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What are the rules for property rights for married spouses?

In Ontario, marriages are deemed to be a form of partnership. All marriages end, whether by separation or death. At their end, under Ontario law, the spouses have a right to share in the wealth generated during the marriage. This is accomplished by equalization under the Family Law Act. If the couple separate, either one may seek equalization. At death, the surviving spouse has the right to choose either to take under their spouse’s will or to elect equalization.

Property Rights for Married SpousesEqualization is a sharing of wealth, or the growth in value of assets, but not the assets themselves. Nothing changes ownership nor do spouses acquire an ownership interest in each other’s assets simply by virtue of the marriage. The first step in the equalization process is to determine what each spouse owned and what liabilities each spouse had at the date of marriage and at the date of separation. The date of separation is called the “valuation date” and it is the date at which the couple began living separate and apart with no chance of reconciliation. A couple may be living separate and apart in the same house, the key question is whether at least one of them has decided that the marriage is at an end and there is no chance of rescuing it.

Once the parties have identified each of their assets and liabilities at the two relevant dates, they need to establish a value for each asset and liability. That may be relatively straightforward for some items, such as bank accounts or credit card debts. For other assets such as closely held corporate interests, trust interests, share options or warrants, the determination of value may be quite complex and likely will require the assistance of a certified business valuator or accountant. Pension interests are valued based on a method set by provincial regulations and, since January 1, 2012, the valuations are to be prepared by the pension plan administrator for Ontario regulated plans. For pension plans regulated federally, in other provinces, or internationally, the member spouse will need to retain a private actuary to calculate the value in accordance with the provincial regulations. In each case the spouse who owns the asset is responsible to provide proof of ownership and value.

Spouses are permitted to exclude the value of certain assets from sharing in the equalization process. These include assets received by gift or inheritance during the marriage, assets excluded expressly by marriage contract, the proceeds of life insurance and damages awards for personal injuries claims and the income from gifted or inherited property received during the marriage as long as the donor or testator expressly stated it should be excluded. The value of assets into which these excluded assets are traced can also be excluded unless the asset has been used to acquire the matrimonial home. Spouses are only permitted to exclude assets that survive at the date of separation and are traceable. That means, for example, if a spouse receives an inheritance during the marriage and uses it to pay down the mortgage on the matrimonial home or mingles the inheritance in a joint account with his or her spouse, the exclusion is lost.

If a gifted or inherited asset is received by a spouse before marriage there is no right to exclude it. All the spouse can do is claim a deduction for its value as of the date of marriage, unless of course the gifted or inherited asset was invested in the matrimonial home. For example, if a spouse receives $100,000 as a gift the day before marriage and invests it in the stock market and by the date of separation that investment has increased in value to $200,000, the spouse must share the value of the $100,000 increase with his or her spouse. If the spouse receives $100,000 as a gift the day after the marriage and invests it in the stock market and by the date of separation that investment has increased in value to $200,000 the spouse can exclude the value of the entire investment and need not share any of it with his or her spouse.

Any property used by the spouses at the date of separation as a family home is a “matrimonial home” under the Family Law Act. It is possible for spouses to have any number of matrimonial homes including a primary residence, a cottage, a ski chalet, and so on. If a property is a matrimonial home then not only is it impossible to claim an exclusion for any inherited or gifted asset invested in that home but if the same property was owned at the date of marriage then the owner may not claim a deduction for having brought the value of the property into the marriage. As an example, if a spouse owns a home worth $500,000 on the date of marriage and the parties continue to occupy the same property at the date of separation then he or she cannot claim a deduction for having brought $500,000 into the marriage. If the spouse owned the $500,000 home at the date of marriage but the parties moved to a new home during the marriage, then the spouse is permitted to take a $500,000 date of marriage deduction in the equalization calculation.

These quirks in the treatment of exclusions, deductions and the matrimonial home can lead to great unfairness. Many spouses choose to enter into marriage contracts to mitigate such unfair results. Absent a marriage contract, however, there is little recourse.

The equalization calculation is a simple formula. Each spouse has a net family property. The net family property is the difference between the value of assets less liabilities and exclusions held at the date of separation and the value of assets less liabilities at the date of marriage (not counting any matrimonial home held at the date of marriage). A spouse’s net worth may have declined during the marriage. This decline is only shared to a limited extent as no spouse can claim a negative net family property. The net family property in that case is deemed to be zero. The equalization payment is half the difference between the spouses’ respective net family properties. The equalization payment is a simple debt owing at the time of separation. The only exception is with respect to an interest in a pension plan. In restricted circumstances a spouse may seek to have part or all of the equalization payment related to a pension interest satisfied by a transfer of funds from the pension plan to a locked in retirement vehicle for the other spouse or, if the spouse is already retired, to a division in pay of the pension.

A spouse has the right to ask that a court order a reduced equalization on the basis that the payment is unconscionable. That is a very high standard to reach. Few cases meet that standard. It is most often relied on only in the case of short term relationships where the combined marriage and any pre marriage cohabitation equal less than five years.

Equalization is a highly technical regime. In all but the simplest of cases spouses do need the assistance of legal and accounting advice.

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