Equalization: How is the Property Settled?
The Family Law Act of Ontario uses a formula to determine how much needs to be paid by one spouse to the other so that you and your spouse end up with the same net property upon your divorce. The formula is illustrated below:
- Add up your assets on the date of separation
- Subtract your debts on the date of separation
- Subtract any gifts from third parties, inheritances or proceeds from a personal injury claim received during the marriage which were kept separate and are still in existence on the date of separation
- Subtract your assets less any debt you had on the date of marriage
Here is an example:
ASSETS ON DATE OF SEPARATION
|Home (Jointly Owned) worth $380,000||$190,000||$190,000|
|Cars (Fair Market Value)||$30,000||$12,000|
|RRSP (deduct 25% for taxes)||$210,000||$25,000|
|Snowmobiles (Fair Market Value)||$5,000||NIL|
DEBTS ON DATE OF SEPARATION
GIFTS, INHERITANCES, PERSONAL INJURY CLAIMS
|Snowmobile – Gift From Parents||$5000||NIL|
ASSETS LESS DEBT ON DATE OF MARRIAGE
|Total A (Assets)||$535,000||$487,000|
|Minus Total B (Debt)||($98,000)||($87,000)|
|Minus Total C (Gifts, Etc)||($5,000)||NIL|
|Minus Total D (D of M)||($43,000)||($32,000)|
|Net Family Property||$389,000||$368,000|
DIFFERENCE $389,000 – $368,000 = $21,000
EQUALIZATION OWED BY HUSBAND TO WIFE IS $10,500.00!
Once the Husband pays the Wife $10,500.00, each will have $378,500. In this example, the home is jointly owned.
If the Husband wants to purchase the Wife’s interest in the home, he would have to pay his Wife the equalization of $10,500 plus pay her for her one half of the interest in the home. This is calculated as $190,000 minus the mortgage of $80,000 equals $110,000. So, the Husband would have to pay the Wife $110,000 plus $10,500 for a total of $120,500. The Husband would then own the house solely and paid out his Wife.
The Husband and Wife keep the assets and debts in their own names.
Of course, in this example, they may decide to sell the home and divide the proceeds equally or adjust the assets or debts (the Husband taking an extra debt or giving the Wife an asset) so as to equalize the numbers.
An inheritance, gift from a third party or payment for a personal injury which is received during the marriage but used to pay joint debts or invested into a jointly owned asset or is spent, cannot be deducted. One of our lawyers can help determine if you have a deduction.
The reason debts were incurred does not matter except when used for illegal purposes. Your debts (meaning the ones in your name) are yours and your spouse’s debts remain your spouse’s debts. Jointly owed debts are shared. Everything is balanced out by the equalization process. If you have more debts than your spouse, your spouse may have to make an equalization payment to balance everything out.
In this example, the value of the husband’s business may be an issue. A Certified Business Valuator may be needed to determine the value for equalization purposes.
Some clients get confused because they want to equalize each asset or each debt. You have to look at the whole picture, using the formula above, and not look at individual assets or debts.
In rare cases, it is possible to ask for an “unequal equalization” if ordering an equalization payment according to the normal formula would be “unconscionable.” Our lawyers can help you determine if your case would be an exception to the general rule.
We have seen many people get the equalization calculation wrong, including other lawyers. Our lawyers only do family law and work with equalization calculations every day. We can help you get it right.