Following separation, parties will likely think about the value of family property. But it is also important to account for the debt and liabilities that either spouse has accrued. Any liabilities that a party maintains can affect the outcome of equalization. In some circumstances, courts will not recognize the face value of a debt, so it is important to recognize how courts might value a spouse’s liability.
Equalization Payments Ensure Equal Value In Net Family Property
Valuation of a spouse’s debt is important for purposes of equalization, which is the statutory framework for the division of property in Ontario. Each party calculates their net family property, which is “the value of all the property that a spouse owns on the valuation date after deducting debts and liabilities.”
The spouse with the lesser net family property will be entitled to an equalization payment. The amount of debt that a spouse carries into the marriage will impact the equalization calculation and could affect their overall entitlement.
In Zavarella v. Zavarella, the Ontario Court of Appeal noted that in a case where a party had a debt and made an assignment in bankruptcy shortly before their marriage and was discharged within months of the marriage without having made any payments on a debt which existed on the date of marriage, in such circumstances, the court cannot simply insert the face value of any debt into the equalization calculation. In the court’s view, doing so could “undermine the objective of equalization, which is to divide equally between the spouses the net wealth accumulated from the date of marriage to the date of separation”. Instead, the court is tasked with making a determination of the proper value to attribute to the date of marriage debt. The court must make a realistic determination of the value of debt in a net family property calculation, and that determination must be based on the reasonable likelihood that the debt will ever be paid.
In Greenglass v. Greenglass, the husband had contingent liabilities at the valuation date due to legal costs associated with litigation that had begun during the marriage. Contingent liabilities are liabilities that have the potential to become a liability in future. The question was how the court should value this kind of liability.
The court decided that contingent liabilities should be taken into consideration when it is reasonably foreseeable that they will be paid. But, if at the valuation date, there is only a very low risk that the party will be called on to pay, then the value given to that liability can be zero. Ultimately, courts must conduct their best assessment of the contingent liability and then use that amount in making equalization calculations.
A similar issue arose in Poole v. Poole. In that case, the husband’s parents lent over $80,000 to him and his spouse. When the parties separated, his parents began legal proceedings to recover from both parties. The court noted that it was not simply a matter of adding the face value of the debt to each’s net family property, since the face value of the debt may not necessarily equate with its real value. Instead, the correct approach endorsed by the court was to value the debt based on the probability that it would be collected.
Here, the judge accepted that there was no doubt that the parents would enforce judgement against the wife, so 50 percent of the face value of the debt was added to her net family property calculation. However, it was improbable that the parents would call on the husband to pay his share of the debt, so it was discounted to 10% of its face value.
Oudeh v. Prior-Oudeh also involved a dispute between the husband and wife over their respective net family property calculations and the equalization payment. Part of the dispute focused on the matrimonial home, of which title was held by the husband. One of the questions for the court was whether the husband should be entitled to include a contingent liability on the valuation date due to an estate litigation claim. His siblings claimed to have an interest in the matrimonial home that was owned by their mother prior to her death.
The court looked to the Greengrass precedent whereby a debt is valued for equalization purposes on the likelihood that the debt will be paid. The judge noted that the estate litigation in this instance had not advanced any further since the valuation date. The estate had not pursued the litigation in ten years, and there was no explanation as to why. It would be reasonable to infer that, due to the delay, there was no merit to the litigation, and consequently there would only be a low risk the applicant would have to pay anything.
The judge accepted that only a nominal value was appropriate for this contingent liability. Setting a nominal value is a matter of discretion and can be entirely speculative. Without any evidence, the judge allowed the applicant to deduct $25,000 as a contingent liability against his net family property.
Following separation, assets owned by one party may have to be sold, and some of those assets may have disposition costs associated with them. Disposition costs include expenses, fees, taxes, and other similar kinds of costs that are triggered by a sale. In some instances, courts will allow a deduction for the value of these future costs.
In 1994, the Ontario Court of Appeal’s decision in Sengmueller v. Sengmueller established that these “notional” disposition costs can be included in the calculation of each spouse’s net family property in certain circumstances. The court found that, while these costs were not liabilities, “in the balance sheet sense of the word, they are amounts which the owner will be obliged to satisfy at the time of disposition, and hence, are ultimate liabilities inextricably attached to the assets themselves”.
The court found that deduction of the costs could be warranted if there is enough evidence of a future date the costs are to occur, and if it is clear that costs will be inevitable when the owner disposes of or sells the assets. However, the onus is on the party claiming the deduction to demonstrate to the court the value of any future obligation.
Subsequent cases have found that the sale of an asset does not need to be inevitable for notional disposition costs to be deducted, so long as the sale is more likely to happen than not. In Knight v. Knight, the applicant argued he should be allowed to deduct a notional 5 percent from his net family property for the costs of the sale of the matrimonial home. He further suggested that he should be entitled to the deduction regardless of whether or not he actually intended to sell the property at the given time. He argued that evidence of a disposition date is not necessary.
In the end, the court found that while a specific date for the sale of an asset is not needed, there must be some evidence indicating it is likely the asset will be sold. For courts to accept that a disposition would occur, there should at least be some evidence showing the property owner’s intentions.
Contingent liabilities can lead to disputes between parties and pose valuation challenges for courts. Nevertheless, the treatment of liabilities and certain debts can be of interest even if the debt incurred is in the other spouse’s name because of the way it can impact how equalization unfolds. A party seeking to calculate the value of a contingent liability should present some evidence to establish the debt will likely be paid to allow the court to meaningfully assess its value.
The lawyers at Boulby Weinberg LLP in Toronto focus exclusively on family law matters for clients in Ontario and internationally and advise clients on complex family property and equalization strategies tailored to their unique circumstances. To discuss your matter further or arrange a consultation, please complete our online questionnaire or contact the firm at 647-494-0113 ext. 102.