is the starting point. So based on our example above:

  • Husband: $100,000 – $150,000 = (-$50,000)
  • Wife: $50,000 – (-$75,000) = $25,000

Now, if net family property for a spouse is a negative number (e.g. the Husband above), then he or she is given a “0″. In other words, there is NO NEGATIVE VALUE attributed to his or her net family property. It can never be a negative number. Only “0″ if the spouse was actually worth LESS on the date of separation than they were at the date of marriage. That’s what section 4(5) of the Ontario Family Law Act says. So now our NET FAMILY PROPERTY for each spouse would be:

  • Husband: $0
  • Wife: $25,000

Step 6: Subtract certain items
Now before we go ahead and find the difference between each spouse’s NET FAMILY PROPERTY, we need to exclude certain items. This is what the Ontario Family Law Act says. Here are the things to exclude:

  • gifts or inheritances from a third person after the date of the marriage;
  • income from gifts or inheritances from a third person after the date of the marriage IF the donor or testator has expressly stated that it is to be excluded from the spouse’s net family property;
  • damages or a right to damages for personal injuries, nervous shock, mental distress or loss of guidance, care and companionship, or the part of a settlement that represents those damages;
  • proceeds or a right to proceeds of a policy of life insurance, as defined under the Insurance Act, that are payable on the death of the life insured;
  • property which things mentioned above can be traced and attributed to (e.g. gifts or inheritances used to purchase certain property);
  • property that the spouses have agreed by a domestic contract (e.g. Pre-Nup, Marriage Contract, or Separation Agreement) is not to be included in the spouse’s net family property; and
  • unadjusted pensionable earnings under the Canada Pension Plan.

OK, so in our example, since the husband had a net family property of $0, there’s no point in deducting anything else. We simply look at the wife’s net family property of $25,000 and see if we can deduct the value of any of the above. If we assume, for example, that the wife inherited $5,000 as a gift from her father’s estate after he died, then we can exclude that (assuming that there’s nothing in prenup, marriage contract, or separation agreement that says otherwise). This means that the wife’s adjusted net family property will be $20,000 ($25,000 – $5,000).

  • Husband: $0
  • Wife: $20,000

Step 7: Find difference between Net Family Property
OK, so now that we have both spouse’s net family property, we find the difference between the two. In this case, the difference is $20,000 (the husband had $0 and the wife had $20,000).

Step 8: Divide difference of Net Family Property by 2
The final step is to divide the difference between the Husband and the Wife to create an EQUALIZATION PAYMENT which each spouse is entitled to when they separate. Dividing $20,000 by 2 means that each spouse is entitled to $10,000.

That, my friends, is a detailed example of how property generally gets divided pursuant to an EQUALIZATION OF NET FAMILY PROPERTY REGIME under Ontario Family Law. You find the NET INCREASE IN WEALTH for each spouse, take the difference between the two spouses, and then divide that figure by two to determine the EQUALIZATION PAYMENT which each spouse is entitled to.

So now that you understand how property is GENERALLY DIVIDED, in the next blog, I’ll talk about how this REGIME can be altered through a prenuptial agreement (entered into before marriage), marriage contract (entered into during the marriage) or separation agreement (entered into at the end of the marriage). All of these agreements are called domestic contracts and are governed by the Ontario Family Law Act.

Remember: if you need help with your divorce concerning the division of property, support (child / spouse) or other matters, make a post on Dynamic Legal Forms. We have family law lawyers who can help you!

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