Key Insights for Dividing Assets – Net Family Property
Dividing property between former partners can be an extremely complex process. This process of equalization is the tool divide married spouses’ assets. The Family Law Act (FLA) governs this process. This process establishes a deferred community of property system.[1] Spouses do not automatically share ownership of each other’s property during the marriage. Rather, each spouse shares of the increase in the couple’s combined assets upon separation. This article will outline the Net Family Property (NFP) calculation process, the special treatment of the matrimonial home, and some exceptions that may alter the equalization.
Key Principles: Equalization and Net Family Property (NFP)
When spouses separate, Ontario and Federal laws ensure that each spouse shares equally in the value accumulated during the marriage. Rather than dividing property piece by piece, which would be incredibly time consuming, the law uses a financial balancing mechanism known as the equalization payment. Each spouse’s NFP value, represents their financial gain during the marriage. The spouse with the higher NFP value compensates the other by paying half the difference between their respective NFP values.
Here’s a closer look at the process and key concepts involved:
Calculating Net Family Property (NFP) and Equalization Payments
- Determine the Value of Assets and Liabilities on the Valuation Date:
- The valuation date is the date of separation. At this stage you must calculate each spouse’s total assets on this date, excluding certain assets under FLA s. 4(2) which “not form part of the spouse’s net family property”, such as gifts or inheritances received during the marriage that remain separate.
- Next, subtract all debts and liabilities each spouse has on the valuation date from the assets to arrive at the spouse’s net family property value on the valuation date.
- Sometimes a parties’ debts exceed their assets on valuation day. In that event, the total is considered zero for the final calculation.
- Calculate Marriage Date Assets and Liabilities:
- Here each party determines assets and liabilities on the date of marriage. The equalizations framework set out in the FLA does not apply to non-married spouses.
- The law treats the matrimonial home uniquely in this calculation. You cannot deduct its value on the date of marriage (unless in case of certain exceptions).
- Negative net worth at marriage (debts greater than assets) is carried forward as a negative number for the purpose of equalization.
- Determine NFP for Each Spouse:
- Finally, subtract each spouse’s marriage date net worth from their separation date net worth. This calculation yields each spouse’s NFP, reflecting their financial gain during the marriage.
- All that is left to do is to subtract the lower NFP from the higher NFP and divide by two to arrive at the equalization payment, which the spouse with the higher NFP pays to the one with the lower NFP.
Example: If Spouse A has an Net family property value of $150,000 and Spouse B has $50,000, Spouse A would owe Spouse B $50,000. This payment equalizes their share of the marital property gain, each effectively ending up with $100,000.
Ownership Disputes: Resulting and Constructive Trusts
Common-law separations may involve the framework of constructive and resulting trusts claims.
These claims are often extremely complex, often requiring a detailed analysis of each partner’s contributions.
Court’s Power to Vary Equalization Payments
The FLA gives courts limited discretion to deviate from the equalization formula if equalization would be “unconscionable.” A party can meet this standard only under specific circumstances. For example, such as a spouse hiding debts existing at marriage, or where a spouse depleted their own assets to minimize the equalization payment.
Applying for Equalization and Court Orders
A spouse must apply for equalization within six years of separation, two years of divorce, or six months after a spouse’s death.[1] Spouses who delay risk forfeiting their claim to equalization.
The FLA also permits a spouse to seek a preservation order under certain conditions. For example, such as if the other spouse is at risk of squandering assets. This court order prevents the at-risk spouse from selling or mismanaging assets to ensure that the applying spouse’s interests are protected.
Marriage Contracts/Cohabitation Agreements
Another facet to the equalization procedure is the use of marriage contracts or cohabitation agreements. These tools offer flexibility to modify or exclude certain assets from equalization. They also provide clarity and protection for each spouse’s financial future.
Given the potential long-term financial impact of miscalculations, it is important to seek legal help regarding net family property. Proper representation can help ensure a fair outcome. It can also reduce the risk of potential future litigation, which is something nobody wants.
Conclusion
Ontario’s approach to dividing property after marriage centers on fair value distribution rather than direct asset division. The unique treatment of certain assets for varying equalization make this a nuanced process.
Have questions about your equalization rights or need personalized legal advice? Contact Progressive Legal Solutions today and let us help you secure a fair outcome.
Written by: Caidan Ubell
[1] ibid, s.7(3).
[1] Family Law Act, R.S.O. 1990, c.F.3 as am.s.4.