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Calculating family and equalization payments

The division of property between spouses under the Family Law Act is complex. Individuals dealing with the division of property following a separation should receive legal advice. The following six steps will provide a basic understanding of how property issues are dealt with. The steps will require certain calculations be made as of certain times. Note the distinction between the date of separation and the date of marriage.

1.   Listing and valuing property since separation date

Each spouse needs to make a separate list of all of his or her assets and determine the value of each of them. Assets may include personal property, vehicles, art, real estate, bank accounts, shares and other investments, pensions, Registered Retirement Savings Plans, and Tax Free Savings Accounts. The value of the listed assets must be determined as of the date of separation. The date of separation is usually the date on which the spouses stopped living together.

The value of most assets can be determined by obtaining their fair market value as of the date of separation. Determining the value of some assets is more complex. For example, it may be necessary to obtain advice from an accountant in order to determine the value of pensions, shares in private corporations, or businesses. The value of property owned jointly by the separating spouses should be split equally between them.

There is some property that is not taken into consideration. Two examples of exempted property are: money or assets received during marriage as an inheritance or gift from someone other than your spouse; and money received under a life insurance policy or as damages for personal injuries. There are several limits that apply to these and other exemptions. For example, the exemption that applies to some money is lost if that money is used to purchase or pay down the mortgage on a family home. Given the complexity of the exemptions, you should seek legal advice about how they apply. (This issue will arise again at Step 5, below.)

2.  Subtract your total debt as of the separation date

Each spouse needs to separately determine his or her total debt as of the date of separation. Spouses may hold certain debts together, such as credit cards or a mortgage. Debts held jointly by the separating spouses should be split equally between them. After arriving at your total debt as of the date of separation, subtract that figure from the total value of property owned on the date of separation. The resulting figure may be positive or negative. That figure represents the total value of your property since the day of the spouses’ separation.

3.  Calculate the value of your property less debts since the date of marriage

Each spouse needs to separately list everything that he or she owned on the date of marriage. Each spouse also needs to list every debt that he or she owed on the date of marriage.  When determining the value of those assets or debts in this step, it is the value as of the date of marriage that must be recorded, not the current value. Once these two figures have been calculated as of the date of marriage, subtract the value of the debts from the value of the assets as of the date of marriage. Again, this resulting figure may be positive or negative. That figure represents the marriage date value of your property.

4.  Subtract the figure determined at Step 3 from the figure determined at Step 2

The purpose of this step is to determine the value of the change in your position between the date of marriage and the date of separation. That is determined by subtracting the figure reached at Step 3 (whether a positive or negative number) from the figure reached at Step 2 (whether a positive or negative number). That resulting number represents the spouse’s “net family property”, also referred to as the NFP. The NFP calculated in this step cannot be less than zero. If you obtained a negative number at this step, then your NFP is zero.

5.  Subtract compensation for personal injury, inheritances, and proceeds of life insurance

As noted at Step 2, some types of property are not taken into account in determining a spouse’s NFP. You may deduct inheritances or gifts received from people other than your spouse while you were married. You may deduct money you received from court as compensation for personal injury. You may deduct proceeds from life insurance policies. There are other items you may be able to deduct. However, there are several exceptions and limits to the possible deductions. You should consult a lawyer for advice about how they may apply to you.

6.  Deduct the lower net family property from the higher net family property, and divide by two

By the end of the fifth step, each separating spouse will have calculated an individual net family property or NFP. The court will compare the two NFPs. The spouse with the higher NFP will be required to pay the spouse with the lower NFP one-half of the difference between the two NFPs. This is the process of equalizing the spouses’ net family properties. For example, if the wife’s NFP at the end of Step 5 is $20,000, and the husband’s NFP at the end of Step 5 is $30,000, then the difference is $10,000. In this example, the husband would be required to pay the wife one-half of that difference, i.e. $5,000.

Equalization payments

The payment that one spouse may be required to make to another in Step 6 is called an equalization payment. The objective of requiring an equalization payment from one spouse to another is to place the spouses in an equal position following separation.

There are several issues that a court may need to determine when attempting to determine the value and ownership of assets. There are also circumstances when a court may exercise discretion to divide property unequally between spouses, including but not limited to separation after a short marriage.

Given the complexity and financial implications of the issues, separating spouses should individually seek legal and financial advice.

Read more:

Property Division in a Divorce in Canada

Equalization - Community Legal Education Ontario