Divorce and the Division of Property - How to Equalize Assets

In Ontario, when a married couple divorces and assets need to be divided, there is generally an equalization payment that is made from a payor spouse to a payee spouse in order to equalize the increase in the spouses' net family property.

The increase in net family property is essentially the net property (assets less liabilities) each spouse owned at the date of separation, less the net property they owned at the date of marriage.

Example – if John and Mary each had $0 (or very close to $0) in property when they married and then at the date of separation John owned $1,500,000 in net property and Mary owned $500,000 in net property, then John would be required to make $500,000 equalization payment to Mary. After the $500,000 payment they would each have $1,000,000 in net property (equal).

It is important to note that if John owned a specific asset that Mary could not demand to be compensated with that asset on demand (example – if John owned an investment property in his name, Mary could not demand that John sign it over). What Mary would be entitled to receive is an equalization payment that equalizes the value of net family property as at the separation date.

Factoring Taxes into a Divorce Settlement

In Ontario, when a married couple goes through the divorce process there is normally an equalization payment required from one spouse to the other spouse. In the absence of a valid marriage contract that states otherwise, the spouses would be entitled to 50% of the increase in the total net family property value from the date of marriage up to the date of separation.

When contemplating the equalization payment there are some very important tax consequences to consider.

Simple example:

If it is determined that at the separation date Harold had $400,000 in net property and Susan had $200,000 in net property, then Harold would have to pay Susan $100,000 so that they each end up with $300,000 in value.

You'll notice in the example that Harold would have to provide Susan $100,000 in order to equalize the net family property value. To be clear though, if Harold provides $100,000 in cash to Susan that would NOT be the same as providing her with investment real estate that is appraised at $80,000 + $20,000 in cash. Why is that? Because of taxes. More on this later.

What is the property that is normally dealt with in a divorce? Let's examine the table below, which outlines the property that Harold and Susan each own at the separation date. Let's assume that they do not own a home, that they rent.

 

Divorce: How are Personal Guarantees on Business Debt Handled ?

It is a common situation where one spouse owns and operates a privately-held business and the non-owner spouse agrees to guarantee some portion of the business debt.

This blog post will examine how personal guarantees for business debt are dealt with in the context of a divorce.

The use of a simple example can illustrate some of the issues that are at play:

Suppose that a couple is going through a divorce. Assume the husband (Mr. John Smith) owns and operates a business through a privately-held company, of which he is 100% shareholder. Let's pretend this corporation has $100,000 in loans from the bank and that Ms. Nancy Smith has personally guaranteed the full $100,000. Nancy is NOT a shareholder of the company.

The question is, how is the personal guarantee from Nancy dealt with now that the couple are divorcing? Is it a liability for Nancy?

Possibly. It is a contingent liability. In other words, it is a liability that may come to fruition.... but may not.

How is the Child Support Amount Determined in a Divorce?

In the divorce process in Canada, once the spouses have worked out the child access details, living arrangements, and so on there still remains the question of child support payments. More specifically, how is the actual dollar amount determined?

The parent who does not have the primary care responsibility for the child (or children) is usually responsible to pay child support to the parent that does. The amount of child support is determined based on the Federal Child Support Guidelines (“FCSG”), which is statutory.

The FCSG are set up to ensure a level of consistency and fairness when it comes to determining the actual amount of child support that must be paid. The FCSG provide guidance as to the procedures involved in calculating what is known as “guideline income” (i.e. the income amount used to determined child support). It is VERY important to understand that guideline income under the FCSG is not necessarily equal to accounting income or income you report on your tax return. Also, either party can request income disclosure from the other party once every year.