Property Division for Married Spouses
Clients are often concerned about what will happen to their family property if they separate. They usually want to know how assets such as their home, RRSPs, cottage and cars are going to be divided. There are very specific rules for division of property for married spouses which are set out in Part 1 of the Family Law Act (“FLA”). For non-married spouses, there are different considerations which will be covered under a separate blog post. This post focuses only on the division of property for married spouses.
Each Family Asset is Not Divided Equally
There is a common misperception regarding the division of family property. Many people believe that we divide each asset equally between the two spouses. It often comes as a surprise that the matrimonial home may not be divided equally if only one spouse owns it. In Ontario, that isn’t how property division works. Instead, we calculate each spouse’s Net Family Property (“NFP”) by adding the value of all assets which belong to that spouse, then subtract debts and any marriage date deductions or exclusions (further described below). Once we’ve determined the NFP for each spouse, whoever has a higher NFP, must pay one half the difference to the other spouse.
Valuation date
Before we determine the equalization payment owing from one spouse to another, we must first determine the valuation date. The valuation date is the date that is used to calculate the division of property. Determining what the valuation date is in a particular case could be the source of dispute as it could potentially impact the amount of property to be divided. Most commonly, the valuation date is the date the parties separated with no reasonable prospect that they will reconcile.[1]
Marital Property to be Divided Between Spouses
Section 4 of the FLA defines property very broadly as: “any interest, present or future, vested or contingent, in real or personal property”. In other words, almost anything qualifies as “property” which must be divided between spouses. Real property such as homes, cottages or rental properties will be included in the calculation of a spouse’s NFP. Property also includes things like bank accounts, RRSPs or other investment accounts as well as vehicles and home contents. In addition, property includes a spouse’s interest in a pension, a business or future stock options and may also include a beneficial interest in a trust.
The key to determining whether an asset is property under the FLA is to understand whether the asset is currently beneficially owned by the spouse or will be owned on some date in the future if certain conditions are met. For example, promises of inheritances are typically not considered property because the testator may change their will and it’s possible the spouse may not inherit any assets. In contrast, if a spouse has been granted stock options in their job which will vest on a certain date in the future, these would be considered property.[2]
If a spouse has a joint or part interest in property, we include the value of the part interest in the calculation of that spouse’s NFP.
The Calculation of Net Family Property
Section 4 (1) of the FLA sets out the method for calculating a spouse’s NFP: “net family property” means the value of all the property, except property described in subsection (2), that a spouse owns on the valuation date, after deducting,
(a) the spouse’s debts and other liabilities,[3] and
(b) the value of property, other than a matrimonial home, that the spouse owned on the date of the marriage, after deducting the spouse’s debts and other liabilities, other than debts or liabilities related directly to the acquisition or significant improvement of a matrimonial home, calculated as of the date of the marriage;
To determine a spouse’s NFP, we calculate all of the property that spouse owns, subtract debts and subtract the net value of assets brought into the marriage, with the exception of the matrimonial home.
As an example, assume a spouse owns on the date of marriage the matrimonial home valued at $1m and bank accounts valued at $100k and the same assets on the date of separation but the value of those assets have doubled so that the value of the matrimonial home is $2m and the bank accounts are $200k. Also assume no debts on date of marriage but debts of $100k on date of separation. The calculation of that spouse’s NFP would be as follows:
Date of Separation value of matrimonial home ($2m) + bank accounts ($200k) = $2.2m
Subtract date of separation debts ($100k) = $2.1m
Deduct date of marriage bank accounts ($100k) = $2m
That spouse has an NFP of $2m. If the other spouse has an NFP which is $1m, the spouse with the higher NFP pays one half the difference ($500k).
The Date of Marriage Value of the Matrimonial Home Will Not be Deducted
The above example highlights a limitation of the FLA and the primary reason many people choose to enter into marriage contracts: if a spouse brings a matrimonial home into marriage, that spouse will lose the ability to deduct the value of the home as of the date of marriage.
The FLA allows spouses to share the increase in value of assets over the course of the marriage, but each spouse keeps the value of what they brought into the marriage, with the exception of the matrimonial home. Without a marriage contract, it is possible that a spouse may need to share the entire value of a home, including the equity which was owned prior to marriage.
In the example above, if the spouse who owned the matrimonial home on the date of marriage had excluded the date of marriage value of the home in cohabitation agreement or marriage contract, there would have been a much larger marriage date deduction of $1.1m.
Exclusions from the Calculation of Net Family Property
In addition to deducting the value of assets brought into marriage, when calculating the NFP, it is also possible to exclude certain assets. The assets which may be excluded are listed under 4(2) of the FLA:
- Property, other than a matrimonial home, that was acquired by gift or inheritance from a third person after the date of the marriage.
- Income from property referred to in paragraph 1, 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, other than a matrimonial home, into which property referred to in paragraphs 1 to 4 can be traced.
- Property that the spouses have agreed by a domestic contract is not to be included in the spouse’s net family property.
- Unadjusted pensionable earnings under the Canada Pension Plan.
Spouses who receive third party gifts or inheritances during the marriage, for example, may exclude the value of those assets from the calculation of their NFP provided that a) they can prove the gift or inheritance and b) they have kept the gift or inheritance separate from their spouse. If they share the gift or inheritance with their spouse, they may lose some or all of the exclusion.
As an example, if a spouse inherits $100k during marriage which is kept in a separate account and the value of that account is $150k on date of separation, the entire value on date of separation may be excluded from the NFP calculation.[4]
Need to Document Deductions or Exclusions
It’s important to note that if a spouse seeks to deduct or exclude an asset, that spouse bears the burden of proof to establish the deduction or exclusion. In other words, you must “prove it or lose it”. It can be difficult to find documentation to demonstrate deductions or exclusions if many years have passed, so good record keeping is essential.
Conclusion
Overall, the FLA provides a reliable method for calculating the division of property for married spouses. Despite the clarity of the legislation, disputes may arise with respect to issues such as the valuation date, date of marriage deductions, exclusions or the valuation of property or debts. Knowing how the property division regime works is useful for spouses who are seeking to protect specific assets with a marriage contract and for those who are in the process of separating, so they may understand their rights.
