In my previous post, I touched on the issue of changing support obligations in light of the pandemic.
More and more, separating spouses are wondering how property issues will be dealt with in light of the pandemic, particularly as assets are dropping in value after separation. In Ontario, we follow an "equalization" regime under the Family Law Act. Broadly put, this means that spouses share in the increase of their net worth for the duration of their marriage. Generally, the spouse who had the greater increase of net worth during the marriage would pay the other spouse one half of the difference. For example, if Husband's net worth grew by $100,000 during the marriage, while Wife's net worth grew by $50,000, then Husband would owe Wife and equalization payment of $25,000 (which is half the difference between $100,000 and $50,000).
Equalization is explained more fully here. For now, it is important to understand that two dates become very important: the date of marriage, and the date of separation. Both spouses' net worth as of these dates become crystallized, which determines the figures used to calculate the equalization payment owing. Generally, fluctuations in the value of assets following separation are not considered, which could lead to unfair results.
- Husband is an employee at a publicly-traded company but receives company shares as part of his compensation package. At the date of separation (pre-pandemic), he solely-owned shares worth $1,000,000. Following the pandemic, the value of the shares dropped by 10%, which may continue to plummet. This provides for a $100,000 reduction of the husband's net worth post-separation. However, following a true "equalization" would provide that any decrease in value post-separation is not shared between the parties. As such, Husband would be accountable for the entirety of his equalization payment, while still absorbing the decrease of his net worth post-separation.
- Wife solely owns a retail store in downtown Toronto. At the date of separation (pre-pandemic), it was worth $500,000. In light of the pandemic, she is unable to pay her overhead costs and must close her doors. As a result, she is stuck with a business that she will struggle to sell. Again, a true equalization regime would have no regard for any post-separation fluctuations in value, leaving Wife accountable for an equalization payment that would otherwise be owed to her Husband.
In either scenario above, the spouse owning the assets could look to section 5(6) of Ontario's Family Law Act to request an "unequal division of net family properties" to avoid absorbing the entirety of the loss. Even then, the test under section 5(6) is stringent. The moving party would need to demonstrate that following a true equalization regime would "shock the conscience of the court".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.