Understanding how financial assets are separated when you split
Equalization is a jargon-y word in family law for how you divide up your wealth (including shared assets like real estate and vehicles) in separation and divorce. It’s a confusing but critical aspect of ensuring fairness and financial balance between spouses that are separating or divorcing.
Legally speaking, the process aims to divide all the wealth accumulated during the marriage (or common-law relationship) equitably, acknowledging the contributions of both parties. Practically speaking, the equalization process involves a lot of documentation, forms and negotiating back and forth.
It can take a long time, and cause a few (a lot of) headaches. It can be a terrain full of potential pitfalls and disagreements, and can be a big cause of stress and overwhelm for people going through this process.
But stick with us. Equalization is something you do need to understand, and it will help you have more fair and balanced outcomes in your separation or divorce.
Equalization strives for fairness
According to CLEO (Community Legal Education Ontario), equalization is based on the principle that both spouses are entitled to share the economic gains made during the marriage or common law relationship. In fact, Ontario's Family Law Act mandates the equalization process, so if you are working with a legal professional, they will help you understand equalization, the calculations and what you are legally entitled to ask for.
So even though it can feel like torture and bring up a lot of difficult emotions to have to fill out all those forms and look up all your investments and historical bank records, to have to tally up your monthly expenses and pay for a valuation on your pension, it’s part of the process—and also, it’s worth it.
The equalization process is the way you can address the economic interdependence that often develops during a marriage or common-law relationship and how you can prevent financial instability post-separation or divorce.
For women especially, the risks are high when equalization is not done properly during separation and divorce. Couples make a lot of joint decisions about merging bank accounts, investments, and assets when they are married, and then layer on other joint family decisions about taking time off work to have and raise kids. Equalization takes into consideration everyone’s contribution to the wealth of a marriage, and that means you can’t be penalized for having a lower paying job, for being a stay-at-home parent or not having a pension in your own name.
There are two very important dates for equalization: date of marriage and date of separation. So have those dates handy and be prepared to do some digging to look at the value of your assets on both those dates. In Ontario, each party is also asked to fill out a Financial Statement form.
The equalization process begins by determining the individual net worth of each spouse, including assets such as real estate, investments, and personal property, and subtracting liabilities. This is often referred to as net-family-property or NFP, and essentially refers to the difference between the total value of a spouse's assets and the total value of their debts at the date of separation. The spouse with the higher net family property (or NFP) is then required to make an equalization payment to the other to ensure a fair distribution of the marital wealth.
In this calculation, certain assets, such as gifts, inheritances, and personal injury settlements, may be excluded from equalization. A lawyer or other legal professional can help advise you on what is eligible. Some equalization issues are also treated differently for non-married spouses, so legal advice should be obtained for those situations too.
The Ontario government provides additional insights into the equalization and the division of wealth and property during the end of a marriage or common-law relationship particularly when it comes to the matrimonial home. In many cases, the home is a significant asset, and its treatment during equalization requires careful consideration.
In a nutshell, the calculation of NFP and the resulting equalization payment helps address the financial consequences of a relationship's end and promotes a more fair and equitable outcome for both parties.
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