Spousal Support Formulas: The Basics

Determining Factors for Spousal Support Entitlement

The Supreme Court of Canada in Bracklow v. Bracklow identified three bases for spousal support entitlement: contractual, compensatory, and non-compensatory, Contractual support would be support based on any agreement that existed between the parties. Compensatory support is meant to reimburse the spouse for choice’s they made during the marriage that required them to sacrifice professional success in favour of the marriage. Non-compensatory is based on the need of the spouse, determined according to the economic interdependency created during the marriage. The longer the marriage, the greater the amount of interdependency, and the longer that may be required to unravel it.

Formulas

There are generally two different methods used to determine both the amount and duration of spousal support: the with child support formula, and the without child support formula. Regardless of the formula applied, both calculations originate from s. 15.2 of the Divorce Act. The Divorce Act sets out, that in making a spousal support order the Court shall consider the means needs and other circumstances of each spouse including:

(a) the length of time the spouses cohabited;

(b) the functions performed by each spouse during cohabitation; and

(c) any order, agreement or arrangement relating to support of either spouse.

These considerations are further supplemented by s. 33(9) of the Family Law Act which provides a long list of considerations to be made when the court is addressing both amount and duration of spousal support. The Court weighs these issues in light of the objectives of spousal support, which the Divorce Act sets out as follows:

(a) recognize any economic advantages or disadvantages to the spouses arising from the marriage or its breakdown;

(b) apportion between the spouses any financial consequences arising from the care of any child of the marriage over and above any obligation for the support of any child of the marriage;

(c) relieve any economic hardship of the spouses arising from the breakdown of the marriage; and

(d) in so far as practicable, promote the economic self-sufficiency of each spouse within a reasonable period of time.

 

The Spousal Support Advisory Guidelines (“SSAGs”) set out two formulas and the method for determining the amount and duration of spousal support.

While the SSAGs do not need to be strictly adhered to, and contain several exceptions, they have become a valuable tool for the courts in determining duration. In fact, the Ontario Court of Appeal in Fisher v. Fisher held that when Judges deviate from the SSAGs, after being referred to them by counsel, they must provide a reason as to why the SSAGs should not be relied upon.

In the SSAGs, calculations regarding the duration of spousal support rely heavily on the duration of marriage. The amount or ‘quantum’ of support is calculated differently based upon whether child support is being paid.

 

The Without Child Support Formula

The without child support formula proposes two occasions when a spouse is entitled to indefinite support. First, when the marriage has been 20 years or longer in length. Second, indefinite support may be awarded where the marriage has lasted five years or longer if the years of marriage plus the age of the support recipient at the time of separation equals or exceeds 65. This is known as the “rule of 65”. Indefinite support does not mean permanent support; it simply means that there is no set date of termination.

When the situation does not fit one of these two scenarios, the duration is generally within the range of, at minimum, half the length of the marriage and, at a maximum, the entire duration of the marriage.

In regards to amount, it ranges from 1.5 to 2 percent of the difference between the spouses’ gross incomes for each year of marriage, up to a maximum of 50 percent. For marriages of 25 years or longer the maximum percentage that will be granted is between 37.5 and 50 percent.

The With Child Support Formula

The Guidelines establish that any initial orders when a spouse is also receiving child support should be indefinite. The SSAGs simply suggest that the original order not have an end date but allow for it to be established subsequently. To do this, the Guidelines further include a duration with an upper and lower limit. The minimum being the longer of one half the length of marriage or the date the youngest child starts full time school and the maximum being the longer of the length of the marriage or the date the last or youngest child finished high school.

Under the basic calculation of this formula, the amount is based on a spouse’s individual net disposable income (INDI), which for the paying spouse is essentially their income after removing child support and taxes. The recipient’s spouse’s INDI is their income adjusted for child support, taxes, and, government benefits. The spousal support amount is then calculated based on the recipient spouse receiving between 40 and 46 percent of the spouses’ combined INDI.

How these factors are to be assessed in determining the amount and duration of spousal support will always be a matter to be determined by a judge. A properly prepared and experienced lawyer will have the knowledge to explain the situation to a court in a thorough and persuasive manner regardless of the type of spousal support order being sought.

— Daniel Pinsky for abblaw.ca

[The above article is for general informational purposes only and is not legal advice. If you live in the Ottawa area and would like advice about a legal issue please email us or call 613-569-9500 to speak with one of our lawyers or a member of our staff.]

Wills & Estates: Dual Wills

It is becoming increasingly common for lawyers to discuss or recommend to clients to have two wills prepared if the testator has a substantial investment in one or more private companies .

This plan involves having one will to govern the estate assets that require probate and a second will to govern those estate assets that do not require probate. The customary objective is to achieve a significant savings in Estate Administration Tax.

Usually the will that governs the assets requiring probate is called the “Primary Will” and is signed first, and the will that governs the assets that don't require probate is called the “Secondary Will” and is signed immediately afterwards.

Assets that can usually be dealt with without the necessity of a formal grant of probate by the court include things like shares in a privately held corporation, partnership interests, beneficial interests in a trust, unsecured debts, and household goods and personal effects except for those that are specifically dealt with under the primary will.

Sometimes even real property can be transferred without probate. This usually includes lands where the title is still registered under the Registry Act, or on the first dealing with lands being converted from the Registry Act system to the Land Titles system.

If you are dealing with a specific parcel of land in the Secondary Will, you should consider having a fall back provision in the Primary will in case the property ultimately cannot be dealt with without probate.

Dual wills however should not necessarily be used automatically in every case where the testator has shares in a private company. There are a number of important considerations and potential problems in using dual wills.

It is important that they be signed in the proper order and that the revocation clause set out in each will be different and properly worded. Otherwise, one of them might inadvertently revoke the other.

If different estate trustees are appointed there could be some overlap or dispute about their respective responsibilities. You might want to be more specific about the division of responsibilities than you would in a case where you only have one will. For example, which estate trustees are going to be responsible for preparing and filing income tax returns? In the event of a conflict or dispute which trustees would have the ultimate decision-making authority?

If there will be a beneficiary designation in the will(s), for life insurance, RRSP,RRIF, TFSA etc, it is generally better to put these in the Primary will because if they are in the Secondary will and prove ineffective that could taint the Secondary will and could result in having to pay Estate Administration Tax on the whole secondary estate.

If there are different beneficiaries, and especially if there are different residual beneficiaries, you should consider carefully which Estate is to pay which debts and taxes on which properties and assets. This might include income tax on RRSP’s, RRIF’s and capital gains tax on taxable property.

Again if there are different beneficiaries and the possibility that there will not be enough in the estate, or the residue of the estate to satisfy all debts, taxes and legacies, consider setting out specifically who is to bear these charges and which legacies will be reduced in what order or by how much.

Lastly, we recommend that you avoid using a codicil(s) to amend dual wills. There is a risk of an unintended revocation because a codicil effectively republishes the will it refers to as of the date of the codicil. With modern will drafting technology it is generally simple enough and more prudent to prepare complete new dual wills.

Anyone with a substantial investment in a private company or other assets that might not require probate should consider making dual wills and should obtain sound legal advice before doing so.

It is important to understand the advantages of dual wills, but also to be aware of the special pitfalls and problems they can create. They are not necessarily appropriate in every case just because the testator has a private company.

— Craig M. Bater for abblaw.ca

[The above article is for general informational purposes only and is not legal advice. If you live in the Ottawa area and would like advice about a legal issue please email us or call 613-569-9500 to speak with one of our lawyers or a member of our staff.]

Equalization Claim by a Surviving Spouse

The Family Law Act (the Act) makes provision for an equalization claim by a surviving spouse. Section 6(2) of the Act allows a surviving married spouse (i.e. not a common law spouse) to elect between his or her succession rights under a will and his or her equalization claim under the Act.

For example, a husband dies and leaves an estate worth $2,100,000.00. In his will he leaves a bequest of $100,000.00 to his wife and the balance of his estate to his secretary. The surviving wife has a period of 6 months from the date of death to file her election if she wishes to make an equalization claim under the Act. In order to determine what is most beneficial for the surviving spouse she has to make a calculation of the value of her equalization claim. In order to make that calculation the surviving wife has to determine her Net Family Property (NFP) and the NFP of the husband. This requires knowing the values of all assets and debts of the parties at the date of marriage and at “valuation date”.

To continue with our example lets assume that that at the date of marriage they had no property. At “valuation date” the husband had $2,100,000.00 and the wife had $1,000,000.00 in net assets. [Note: In the case of a separation “valuation date” is the date of separation. In the case of an equalization claim following a death “valuation date” is the day before death]. Based on the facts set out above the surviving wife’s equalization claim would be ($2.1M - $1.0M = $1.1M / 2 = $550,000.00). Based on those facts, it would be financially advantageous for the wife to make an election to make an equalization claim (worth $550,000.00) rather than take her bequest under the will.

If the wife made the necessary election within the 6 month time limit, her right to an equalization claim would have priority over bequests in the will and dependents relief claims (other than dependent relief claims by the deceased’s children).

Recent statutory amendments have clarified the credits which are to be made against a surviving spouse’s equalization entitlement. The credits listed are as follows:

a) Benefits payable to the spouse pursuant to a life insurance policy on the life of the deceased spouse;

b) Lump sum benefits payable to the spouse pursuant to pension or similar plan payable as a result of the death of the deceased spouse; and

c) The value of property or a portion of property to which the surviving spouse becomes entitled by right of survivorship on the death of the deceased spouse.

So, in the example above, if the wife was, together with her husband, the joint owner of a home which had equity of $1.1M she would receive a benefit of $550,000.00 by way of survivorship. This “credit” would eliminate her equalization claim. In this circumstance the wife would be advised to take the said survivorship interest and the bequest under the will.

It quickly becomes apparent how complicated these sorts of cases can become. In real cases this complexity is often magnified by the difficulty in getting the necessary financial disclosure to make the necessary calculations in a timely fashion. Anyone considering making an election pursuant to the section 6(2) of the Act should obtain good legal advice and should do so as soon as possible.

- Philip W. Augustine for abblaw.ca

[The above article is for general informational purposes only and is not legal advice. If you live in the Ottawa area and would like advice about a legal issue please email us or call 613-569-9500 to speak with one of our lawyers or a member of our staff.]

To Be or Not To Be (Married)

Introduction

Today, more couples are choosing to live together in a relationship resembling marriage, without the formalities of marriage. There are many different reasons why a couple may choose not to get married; however, just as choosing to get married has legal implications, so does choosing not to get married. One of the most notable legal implications of not getting married relates to the division of property when the relationship breaks down. So, if you make the decision not to get married, do you really know what you are (not) buying into?

Division of Property for Unmarried Couples

Division of property is dealt with in Part I of the Family Law Act. When married couples separate, generally speaking they are entitled to divide their property equally between the two spouses, regardless of who legally owns the property.[1] Under the Family Law Act, “spouses” are entitled to divide their property on the breakdown of the marriage. “Spouse” is defined as either (1) two people who are married to each other, or, (2) two people who entered into a marriage that is either void or voidable, in good faith. It does not include “common law couples” – even couples who have lived together for more than least 3 years, or are living together and are the parents of a child. So, what does that mean exactly? It means that common law couples cannot look to the Family Law Act to make a claim to a share of property that they do not own. Let’s look at an example:

Jack and Jill have been living together for the past 15 years. They are not married. They live in a quaint house owed by Jill that they both spent time furnishing, decorating and renovating. They have two cars. Both vehicles are jointly owned. Jack and Jill each have their own chequing account. They also have a joint savings account in which they both deposit money to save for a vacation. Jill has a fairly substantial pension with the federal government. Jack only has a modest RRSP. Jack was never worried about his retirement because he knew Jill had a large pension that could support them both. They never had any children. Suddenly, Jill tells Jack she is no longer happy and wishes to end the relationship.

Dividing Jack and Jill’s Property

When common law couples break up, lawyers look to the title, or ownership of the property to determine how it will be shared. If the title is held jointly, the parties can share the value of the asset equally. If the title is held by only one person, only that person is legally entitled to the asset, with only limited exceptions.

What Jack and Jill Can Share

Jack and Jill will be able to share in the value of both vehicles, as well as the joint savings account. This is because these assets are held jointly. Both parties are automatically entitled to share in the value of those assets.

What Jack and Jill Can’t Share

Jack and Jill would each keep their own bank accounts. Unfortunately for Jack, the title to the house is in Jill’s name alone. While Jack and Jill have been living in the house together for the last 15 years, and both put time and money into renovating and decorating the house, Jack has no automatic entitlement to half the value of the house. Jack is also not entitled to exclusive possession of the home. If Jack and Jill were married, the treatment of the house would be very different.

Jack would be entitled to keep his RRSP. Jill would keep her pension; quite unfortunately for Jack, as he was hoping to share in Jill’s pension to fund his retirement. Now that Jack and Jill are no longer together, Jack is likely going to have to come up with an alternative retirement plan.

The Exception

While the law for dividing property on the break down of the relationship for common law couples follows the title of the asset, it may be possible to make a claim for an equitable share in an asset that is in the other person’s name. The best means of doing this is to claim a Constructive Trust[2]  based on equitable principles. Be forewarned that such a process is expensive and protracted. And the threshold for establishing a claim is high.

Conclusion

When asking the question: to get married or not, it is important to understand the legal implications of your decision. The best way to do this is to consult with a lawyer to better understand how the law will apply to you. A lawyer can advise you as to what you can do to protect yourself, and your assets, prior to entering into either a marriage, or a common law relationship with your partner. A lawyer can draft a domestic contract that can set out what will happen if the relationship breaks down and can address the equal sharing of assets, whether you marry or do not marry. This will help to save you from ending up as Jack did: a victim of the fact that common law spouses are not included in the division of property provisions of the Ontario Family Law Act.

- Mary Jane Binks Q.C. and Lauren M. Angle for abblaw.ca

[The above article is for general informational purposes only and is not legal advice. If you live in the Ottawa area and would like advice about a legal issue please email us or call 613-569-9500 to speak with one of our lawyers or a member of our staff.]

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[1] There are exceptions when it comes to dividing property between married couples, such as gifts or inheritances received by one spouse during the marriage, among other things. For more information on what can and cannot be equalized on separation, consult with a lawyer.

[2] A constructive trust is an equitable remedy that the court will impose if they believe the person retaining the asset will be unjustly enriched, to the detriment of the other, by being able to keep the entire asset.

Executor's Compensation

What is it?

Executor’s compensation is the money that is paid by an Estate to the trustee(s) or executor(s) who manage the Estate. A trustee or executor is the person appointed in a will to manage the affairs of the deceased's estate. Although those terms refer to different roles they are often used together because the same person(s) is often appointed to take on both roles. Normally, after a person dies, there are bills to pay, there are bank accounts to manage (i.e. close the existing account and open a new account in the name of the Estate), there are taxes to be paid, there may be real estate to manage or sell, there may be disputes to settle etc. When all is resolved, hopefully there will be a balance in the Estate to distribute to the beneficiaries under the will.

Some estates are large in value and some estates are small in value. Some estates are complex and require that the executors do a lot of work. Some estates are simple and don't require that the executors do much work at all. No one is expected to work for free. The question becomes, how much financial compensation should an executor receive for the work they do on behalf of a particular Estate? That is the issue known as "Executor's Compensation.”

How much should be paid to an executor?

       Should the Executor Waive Compensation?

The first point to recognize is that where the executor and the residual beneficiary are the same person there is no financial benefit (and a tax disincentive) for the estate to pay executor’s compensation. In those cases the executor would normally waive any compensation. For instance, a husband may appoint his wife as his primary executor and may also name her as the sole residual beneficiary of his will. In that case there would be no point in paying her compensation for her work as an executor. Effectively, she would be paying herself and she’d have to pay income tax on the money paid to her as executor’s compensation whereas the bequest under the will is not subject to income tax. (See Scenario #1 at the end of this article.)

      Where Executor’s Compensation is Claimed by an Executor

Where the executor claims executors compensation, how is that compensation quantified? It may be that the residual beneficiary and the executor come to an agreement as to a fair and reasonable allowance to be paid for executor’s compensation. If the parties are unable to agree upon an amount, then the executor is entitled to pass his/her accounts and in the process of passing accounts to claim executors compensation. It is then up to the beneficiaries (or some of them) to object to the passing of accounts. In Ontario a single judge of the Superior Court of Justice has jurisdiction to quantify executor’s compensation. Set out below is a summary of the legal guidelines and principles applied by the Court in fixing executors compensation.

Statutory Authority

In Ontario the statutory authority enabling the Court to permit a fair and reasonable allowance upon a passing of accounts for the effort expended in the administration of the estate is found in section 61 of the Trustee Act, which says that;

“A trustee, guardian or personal representative is entitled to such fair and reasonable allowance for the  care, pains and trouble, and the time expended in and about the estate, as may be allowed by a judge of the Superior Court of Justice.”

The courts have developed guidelines for quantifying what is “fair and reasonable” compensation. The usual starting point is an amount equal to 5% of the estate or:

2.5% on capital receipts;

2.5% on capital disbursements;

2.5% on revenue receipts; and

2.5% on revenue disbursements.

In addition, the courts will often allow a management fee of 2/5 to 3/5 of 1% of the average annual value of the gross assets under administration.

It is also possible for the executor to request a special (i.e. additional) fee where additional compensation is required to fairly compensate the executor for the work and responsibility taken on by him/her.

The case law interpreting section 61 of the Trustee Act has developed 5 factors which are to be considered in reference to executor’s compensation on a passing of accounts:

a. The magnitude of the trust;

b. The care and responsibility involved;

c. The time occupied in performing the duties;

d. The skill and ability displayed; and

e. The success which has attended its administration.

Toronto General Trusts Corp. v. Central Ontario Railway Co. (1905), 6 O.W.R. 350;1905 CarswellOnt 449 (Ont. H.C.)

The law concerning executor's compensation is set out in Jeffery Estate (Re) (1990), 39 E.T.R. 173, 1990 CarswellOnt 503 (Ont. Surr. Ct.) at paras. 13 & 16 in the following terms:

  

“… In Ontario, at least, a practice has developed of awarding compensation on the basis of 2 ½ per cent against the four categories of capital receipts, capital disbursements, revenue receipts and revenue disbursements along with, in appropriate cases, a management fee of 2/5 of 1 per cent per annum on the gross value of the estate…. Beyond this, of course, the cautionary words of the Re Atkinson case, emphasize that the use of percentages must not become a ritual.

…

To me, the case law and common sense dictate that the audit judge should first test the compensation claims using the “percentages” approach and then, as it were, cross check or confirm the mathematical result against the five factors approach set out in Re Toronto General and Central Ontario Railway ….The process is not scientific but it is not intended to be: in the estate context, it is a search for an award which reflects fairness to the executor; in a real sense, the search is for an appropriate quantum meruit award in a unique setting.”

In the case of Laing Estate v. Hines (1998), 167 D.L.R. (4TH) 150 O.C.A; 1998 CarswellOnt 4037 (Ont. C.A.) the Ontario Court of Appeal confirmed the law as expressed in Jeffrey Estate. At ¶ 9 of the Laing case the court stated:

“A court on a passing of accounts is obliged to first test the compensation claimed by applying the percentages and then cross checking the result in reference to the five factors with a view to achieving a fair and reasonable result.”

Conclusion

The ultimate question that the court must answer is what amount is “fair and reasonable” for the work performed and the responsibilities undertaken by the executor. The answer to that question is arrived at by:

1. Applying the percentages (i.e. 5% of the value of the estate);

2. Cross checking the result of the percentage approach in reference to the five factors

3. Using a broad brush approach rather than a fine calculation approach in considering the result.

Note:

Executor compensation issues can be very complex. Should such issues arise it is recommended that a lawyer be consulted to deal with the factual and legal circumstances of a particular case.

 

Scenario #1

The testator dies leaving an estate with a value of $1.0M. The testator appoints his wife as executor and she is the sole residual beneficiary of the estate.

If the wife did not take any executor's compensation she would receive $1.0M as residuary beneficiary.

If the wife took the normal executor’s compensation of 5% of the value of the estate as executor's compensation she would receive $50K as executor’s compensation and the balance of the estate ($950K) as residuary beneficiary. Note however that executor's compensation is taxable income (as wages) and therefore the wife would have to pay income tax on the $50K of say $20,000.00. In this case, as a result of claiming executor’s compensation, the wife would receive $980K (after tax) rather than $1.0M.

Logically therefore, where the executor and the sole residual beneficary are the same person, the executor will waive their entitlement to compensation and none will be paid.

Scenario #2

The testator dies leaving an estate with a value of $1.0M. The testator appoints his brother as executor. The testator’s wife is the sole residual beneficiary of the estate.

If the brother did not take any executor's compensation the wife would receive $1.0M as the residuary beneficiary.

If the brother asked for and the wife agreed to executor’s compensation of 5% of the value of the estate as executor's compensation the brother would receive $50K as executor’s compensation and the balance of the estate ($950K) would be paid to the wife as residuary beneficiary. The brother would have to pay tax on the executor’s compensation he received.

Scenario #3

The testator dies leaving an estate with a value of $1.0M. The testator appoints his brother as executor. The testator’s wife is the sole residual beneficiary of the estate.

The testator’s brother seeks the normal executor’s compensation of 5% of the value of the estate as executor's compensation. The testator’s wife objects to the brother receiving $50,000.00. The brother passes his accounts and the court applies the percentages and then the 5 factors to determine if the compensation is fair and reasonable. The brother may receive $50,000.00 or he may receive less depending upon the view of the Court as to what is “a fair and reasonable allowance”.

Scenario #4

The testator dies leaving an estate with a value of $100K. The testator appoints his brother as executor. The testator’s wife is the sole residual beneficiary of the estate.

The testator’s brother seeks the normal executor’s compensation of 5% of the value of the estate as executor's compensation plus a special fee due to the large amount of work involved in this particular estate. In this case the amount payable by applying the percentage approach is only $5,000.00. The testator’s wife objects to the brother receiving more than $5,000.00. The brother passes his accounts and the court applies the percentages and then the 5 factors to determine if the compensation is fair and reasonable. In this case it may be that matrix of quantum of the estate and quantum of work required of the executor justifies an additional payment. Again, it depends upon the view of the Court as to what is “a fair and reasonable allowance”.

-- Philip W. Augustine for abblaw.ca

[The above article is for general informational purposes only and is not legal advice. If you live in the Ottawa area and would like advice about a legal issue please email us or call 613-569-9500 to speak with one of our lawyers or a member of our staff.]

Wills and Estates 101 Mini-Series Part IV: Did He Die or Did He Separate?

In Ontario there is a family property regime set out in the Family Law Act (FLA) which provides for the equal sharing of property accumulated by married parties during their marriage. Note, this provision does not apply to common-law spouses. What happens if, after the death of one married spouse, it is discovered that the deceased spouse has given all of his or her wealth to someone other than his or her surviving spouse?

Suppose Harold was married to Wendy for 42 years. After his death his last will and testament left most of his estate to his “close friend” Susan. Harold left Wendy $50,000.00. Wendy feels betrayed (especially if her will left everything to Harold). What can Wendy do?

In Ontario the FLA permits the surviving married spouse of the deceased to elect to take either under the will or to make a claim against the estate for an equalization of net family property (NFP) pursuant to Part I of the FLA.

Assuming Harold had a NFP greater than Wendy, Wendy may wish to elect to make a claim for a monetary payment equal to one-half the difference her NFP and Harold’s NFP. For a more thorough discussion of NFP equalization, please click here to read a post by Philip W. Augustine.

When spouses separate, the valuation date is typically the date of separation. This means that the assets and liabilities of each spouse would be calculated based on their value at the date of separation. But, where one of the spouses has died, the FLA deems the valuation date to be the day before the date of death.

The surviving spouse has six months from the date of death to elect to take an equalization payment pursuant to the FLA rather than taking pursuant to the will of the deceased.

An example will illustrate how this election works.

At the date of his death Harold had Net Family Property of $600,000.00

At the date of Harold’s death Wendy had Net Family Property of $300,000.00.

Pursuant to the FLA Wendy is entitled to $150,000.00 calculated as follows: $600,000.00 - $300,000.00= $300,000.00

$300,000.00 /2 = $150,000.00

Pursuant to the will Wendy is entitled to $50,000.00 (see facts above)

Unless Jim’s will had expressly provided that Sally could both make the election under the FLA and take under the will, Sally would be forced to choose only one of the two options.

If forced to choose, it is obviously more beneficial for Wendy to take pursuant to the FLA ($150,000.00) than pursuant to the Will ($50,000.00). Wendy would be well advised to make an election to take pursuant to FLA. Wendy has 6 months to make that election, failing which she shall be deemed to take pursuant to the will.

Should a surviving married spouse feel that he or she has not received a proper division of property upon the death of their spouse they should promptly seek out legal advice so they are in a position to make the necessary election should it be in their interests to do so.

     – Michael D. Heikkinen and Philip W. Augustine for abblaw.ca

[The above article is for general informational purposes only and is not legal advice. If you live in the Ottawa area and would like advice about making an FLA election or would like Augustine Bater Binks to prepare your will, please email us at info@abblaw.ca or call 613-569-9500 to speak to one of our lawyers or a member of our staff.]

Matrimonial Home a Trap for the Unwary: Issue #1

The “matrimonial home” is given special treatment in the Family Law Act and that special treatment can involve huge unfairness to one of the parties to a marriage following marriage breakdown. One way in which this unfairness can arise involves a provision in the Family Law Act (paragraph 4(1)(b)) which defines “net family property” –a fundamental legal concept which is used to equalize property upon the breakdown of a marriage.

When equalizing property accumulated by the parties during the marriage, the parties are each allowed to deduct from the value of their property at date of separation the value of the property which each of them brought into the marriage. However, (and this is where the unfairness comes in) a party is not allowed to deduct the value of the “matrimonial home” if a party owned it at the time of the marriage.

The easiest way to illustrate this issue is by a series of examples.

Example Number 1

Harold has $400,000.00 in cash when he gets married. Wendy has $0.00 at the date of marriage. The parties are married for 10 years and then separate. At the end of the marriage Harold has a net worth of $1,100,000.00 and Wendy has a net worth of $600,000.00. In this case Harold would be entitled to deduct the $400,000.00 he had at the date of marriage. That would reduce his net family property to $700,000.00. Harold would then pay Wendy ($700,000.00 - $600,000.00 = $100,000.00 / 2 = $50,000.00. Harold would then have ($1,100,000.00 - $50,000.00 =) $1,050,000.00 and Wendy would have ($600,000.00 + $50,000.00 =) $650,000.00. In other words, Harold would end the marriage with $400,000.00 more than Wendy and Harold and Wendy would both have shared equally in the wealth accumulated during the marriage. The parties would be in exactly the same relative property position property at the end of the marriage as when they started the marriage (i.e. Harold would have $400,000.00 more than Wendy). That is considered fair by most people.

Example Number 2

Now consider the same facts as in Example number 1, except, the day before getting married Harold purchased 123 Elm Street so that the happy couple would have a nice home to which to return after their honeymoon. The parties live in the home for 10 years and Harold still owns the same home at the date of separation. In this case Harold is not entitled to deduct the value of the home from his Net Family Property. The math in this example would be as follows:

     Harold $1,100,000.00 - $0.00 = $1,100,000.00

     Wendy $600,000.00 - $0.00 = $ 600,000.00

     Harold pays Wendy ($1,100,000.00 - $600,000.00 =)

     $500,000.00 / 2 = $250,000.00

     Wendy and Harold both end up with $850,000.00.

In example number 2 Harold lost half of the $400,000.00 which he brought into the marriage because he purchased a home prior to the wedding day and owned that home at the date of separation. Had Harold waited until after the wedding to purchase the home and brought cash into the marriage he would have been entitled to keep all of the $400,000.00 following marriage breakdown. Most people consider this result to be unfair.

As couples marry later in life or marry for a second time it is increasingly likely that one party to the marriage will bring a home into the marriage in which the parties will reside until the breakdown of the marriage. The treatment of the matrimonial home on separation has many traps for the unwary. More to follow.

— Philip W. Augustine for abblaw.ca