Divorce Equalization Payment Calculation – Case Study

Mary a 49-year-old School Teacher and Bruce, a 51-year-old Plumber, They’re really hoping to avoid a lengthy and protracted negotiation. They both agreed mediation was the best fit for them, if only for the sake of their children – 14-year-old Madison and 17-year-old Mackenzie. Bruce and Mary experienced the devastating effect of Mary’s sister’s acrimonious divorce two years earlier.

Dad earns approximately $87,000 with his Plumbing Business. Mom earns $93,000 per year as a school teacher.

The couple owns a home jointly with $1,250,000 of equity. The balance of the mortgage is $550,000.

Bruce’s Plumbing Contracting Business has a pre-tax value of $135,000. He also has an RRSP with a pre-tax value of $216,600. The pre-tax value of the Wife’s Teacher’s Pension is $600,000. They each have cars and individual bank accounts.

During the process of calculating Equalization, a separation and divorce case, disagreements may develop about which spouse owns which assets and which assets are owned jointly. These are factual issues, not legal ones. Simply because you are married or because you use the item together. You are not automatically joint owners of any asset.

Jointly owned assets have no bearing on the Equalization of Net Family Property Calculations because, effectively, both the Husband and the Wife own the asset. Of course, the divorcing couple will still have to determine what to do with their jointly held assets. They may be sold and the proceeds divided, or the assets could be physically divided. One spouse could buy out the other’s interest as in the case of the matrimonial home.

Alternatively, despite the breakup of their marriage, the spouses could decide to continue as joint owners. However, all of this is separate and apart from the problem of net family property equalization.

Both tangible and intangible assets are considered when assessing net value. In this regard, the term “net family property” is deceptive. Business interests and pension entitlement, for example, must be appraised and included. These can be difficult for the parties and the courts to deal with in terms of valuation. Problems might also occur when a significant amount of a spouse’s net worth is invested in assets that are difficult to liquidate in order to generate the funds needed to make an equalization payment, such as pension plans, RSPs, or company holdings.

There are a number of essential unique restrictions that apply to specific types of property, the most important of which apply to matrimonial residences. When just one of the spouses owns the marital house, this can have serious and unanticipated repercussions.

The value of assets owned at the time of marriage is subtracted from the value of assets owned at the time of separation for calculating growth in net worth. There is an exemption, however, in the event of a matrimonial residence that was owned at the time of the marriage. There is no deduction for this. As a result, if only one spouse owns a property that becomes a marital residence after marriage, that spouse’s equalization payment burden is increased. He or she will be responsible for not only the growth in his or her Net Family Property that occurred during the marriage but also the entire value of the marital house.

For example, if a spouse enters the marriage owning a $300,000 home, which becomes the matrimonial home, and the home is worth $600,000 after the marriage ends, the owning spouse will be liable for an equalization payment to the non-owning spouse of $300,000, not just $150,000 (half of the increase) (assuming, for illustration purposes, that the house was the only asset of either spouse). The value of the matrimonial residence as of the date of marriage is not reduced from the value as of the date of separation in determining net family property, contrary to popular belief.

Compare this to a spouse who started the marriage with $200,000 in a stock portfolio that grew to $300,000 during the marriage. In the event of a divorce, that spouse would be liable to the other for a $150,000 equalization payment, which is half of the $100,000 increase. (However, remember that the equalization computation is done worldwide rather than asset by asset.)