Sharing Family Property on Separation
On separation, the value of property owned by each of the parties to a marriage or common-law partnership (after three years of cohabitation or registration with Vital Statistics), less the value of their debts, are shared between the parties by an equalization process. Assets and debts that are owned jointly are treated somewhat differently.
While each province has a property regime on separation, each is different from the others, some in major ways. Do not rely on the cases from other jurisdictions without careful analysis.
In Manitoba, while jointly owned assets are typically governed by The Law of Property Act (LPA), all other assets and debts in the name or possession of each individual partner are dealt with by the provisions of The Family Property Act (FPA).
For those common-law relationships which don’t last the three years, relief may still be found in the case law of trusts or unjust enrichment.
Contrary to common understanding, the FPA does not provide for the actual division of things or the equal sharing of things. It has no effect on ownership, before or after separation.
The FPA provides for a regime of "deferred sharing", that is, each spouse will account for the shareable values of their assets and liabilities as of the date of separation. The spouse or partner with the greater net worth (assets less liabilities) will then be required to equalize the difference in net values. This amount is called an “equalization payment”.
Assume the first party has $100,000 in shareable assets and $20,000 in shareable debts, or $80,000 in net property, and that the other has $50,000 in assets and $5,000 in debt, or $45,000 in net property.
The difference in their net property would be ($80,000 - $45,000 =) $35,000. To equalize, half of the difference, or $17,500 would be paid by the first party to the second, which would leave each with $62,500 in net assets.
To equalize, half of the difference, or $17,500 would be paid by the first party to the second, which would leave each with $62,500 in net assets.
Common Law of Trusts or Unjust Enrichment
Where the provisions of the FPA or The Law of Property Act do not necessarily apply, a remedy may still be available through the operation of the law of trusts or Unjust Enrichment. This area of the law is complex and rarely used. See the Supreme Court of Canada case of Kerr v. Baranow for an excellent review and summary of the current law.
An example of the kind of situation in which resort must be had to these concepts might be where a common-law couple has lived together for less than the required three years before separation, yet property has been acquired that ought to be shared.
The general principles of trust can be invoked where a promise has been made, or money advanced, or “sweat equity” poured in on the understanding, for examples, that the property will be held in the name of one party when in fact the parties have agreed that the other one is the real, or beneficial owner, of the property.
Unjust enrichment arises where without a particular legal reason one party has been enriched and the other deprived by the facts of ownership, such as where the non-titled party has contributed money or monies’ worth to the acquisition of the asset, perhaps on the understanding or expectation of a future reward or sharing of the asset.
Fair Market Value
The accounting of Family Property on separation deals with the value of the assets and debts as of the date of separation. This date can be agreed by the parties or set by the court.
Value is "fair market value" of the asset or debt in question as of the date of separation. Thus, the value of the car or household furniture, for examples, is not what you paid for it or what it would cost you to replace it now, but, more probably, the "used", "auction" or "yard sale" value that it would have fetched on that date.
The definition of value presumes a willing seller and a willing buyer, neither being compelled to act, and neither having any special knowledge or market.
Some assets have no ready market and their valuation can be difficult to ascertain, requiring expert evidence. The value of a business, commercial goodwill or professional practice is often vexing to ascertain without the assistance of forensic accountants or qualified valuators. Sometimes the fair market value might be discounted, for example, for disposition costs or tax implications.
Debts and Liabilities
While debts and liabilities are taken into account in determining each party’s net property for the accounting, where the total value of a party’s debts exceeds the total value of his or her assets, it takes a special application to the court to attempt to force the other party to share that excess.
This is sometimes called a “negative accounting”. One example of a situation in which a court might allow a negative accounting is where the debts were unknown to the other party or were accrued by gambling or criminal behaviour.
Assets Exempt from Sharing
Some assets may be exempt from the accounting.
Conversion of Assets
Assets which may be exempt because they were acquired as gifts or inheritance, or because they were acquired prior to the relationship, might still be subject to sharing. When such an asset is sold or otherwise disposed, if the proceeds of disposition are used to acquire a “family asset”, as that term is defined, then the newly acquired asset will be shareable.
This can be a trap for the unwary. For example, a party who owned a house before the relationship may decide to sell it during the relationship. If a new family home is purchased with the proceeds of sale, that new home will be sharable and there will be no credit for the prior-acquired asset. If the owner of the prior-acquired home had used the proceeds to purchase an investment property that investment would remain exempt. In the same way, an inheritance, which might otherwise be exempt from sharing, will be lost if used to buy a family car or is used to pay off the mortgage, for examples, then those amounts will be subjected to sharing.
Pensions, RRSPs and Canada Pension Plan
Pensions are a complicated subject and need to be approached with care and often expert actuarial advice. Pensions, Registered Retirement Savings Plans (RRSP), and Canada Pension Plan (CPP) credits are all family property.
D = 1/2 x (A / B) x C, where:
A = the number of months of married cohabitation during which pension contributions were made
B = the number of months during which pension contributions were and will be made
C = the gross amount of pension payable to the pensioner
D = the gross amount payable to the non-pensioner spouse
Costs of disposition of pensions, RRSP and other assets with inherent costs of disposition are worthy of special attention. It is difficult to predict the future tax costs to an individual. As noted above, the courts have typically chosen arbitrary discounts of about 33% for RRSP and pensions.
The disposition costs of other assets is more complex. One normally expects to pay real estate commission and legal fees on the sale of a house, or there may be tax costs inherent in the sale of a business or farm, such as recapture of depreciation, or capital gains tax, which should be taken into account. Sometimes these costs are too speculative for the court to accept, but it will do the best it can based on appropriate evidence.
Taxation on Property Transfers
Complex rules govern the transfer of property from one person to another. Under the special circumstances of marital breakdown, capital property can be transferred between spouses, by a rollover, without triggering the usual tax consequences.
This has the effect of transferring the tax consequences to the recipient of the property who is deemed to have acquired that capital property at the same cost base as the transferor had at the time of the transfer. The transferor could elect, however, not to employ the rollover and the disposition would be deemed to be at its fair market value thereby triggering a capital loss or gain, as the case may be.
In order to ensure that future gains are payable by the recipient rather than being attributed back to the transferor of the property, the parties will be required to complete an appropriate election form (s.74.5(3) of the Income Tax Act).
Given the difficulty in valuation and the complexity of the law, professional legal and accounting advice is usually required in these kinds of transactions.
While one of the parties may claim that the other has dissipated assets, the test is very difficult to meet, as the squandering of assets must be seen to be "jeopardizing of the financial security of a household". Where dissipation is found, the court may add back those assets into the accounting and may follow them into the hands of complicit third parties.
While many parties claim that there should be an unequal division of the family property, the court has only a very limited discretion in this area (s. 14 FPA) and has only varied the equality provision in a handful of cases in the last 3 decades, despite the routine claim for that relief in most petitions.
The test for “family assets” is that equality would be “grossly unfair or unconscionable”. Where the assets are “commercial assets”, the court will alter equality only where it is “clearly inequitable”. In each case the court’s exercise of its discretion is subject to a number of considerations.
Reference and Confirmation
The accounting under the FPA is often dealt with in a separate proceeding called a "Reference", a form of trial, which is undertaken before a Master of the court whose report is then referred to a Judge for "confirmation".
The confirmation hearing is generally a form of appeal, that is, the judge will review the record, which will include the transcript of proceedings and exhibits filed of the hearing before the Master. Only rarely will the court hear new evidence.
The remedy for joint tenants who want to have the property sold is found in The Law of Property Act. Sometimes the request for sale of jointly held property will be severed from the main proceedings as, subject to a claim for sole occupancy or postponement of sale, joint owners have a right to have the property sold.
Once a court order for sale is made, the matter is referred to the Master for a Reference to set the terms and conditions of sale, and to calculate adjustments between the parties. The Master's report will then have to be confirmed by a judge.