How do you calculate the equalization payment in a divorce in Ontario?
Q: In matrimonial cases, what is the first step to calculating the equalization payment in Ontario?
OG: In a divorce proceeding, the first step to calculating the equalization payment is to complete a “Form 13.1 Financial Statement.” The form has 2 parts: the first part of the form itemizes your income and expenses. Disclosure must include three years of personal income tax returns and notices of assessments.
The second part of the form calculates what is known as Net Family Property, which essentially is the growth in a spouse’s net worth from the date of marriage to the date of separation. The values of each asset and liability need to be disclosed at 3 dates:
1. marriage date,
2. separation date, and
3. current date.
Q: You mentioned Net Family Property. How is that calculated?
OG: Net Family Property is the growth in a spouse’s net worth from the date of marriage to the date of separation. First, you list the values of all assets at the date of separation. This includes bank accounts, RRSPs, TFSAs, home, cottage, brokerage accounts, business interests, monies owed to the spouse and so on.
Next, you deduct all liabilities at the date of separation. These include loans, credit cards, mortgages, and money owed to CRA. Also included are contingent liabilities. For example, you can take into account the contingent income taxes that will ultimately be paid on the withdrawal of RRSP funds on retirement.
The next step is to deduct the net worth at the date of marriage. So this involves setting out the assets and liabilities at the date of marriage.
Another deduction is allowed for Excluded Property, which generally includes gifts and inheritances from a third person during the marriage, damages and settlements from personal injuries and life insurance proceeds. The total represents a spouse’s Net Family Property.
Q: How is an equalization payment calculated?
OG: In order to explain how an equalization payment is calculated, let’s walk through an example. Jim has Net Family Property of $800,000. Meg has Net Family Property of $200,000. The difference between the spouses is $600,000. In order to equalize, the spouse with the larger Net Family Property must pay an equalization payment of half the difference to the other party.
In this case, Jim, who has the higher Net Family Property, must pay half of the $600,000 difference, or $300,000, to Meg. The final result after the equalization payment of $300,000 will be that Jim and Meg will each have $500,000 of Net Family Property.