June 14, 2013 By: Pam MacEachern

Regardless of whether a spouse is married or not married, ownership of assets and debts matters. This is frequently overlooked by married spouses who assume that they will share everything between them, regardless of who owns it on a 50-50 basis. This is not correct.

Common law spouses in Ontario frequently make a similar mistake, believing that once they have been living together "long enough" they will be treated the same as married spouses and share everything 50-50. This is also incorrect.

Common law spouses in Ontario are not entitled to apply for an equalization of the net family property acquired during the relationship under the Ontario Family Law Act. Common law couples in Ontario will leave the relationship with the assets and debts in their own name, subject only to their ability to claim under a contract or other equitable legal exceptions that they are entitled to share in the other spouse's property, but that is the exception and not the rule. It is therefore important for common law spouses to seek family law advice so that they understand their obligations and entitlements within their relationship, and how these differ from those of married spouses.

The misconception among married couples that "everything gets divided 50-50" is due to a misunderstanding of what equalization under the Ontario Family Law Act means. In Ontario, the family law scheme does not provide for property division – it provides for an equalization payment, which is a very different creature. A separating married spouse in Ontario is entitled to an "equalization payment," calculated in accordance with the Ontario Family Law Act, based on what is included, deducted, and excluded from this calculation.

Each married spouse owns the assets and debts in his or her name. There is no entitlement to get "half of" the other spouse’s assets (again there are some exceptions to this rule). What a married spouse may be entitled to is an "equalization payment" if the value of his or her "net family property" is less than the value of the other spouse's "net family property".

Simply put, this means that for married spouses in Ontario, ownership does matter. It matters for two main reasons in the family law context. The first is that the owner gets to keep the asset in his or her name (unless they have to sell it or transfer it to the other spouse to make an equalization payment). For example, if a cottage is held in the wife's sole name, it is her cottage and at the end of the day she gets to keep it, subject only to the potential that she may owe an equalization payment and has to sell the cottage to have enough money to pay the equalization payment to her spouse. If the husband loves the cottage, and wants to keep it, he is out of luck unless the wife agrees to sell it to him. Again, this is subject only to the ability of the non-titled spouse to claim an interest in the asset either under contract law or the law of equity.

Another example involves corporate shares. In the event of separation, each spouse will own the shares that he or she owns. These may give the spouse a controlling interest in the company, or a minority interest. It will matter after separation which is which. This may determine who gets to continue to operate the company and how post separation earnings by the company are shared.

The second main reason why ownership matters is that under the Ontario Family Law Act, a spouse cannot have a "net family property" of less than zero. If a spouse has a negative net family property value, for the purpose of calculating the equalization payment, their net family property is set at zero. This can lead to what is effectively an unequal payment.

For example, if the wife's net family property is made up of only a $200,000 income property owned on the date of marriage and, on the date of separation, the value of that property is still worth $200,000, her net family property is zero because her net worth did not increase during the marriage. The wife had $200,000 at separation, and had $200,000 at the date of marriage. If the husband has a net family property of $500,000, he would owe the wife an equalization payment of $250,000. The difference between their respective net family properties is $500,000. One half of this is $250,000 which is the "equalization payment". At the end of the day, the wife has her income property worth $200,000, plus the $250,000 equalization payment from her husband for a total of $450,000.

If we change the above example because the wife, as a business person, decided she should put the income property in her husband's name, the outcome is very different. The wife had $200,000 on the date of marriage but has nothing on the date of separation because she no longer owns the property. Her net worth therefore has decreased by $200,000. She has nothing at the date of separation, and deducts from this the $200,000 she had at marriage. Her net family property would be negative $200,000, but the Ontario Family Law Act says it cannot be less than zero. The husband's net family property now includes all of the income property plus his other assets so his net family property is $700,000. The difference between their respective net family properties is $700,000 because the wife's net family property is artificially set at zero. The husband would owe the wife one half of this amount, being $350,000. At the end of the day the wife does not own the income property, she just gets a $350,000 equalization payment. If she had not placed the property in the husband's sole name, she would have had $450,000. The wife has lost $100,000 because of her decision to transfer the house into her husband's sole name.

What Does This Mean?

How married and common law couples in Ontario choose to hold assets, and debts, will make a difference in how property is shared in the event of the breakdown of the relationship. Each spouse should obtain family law advice to ensure they understand the legal consequences of such decisions, and that they make the right choices accordingly. It may be that part of this family law advice will be for them to enter into a domestic contract that sets out how the property will be divided in the event of the breakdown of the relationship.

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.

Service: Family Law