The "Roll" of RRSP's in Your Separation and Divorce

Registered Retirement Savings Plans are the main savings vehicle for many Canadians, especially those who don't have a pension through their employment. As a result, upon separation and divorce, RRSP's are part of the property settlement. 

Our guest blog this week is  by Sandra Ramos, a well known financial advisor in Barrie, Ontario.  She has great advice about how to deal with RRSP's during your separation and divorce. 

For most couples, separating your assets can be the most challenging event of your separation, not only from the standpoint of “equalization” but also from a “taxation point of view”. RRSP’s, Registered Retirement Savings Plans add complexity to the equalization process due to their inherent tax implications. If you remove funds from your RRSP you will pay tax on the withdrawal and the amount will be added to your income in the year of the withdrawal. You can roll your RRSP’s to your spouse during the equalization process without immediate taxation, however, should your spouse use those assets to pay for legal fees or to get back on their feet financially, there will be taxes when withdrawn. This is an element that is often times overlooked during negotiations simply because the current dollar value is the only information being considered and not the net after tax effect. It is important if you are going to receive some part of your settlement in the form of an RRSP roll over from your spouse, that you tax the potential future tax implications into consideration.

Example if your spouse has $ 10,000 in an RRSP that he or she would like to roll to you as equalization payment for other property; you must adjust for taxes. If your personal marginal tax rate annually is 20% this RRSP asset should only be viewed as $ 8,000 after tax. Receiving assets inside an RRSP can be very beneficial to the recipient when handled and valuated properly, but it should not be viewed in the same way as cash or other property.

The involvement of a Financial Advisor or Accountant at this point in the equalization process is very important to ensure there is a thorough understanding of the taxation issues for your unique scenario. The collaborative process involves all of these elements for you, to ensure you understand the implications of the decisions you are making both from an asset valuation and forward taxation point of view.

I would love to hear some of your stories and thoughts regarding this topic and if you are interested in learning more about how I can assist you, please do not hesitate to give me a call at 1-866-949-1027 ext 235 and visit my website at www.sandraramos.ca.

Sandra Ramos, CFP

Senior Executive Consultant

Investors Group Financial Services Inc.

138 Commerce Park Drive

Barrie, Ontario  L4N 8W8


Separation Agreements: The Devil in the Details

There is a saying... "the Devil is in the Details".... meaning details that are overlooked can cause problems later. No doubt this is true when drafting a separation agreement. Attention to detail is essential. 

The top ten big issues that need to be resolved are: 

  1. Where will the children live? 
  2. How much time with the children spend with each person? 
  3. How will holiday time be scheduled with each parent? 
  4. How much child support will be paid? 
  5. Are there any extraordinary extracurricular activities that should be shared costs? 
  6. Is there an obligation to pay spousal support? How much? How long? 
  7. How will the property be divided? 
  8. Is there an equalization owed by one person to the other to equalize the property division? 
  9. Do we need to maintain life insurance to protect the support obligation? 
  10. Should the extended health care insurance coverage continue for everyone? 

Robert Hues of Ohio wrote an excellent blog where he lists some of the many details often missed in separation agreements. Here is Robert's list: 

  1. Garage door openers 
  2. Gate remote controls
  3. Extra keys to car and house
  4. Security codes
  5. Hotel credit card and airline points
  6. Utility and other deposits
  7. Tax and insurance escrows
  8. Car tag credits
  9. Overdrafts on joint checking accounts
  10. Dates to carry through insurance coverages
  11. Attorney’s fees paid with joint funds
  12. Real estate escrow account refunds
  13. Important days not addressed in the Court’s Parenting Time Order
  14. Season ticket rights
  15. Country club membership and club access
  16. Storage unit details
  17. Dividing and copying family photos
  18. Copying documents, pictures and files from the family computer
  19. Providing change of address notification to Bureau of Motor Vehicles, support enforcement agency, credit cards, magazines, post office, etc.
  20. Cell phone account restructuring
  21. Review of auto insurance coverage
  22. Close joint credit cards
  23. Update estate planning documents and review beneficiary information
  24. Stock options
  25. Future health insurance coverage and cost    

We could add to Robert's list indefinitely. Here are some more details to consider: 

  1. How and when will new partners be introduced to the children? 
  2. How will we celebrate the children's birthdays? 
  3. Will spousal support continue to be paid if the recipient gets married or lives with someone? 
  4. How will we share the costs of post secondary education?
  5. Who will hold the passport and health insurance cards of the children? 
  6. What happens if one spouse wants to move far away and we have children? 
  7. Can both parents attend the sports events of the children and parent/teacher interviews together? 
  8. How will we divide the books and CD's?
  9. How do we divide heirlooms from one side but given to us during our marriage? 
  10. Will the children be able to transport their items between homes? 
  11. Who pays for recreational ports equipment used in both homes? 
  12. Who gets the car seat and children's furniture and children's toys etc.? 

The list of details is endless. Although it is great idea to deal with as many details as possible so as to minimize future conflict, some issues will come up that you did not discuss. Perhaps the best we can do is develop some principles for behaviour and resolving conflict. Here are some ideas: 

When issues arise, we will do the following: 

  1. We will treat each other the way we would like to be treated... even if it may not always seem to be reciprocated. 
  2. We will not attribute negative intention to the other person but rather assume the best. 
  3. We will always discuss issues respectfully and politely. 
  4. We will not allow ourselves knee-jerk responses but rather will "sleep on it" before responding. 
  5. We will not engage or expose the children to our disagreements. 
  6. We will negotiate respectfully. No interruptions. No yelling. No name calling. 
  7. We will fully disclose all documents and information during negotiations. 
  8. We will both compromise. 
  9. We will seek to meet the core concerns of both parties. 
  10. We will not take advantage of mistakes by the other party.
  11. We will not sweat the little stuff. 

Paying attention to the details is an essential skill for a family law lawyer because one of our mandates is to minimize future conflict for our clients. Our lawyers will work with you to help create a separation agreement that meets your needs and keeps the devil in his place. 

Divorce and Financial Planning

Sandra Ramos is a financial planner who has helped many clients who are going through a divorce make good financial decisions about their future. Sandra graciously agreed to offer a guest blog with her insights. Here it is. 

Following any marriage breakdown there is a time of emotional healing, but there is also a need for financial healing. During a marriage we have often comingled our assets, income, goals and dreams. And when divorce occurs, it seemingly all unravels right before our eyes, leaving us feeling unsure about our financial future.

It is easy and somewhat naïve to suggest that all you need is a new Financial Plan. The reality is divorce can result in some significant changes financially and this can lead to a tremendous amount of stress for both parties. In extreme cases some individuals will not be able to meet their current obligations, let alone think about saving for the future.

 

The first and best financial decision you can make is to commit to the collaborative process during your separation and divorce negotiations. This process is designed to minimize feelings of animosity and therefore promote cooperation, communication and of course collaboration. From a financial point of view, the result is financial savings of potentially thousands of dollars.

 

The collaborative process is something that I promote in my practice because, I know that it will save my clients money, undue stress and create an environment of cooperation to ensure both parties walk away with what they need to start their new life on their own. This is even more important when there are children involved.

 

When the collaborative process is over and we have a written and signed a separation agreement and all of the details around finances and children have been agreed to, it is time for the next step. This is where the services of a Professional Financial Advisor are needed.

 

The first step for my clients is the budget. Most people dislike budgeting and cringe at the word. However, it is the essential first step in moving forward. We must identify with accuracy what are your regular monthly income and your necessary expenses. The difference between these two numbers will be your discretionary income; it is with this income we can re-plan and re-design your financial future.

 

There are many factors to organize and understand:

 

-
Tax Planning – understanding the changes to your Personal Taxes
-
Retirement Planning - RRSP’S, TFSA’S & Pension Plans
-
Estate Planning - New Will and Powers of Attorney & Life Insurance
-
Education Planning - RESP’S
-
Employer Benefits

 

I have 20 years of experience in the Financial Planning Industry and I have also experienced Divorce personally. I know how overwhelming this period in your life is; however by re-establishing your goals and taking control of your financial situation you will be on the right path toward financial independence.

 

If you are interested in learning more about how I can assist you please do not hesitate to view my website www.sandraramos.ca. Or contact me at 1-866-949-1027 x 235.

Sandra Ramos, CFP

Senior Executive Consultant

Investors Group Financial Services Inc.

138 Commerce Park Drive

Barrie, Ontario

L4N 8W8
















 

Forensic Accounting and Divorce

image of couple pulling rings apartThe role of a Forensic Accountant in a divorce is not well known. Erin Palmer offers great insights into this valuable professional who can help uncover hidden assets or income of a deceptive spouse. Here is Erin's blog: 

All’s Fair in Love and War, Except in Divorce – That’s What Forensic Accountants Are For

You aren’t alone. Many couples considering divorce find themselves in a predicament they never expected to be in and begin to look at each other in a new light. Here’s one scenario: One spouse may be shuffling money around and squirreling it away. The other is offered a piteous settlement and is none the wiser, but instinctively feel that the numbers just don’t add up. Here’s a second scenario: One spouse offers the other a blunt settlement with no questions asked, without a way to alter the settlement later on. Both scenarios should be considered cautionary tales. If your intuition is telling you something isn’t adding up, or your divorce lawyer recommends getting a forensic accountant, you should listen. Large corporations aren’t the only ones guilty of moving and hiding assets these days.

Three Things You Should Know About Forensic Accountants

1.       Why You Need a Forensic Accountant

It’s such a simple question to ask, “Why?”, but the answers can vary greatly. An article posted, April 30, 2012, on the Wall Street Journal’s website gave staggering data from several studies…

·         31 percent of U.S. adults who join their earnings and savings with their spouse or significant other admitted they have been deceptive about money at times. – National Endowment for Financial Education

·         58 percent from the same study (mentioned above) admitted they hid cash, as well. – National Endowment for Financial Education

The Wall Street Journal article goes on to report something else of significance – technology is playing a larger role in discovering deceptive financial practices between couples.

·         During a 2010 survey, members of the American Academy of Matrimonial Lawyers were asked if in the past five years had they had seen an increase of information and evidence used that was gathered from social media/social networking websites (think Facebook, LinkedIn, Twitter). Can you believe that 81 percent of the members said yes?

·         Two years later the members were polled again with the same question and the number of lawyers answering yes climbed to 92 percent. That’s an increase of 11 percent in just two years.

2. What Forensic Accountants Look For

Forensic Accountants are highly trained professionals who may also possess a CPA license as a result of passing the Uniform CPA Exam. These financial professionals have received specialized training in locating financial information through research and technology. When a forensic accountant is assisting with a divorce, one of the first things they review are tax returns belonging to both parties. Believe it or not, a forensic accountant can learn a lot from a tax return such as real estate information, investments, partnerships and businesses, trusts and estates, and much more. Once they’ve reviewed this information, the forensic accountant can branch out and continue digging.

Other items forensic accountants look for are things like unreported retirement funds and decreased earnings being reported by the main bread winner. An unreported retirement fund is a deceptive practice. And decreased earnings may not be a red flag to most lay people, but to a trained professional this could lead to much more. They will look to see when the earnings first started to decrease and study as to whether they can put a tangible reason to the decrease or if it looks like money is being funneled in another direction.

Another task a forensic accountant may perform requires the use of specialized computer programs that can sift through all the data that is currently living on a hard drive or had once been there. Yes, even if data has been deleted from a drive, the information remains deep within the heart of the hard drive and these professionals have the ability to try and retrieve it.

The work of a forensic accountant isn’t always structured around finding a deceptive spouse. They also help lawyers create financial statements based upon their review of the couple’s assets. This has proven to be very helpful in creating an accurate financial picture that presiding judges can utilize to make his or her decision on the separation of assets.

3. If You Want It Done Right (Legally), Hire a Professional

When it comes to divorce, emotions can run high. And it’s natural to have your anger and frustration build. However, trying to take matters into your own hands is not advisable. If you have decided to Google or follow your spouse’s trail online and started finding information pertinent to your case, discuss this with your lawyer first.

The Wall Street Journal article “Why Hiding Money From Your Spouse Has Gotten a Lot Harder” mentions the grey area between following your soon-to-be former spouse’s online history versus putting a key logger on their computer. A key logger can be a piece of hardware or software installed on a computer that records the actions of whomever is using it.

If you are considering going rogue and ‘bug’ your spouse’s computer, it is very important that you talk to your lawyer first. More than likely they will advise against it and the information obtained may not be admissible during your legal proceedings. Not to mention, you could end up in legal trouble of your own.

If you are considering divorce and want to allocate your assets properly, or suspect your family’s assets have been mis-handled or-represented by your spouse, a forensic accountant will be your best line of defense next to your attorney. There are various reasons why you would hire this type of legal representation but for those who may not know the benefits to hiring a Forensic accountant or  how to hire the right CPA for your situation, it is highly suggested you research or interview multiple professionals in search for the best fit for your situation.

Erin Palmer writes about CPA exam review and CPA continuing professional education for Bisk Education.

Divorce, Matrimonial Home and Mortgages: Sage Advice And Good Options

image of couple fighting over houseDarren Robinson is a mortgage broker in Barrie. He helps many clients who are going through a divorce refinance their home and get on their feet. He has some interesting and suprising advice. Darren is with Dominion Lending in Barrie. He wrote the following excellent blog: 

How does separation or divorce impact my home & mortgage?

On the unfortunate occasion when a marriage is dissolved, there are a number of financial questions that need to be answered.  The most important is what to do with the matrimonial home?  The two easy answers are; 1) sell it, divide the equity & move on or 2) one party buys out the other party and stays in the home.

While option one might sound like the simplest option, if the couple have kids it is usually better for them to keep some type of consistency in their lives.  Staying in the home will allow them to remain at the same school & keep their neighbourhood friends which can be very comforting.  Also, option one might not be financially possible due to mortgage penalties or a weak real estate market.

In order for option two to work the spouse will have to ensure that they will be able to afford to stay in the house on one salary.  The current lender will need to re-qualify the applicant on their own before they will allow the ex-spouse to be removed from title and released from the mortgage (it is extremely important that both these steps are taken because it is possible for someone to be removed from title but still remain responsible for the payments if the mortgage is in arrears).  This transaction normally doesn’t involve any lender penalties but a real estate lawyer’s service will be needed to transfer the title.

If, as part of the separation agreement, the spouse remaining in the home is required to make a lump-sum payment to the other, they may need to refinance their mortgage to enable equity to be taken out of the property.  This may or may not involve lender penalties (check your lender’s policies).  In many cases the lender will allow you to leave your current mortgage intact but add refinance funds to the original balance in a transaction called a blend & extend, avoiding any penalties.  There are lending rules in place in Canada that will only allow a home owner to refinance their mortgage to 85% of the home’s value.  This can be very limiting to couples who have less than 15% equity in their home, so CMHC (Canadian Mortgage & Housing Corporation) will allow, on a case-by-case basis, the transaction to go through as a purchase to 95% of the home’s value.  This can then free up most of the capital the couple has accumulated in the house for a more simple division of assets.

If the spouse staying in the house does not qualify for a new mortgage on their own there is the possibility to add a co-signer/co-borrower to the mortgage.  This applicant is normally a parent or sibling who has good credit/income and is willing to take over payments on the home if the loan goes into default.  An alternative option is to leave the ex-spouse on title but I highly recommend against this because no matter how amicable your relationship is now you never know how your relationship will evolve in the future.

Keep in mind that most lenders require a finalized separation agreement be in place before they will consider a new approval.  They will need complete visibility/disclosure of any alimony or child support payments, as they will need to be calculated when qualifying the client for a new mortgage.

When facing separation or divorce it is always best to sit down with a mortgage broker for a free consultation.  They will be able to outline viable options and work through different scenarios throughout the separation process to ensure you’re making the best financial decision available to you.

If you live in the Barrie, Ontario area I’d be happy to set an appointment at my office (62 Commerce Park Drive, Unit N) to discuss your options and detail a plan to move forward.  You can call me at (705) 737-6161, (888) 737-6162 or by email drobinson@domininionlending.ca.  Alternatively you can find more information about mortgage financing at www.darrenrobinson.ca.

New Pension Legislation in Ontario Effective January 1, 2012

image of money being split in halfMatthew Krofchuk has written a excellent blog at Divorce Happens Blog regarding the changes to the pension division legislation in Ontario which came into affect January 1, 2012. Matthew is with Krofchick Valuation so knows his stuff. 

The biggest impact of the new legislation is that you can now divided Ontario pensions at source if you want. So, let's say you have a pension worth $60,000. In the past, you would have to give your spouse $30,000 to equalize the value of this asset if all other assets and debts were equal. Now, you can arrange to have your pension plan transfer to your spouse $30,000 into a locked in savings vehicle (LIRA). 

Here is Matthew's blog... it explains it well.... 

Beginning January 1, 2012 new legislation passed by the Ontario legislature will result in a dramatic change in the way pension assets are divided between divorcing couples in Ontario. According to the Ontario Family Law Act (FLA), the value of married spouses’ pension assets must be included in family property, so the new pension rules could potentially affect a large number of married people in Ontario.

Are you one of them?

Well, for starters, the new rules – formally known as Bill 133 – only apply to spouses where no court order, family arbitration award, or domestic contract that provided for the division of pension assets between the two spouses was made before January 1, 2012. If you’ve entered into any one of these arrangements before the end of 2011, you’ll have to stick it out under the old rules.

The new rules also affect only those pensions covered by the Ontario Pension and Benefits Act, or in other words, provincial pensions. So if you or your spouse is a member of a pension plan that operates at a nationwide level like those available to federal public service employees or banks, for example, the value of the marital pension will be calculated in exactly the same way it was before. Provincial plans, however – like HOOPP, OMERS, and Ontario Teachers’ Pension Plan – will be directly affected by the new rules and there will be a number of changes divorcing spouses with pensions like these should be aware of.

The first major change involves just who’s calculating the value of the pension. Pensions are currently valued by third party actuaries retained either by one (or both) of the divorcing spouses or their lawyers. The new rules, however, no longer give divorcing couples this option. Beginning in 2012 divorcing spouses will have to apply directly to the pension plan administrator to calculate the value of the pension to be divided as net family property. You will need to appeal to them directly by filling out a form from the Financial Services Commission of Ontario’s (FSCO) website and they will likely charge a fee for their services.

The new rules also allow divorcing spouses to transfer the value of the member spouse’s pension in the form of a lump sum payment if they desire; this option was not available under the old rules. Previously, the only way that a spouse could receive their portion of their partner’s pension was either as a percentage of monthly pension benefits, when they became payable, or indirectly through negotiating their settlement (kind of a, “you get the house and I’ll keep my pension” arrangement). It’s important to know that this new lump sum option is just that: an option. Spouses can still elect to go at it the old fashioned way if they desire.

The last big change involves how the value of the pension is calculated. As they relate to pension valuation the new rules don’t contain any provisions that require the spouses to do anything over and above what they already do; you still have to get that pension valued. However, the pension administrators – now the folks in charge of calculating the value of these pensions – will not be applying traditional actuarial practices in valuing them. The new rules mandate that all pension valuations be performed using a prescribed formula that should apply to all pensions.

This last change appears to result from an effort by the province to minimize conflict and lengthy court proceedings. By setting out a simple formula for the administrators there’s very little room for either party to argue or to revisit the calculation at some later date in light of a change in circumstances, both of which were not uncommon under the old rules. The downside to this approach, however, is that not all pensions are created equal (and certainly, not all divorcing couples are either). The new rules don’t make any provisions for the kinds of unique circumstances that could impact the value of pensions – like retirement ages or health issues – but unless the Courts decide that these issues should be taken into account as they arise, we’re probably stuck with them for the time being.

By Matthew Krofchick

Double Dipping. Paying Spousal Support from Pension Income

cakeWhen you divorce, what would you rather have - a valuable pension or a home worth the same? Or does it matter? 

If a pension is worth the same as the equity in the home, the property settlement is easy. One person keeps their pension and the other keeps the house. Technically, this seems like a fair settlement but there may be complications. 

Retirement

Often the pension holder is the bread winner for the family so will be paying spousal support to the other spouse. The challenge is that when they retire, the pension holder will have an income from the pension but the one with the home may not have any income. The pension holder will say "Hey, I shouldn't have to pay you spousal support from my pension... you got the house because it was of equal value to my pension.... if I have to pay spousal support from my pension, that would be double dipping!" 

In the case Boston v. Boston, the Supreme Court of Canada agreed. It said that in most cases it would not be fair that the pension holder would have to pay spousal support to their spouse from that portion of their pension income that has been equalized. They did say that any pension that was acquired post-separation or any other income could be considered for the purposes of determining whether spousal support should be paid. So, if the pension income is $5,000 per month and $4,000 of it was based on the pension acquired at the date of separation (which was equalized), then only $1,000 per month would be considered as the payor's income from which spousal support could be ordered. With an income of merely $1,000 per month, spousal support won't likely be ordered.

There is an assumption in the Boston case that the home owner should be able to generate a stream of income from the home asset when a retirement income is needed. For example, the home could be sold and the money invested into an annuity. As a result, both parties are in a similar situation. 

Exceptions

There are exceptions to this general principle against double dipping. In Meiklejohn v. Meiklejohn, the Ontario Court of Appeal states it may be appropriate to order spousal support be paid from an equalized pension when the recipient is in dire need, has little ability to earn an income and most of his or her assets are tied in their home. 

If you are the pension holder, you will want to include a provision in your separation agreement that specifically prevents double dipping. If you are the home owner, you will want to argue against such a provision and leave open the potential of spousal support from the equalized pension. 

Pension Division 

There is pending legislation in Ontario that will allow a pension to be divided at source. That means that a portion of the pension can be transferred directly to the other spouse. You can do this with some federal pensions already. This new legislation will be welcomed. It will be mean that each can have a portion of the pension and each can have a portion of the equity in the home. It will certainly make for better settlements. I anticipate there will be fewer arguments about double dipping after this legislation is finally passed. 

My mom used to say "You can't have your cake and eat it too!" but she is wrong when it comes to double dipping. There can be exceptions. 

Why Is the Date of Separation Important?

Do you remember the day you separated? How did it happen? Was a note left or an email sent to say it's over? Maybe a text? Maybe it was a screaming match? Maybe it was just a sad mutual realization that your marriage was over?

Regardless of how it happens, the date of separation is a painful memory, whether you are the one leaving or the one being left. 

I remember my "date of separation". It was over seven years ago but the memory of that day remains vivid in my heart and mind today. Each year, when the anniversary of it comes around, I cannot help but think of how dramatically my life changed since the date of my separation. 

From a lawyer's perspective, we need to know the date of separation for three main reasons. This first reason is we use it to determine the equalization of property. Here is an article about the equalization process.  Secondly, you can obtain a divorce one year after your separation. The clock starts ticking from the date of separation. Lastly, if support is owed, it likely will begin from the date of separation. 

You can still be living under the same roof but considered separated so determining the date of separation can sometimes be difficult. 

Property Issues

Some times the date of separation can have a huge impact on the equalization of property. I remember one client who had some shares in a business. If he used one date, he would owe his wife about $10,000 related to the value of his shares. If he used a date three months later, he would have to give her $30,000, because the value of the shares had rapidly increased over that three month period. 

The reverse is sometimes true. You might prefer an earlier date because the value of your spouse's asset was much higher than it is at a future date. This certainly has been the case recently with some businesses and real estate investments that have been dropping in value. 

The value of jointly owned assets is less relevant because any increase in value or decrease in value from the date of separation is shared. 

Divorce

Although it is possible to get a divorce on the basis of adultery or physical/emotional abuse, the vast majority of people seek a divorce simply on the basis of a one year separation. It is easy and does not involve any blame. 

Support

The date of separation is relevant to support issues too. Support is owed from the date of separation unless there are other payments being made in lieu of direct support payments. 

Here is an article about child support and another one about spousal support

Determining the Date of Separation

If there is some ambiguity about the true "date of separation", the law says you should look at the circumstances of the parties. For example, when did one of the parties communicate their intention to end the marriage to the other; when did the parties start to hold themselves out to family and friends as being separated; when were finances separated; when did sexual relations stop; when were chores were no longer shared; when did the parties physically separate (two beds or two homes); when did the parties stop doing social activities together such as eating meals together or attending events together. This is not an exhaustive list but gives you an idea of the factors taken into consideration.  You don't have to have all of these factors to say there has been a separation. It just depends. 

If you are not sure which date to use, consider whether it will impact the bottom line. Maybe compromising on the date is better than fighting over it if the impact is fairly small. 

Regardless of what date is called the Date of Separation for the property and support issues, no doubt there will be a day you will always remember as the day you knew your marriage was truly over. Perhaps that is the "emotional date of separation". That date is important because it marks the beginning of the healing process. It is the first day of the rest of your new life. 

Division and Equalization of Property in Barrie Ontario

Property Division in OntarioThe division of property after separation raises many questions: How is it divided? Do we have to sell the house? Do I have to share my pension? What about my inheritance? 

The uncertainty leads to many sleepless nights. Everyone fears they will end up with nothing. The classic country song by Jerry Reid comes to mind for many: "She Got the Gold Mine, I Got the Shaft".(Women may insert "He" instead of "She" in the title and lyrics. The fear is the same for both genders.)

In Ontario, some of the uncertainty is eliminated by the Family Law Act which describes a formula so both you and your spouse end up with about the same net property. It looks like this:

+ 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.

The resulting number is called your Net Family Property (NFP). Your spouse does the same calculation.

÷ 2  If your NFP number is higher than your spouse’s NFP number, you owe half the difference so as to make the NFP's equal.

Here is an example:

ASSETS ON DATE OF SEPARATION HUSBAND WIFE
Home (Jointly Owned) worth $240,000 $120,000 $120,000
Cars (Fair Market Value) $20,000 $12,000
Pensions $60,000 NIL
RRSP (deduct 25% for taxes) $10,000 $45,000
Snowmobiles (Fair Market Value) $5,000 NIL
Total A $215,000 $177,000
     
DEBTS ON DATE OF SEPARATION HUSBAND WIFE
Mortgage $80,000 $80,000
Visa $10,000 $7,000
Car Loan $8,000 NIL
Total B $98,000 $87,000
     
GIFTS, INHERITANCES, PERSONAL INJURY CLAIMS HUSBAND WIFE
Snowmobile - Gift From Parents $5000 NIL
Total C    
ASSETS LESS DEBT ON DATE OF MARRIAGE HUSBAND WIFE
Pension $15,000 NIL
RRSP NIL $5,000
Car $3,000 $4,000
Car Loan NIL ($2,000)
Total D $18,000 $7,000

To Summarize:

  HUSBAND WIFE
Total A (Assets) $215,000 $177,000
Minus Total B (Debt) ($98,000) ($87,000)
Minus Total C (Gifts, Etc) ($5,000) NIL
Minus Total D (D of M) ($18,000) ($7,000)
Net Family Property $94,000 $83,000

DIFFERENCE $94,000 - $83,000 = $11,000

EQUALIZATION OWED BY HUSBAND TO WIFE IS $5,500.00!

Once the Husband pays the Wife $5,500.00, each will have $88,500.

The Home: 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 $5,500 plus pay her for her one half interest in the home. This is calculated as $120,000 minus the mortgage of $80,000 equals $40,000. So, the Husband would have to pay the Wife $40,000 plus $5,500 for a total of $45,500. The Husband would then own the house solely and paid out his Wife. Alternatively, the house could be sold and sale proceeds divided or the Wife could buy out the Husband's interest. 

Ownership: You and your spouse keep the assets and debts in your own names. So, all we deal with in Ontario is the value of the various assets and debts. You don't have an ownership interest in your spouse's pension or other assets. Just a potential right to an equalization payment if they have more stuff (a larger NFP number) than you. 

Household Contents: If you want help dividing up the furniture and other items in the home, here is a blog about it. 

Adjustments: You may wish to to adjust the assets or debts so as to equalize the NFP numbers and avoid an equalization payment. So, in this example, the Husband might give his Wife some of his assets or take on some of her debt so there is no equalization payment owed. 

Excluded Property: An inheritance, a gift from a third party or a payment for a personal injury which is received during the marriage is not shared. If it was used to pay joint debts or invested into a jointly owned asset or is spent, it cannot be deducted. 

Equalization of property in Ontario

Debts: I often hear complaints from clients about having to take into consideration debts incurred by their spouse without their consent or knowledge. It is very frustrating. The law says that the reason debts were incurred does not matter except if it was for an illegal purpose. Your debts (meaning the ones in your name) are yours and your spouse’s debts remain your spouse’s debts, and jointly owed debts are shared. But 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.

Whole Picture: Some clients get confused because they want to equalize each asset or each debt one at a time. You have to look at the whole picture, using the formula above, and not look at individual assets or debts.

Unequal Equalizations: 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.

Case Study: If you are interested in reading how a typical case is resolved, read this article. 

Personal Insights: When I went through my own divorce (yes, divorce lawyers can get divorced... just like doctors can get sick), I learned some personal lessons. Here they are.

Perhaps Jerry Reid wasn't living in Ontario when he wrote the lyrics to his famous and hilarious song: 

Well, she got the gold mine!
I got the shaft.
They split it all down the middle,
And then they give her the better half.
Well, I guess it all sounds funny,
Hoo, hoo, hoo, ha-ha-ha-ha-ha!
But it hurts too much to laugh.
She got the gold mine - I got the sha-a-aft.

... or maybe he just retained the wrong law firm!