When two married spouses separate, among other issues they must resolve, they must “equalize” their “net family property”, respectively.
Basically, the spouse whose net worth increased more between the date of marriage and the date of separation must pay to the other spouse one-half of the difference in that increase over the other spouse, subject to a few rules and exceptions that often cause disputes in and of themselves.
If Sharon’s net worth increased by $10 during the marriage, but Mike’s, her married spouse’s, net worth only increased by $5, Sharon would legally be required to pay to Mike $2.50, thereby equalizing their net family properties.
Of course, it is more complicated than this, as special rules and exemptions also apply, but this is the basic family law requirement, unlike in most of the United States, where a married spouse is entitled to half of the combined assets and liabilities, generally.
COVID-19 now casts an uncertain shadow over this family law rule.
Assets have already substantially lost value during the pandemic, particularly investment holdings and likely the value of matrimonial homes, farms, etc.
The key dates are the date of marriage and the date of separation (referred to as the “valuation day”).
So, if the date of separation was early on during, or even before, the pandemic affected Ontario, there is substantial risk involved with utilizing the date of separation fair market value for assets to compute the equalization of net family properties.
It may create unfairness to the higher net worth spouse, forced to solely burden the economic impact of the virus, particularly if a settlement or trial does not take place for several months after the pandemic struck us.
If an asset is jointly-owned, the issue is less likely to arise, as both spouses typically, subject to a few exemptions, bear the prevailing market conditions post-separation.
Furthermore, there is so much uncertainty about the future of the economy and market forces, the risk may actually be increasing as time passes during the pandemic.
A higher net worth spouse in these circumstances does, at law, have a remedy to assert to try to gain some relief.
Under the legislation for Ontario, the Court is empowered, subject to strict conditions, to reduce or vary an equalization payment by the higher net worth spouse to the other.
This is commonly referred to as an “unequal division” of net family properties.
The relevant section of Ontario’s Family Law Act reads:
Variation of share
(6) The court may award a spouse an amount that is more or less than half the difference between the net family properties if the court is of the opinion that equalizing the net family properties would be unconscionable, having regard to,
(a) a spouse’s failure to disclose to the other spouse debts or other liabilities existing at the date of the marriage;
(b) the fact that debts or other liabilities claimed in reduction of a spouse’s net family property were incurred recklessly or in bad faith;
(c) the part of a spouse’s net family property that consists of gifts made by the other spouse;
(d) a spouse’s intentional or reckless depletion of his or her net family property;
(e) the fact that the amount a spouse would otherwise receive under subsection (1), (2) or (3) is disproportionately large in relation to a period of cohabitation that is less than five years;
(f) the fact that one spouse has incurred a disproportionately larger amount of debts or other liabilities than the other spouse for the support of the family;
(g) a written agreement between the spouses that is not a domestic contract; or
(h) any other circumstance relating to the acquisition, disposition, preservation, maintenance or improvement of property. R.S.O. 1990, c. F.3, s. 5 (6).
(7) The purpose of this section is to recognize that child care, household management and financial provision are the joint responsibilities of the spouses and that inherent in the marital relationship there is equal contribution, whether financial or otherwise, by the spouses to the assumption of these responsibilities, entitling each spouse to the equalization of the net family properties, subject only to the equitable considerations set out in subsection (6). R.S.O. 1990, c. F.3, s. 5 (7).
The test to be given an unequal division by the Family Court is high and onerous.
Essentially, applying the regular and usual family law must, in the special circumstances, be shocking and unconscionable to the Court.
The question is: does COVID-19 fall into that high threshold potentially?
Certainly the 2008 recession was considered by the Court to justify deviating from the otherwise normally-applied family law for equalization of net family property.
It seems, then, that COVID-19 would also be proper grounds to request an unequal division, in the right circumstances.
Indeed, a spouse’s net worth may be substantially impacted by the pandemic between the date of separation and the time when the Court holds a trial, or there is a settlement reached.
What to do?
If a spouse has experienced a material decline in his or her net worth since the onset of the pandemic, before or after a separation date, careful consideration needs to be given to possibly seeking an adjustment to how the law would otherwise, normally be applied by the Court.
It may be that, due to the virus, there are justifiable reasons to assert that the high test has been met to warrant a lesser property settlement payment than would otherwise be required.
In addition, there are other important considerations before resolving a relationship breakdown during, or following, the pandemic, particularly relating to the content of the separation agreement that may be entered.
Below is an excellent list of issues that need to be carefully reviewed before finalizing any settlement of a relationship breakdown during, or related to, the pandemic, published on April 20, 2020 by Lorne Wolfson, a lawyer at the Toronto firm, Torkin Manes:
- In the absence of formal screening by a qualified third party screener, a family lawyer cannot know if his or her client is entering an agreement under duress or undue influence, the risk of which is particularly heightened if the parties are still co-habiting under the same roof. The standard solicitor’s certificate, “My client is not suffering from duress or undue influence,” should be amended to reflect the particular circumstances in each case.
- Property settlements that rely on asset valuations or support arrangements that are based on current or proposed incomes should be viewed with caution since the value of assets and the level of incomes could suffer dramatic changes within days of finalizing a settlement. For property division, an “if and when” asset division may protect both parties against an unfair and unexpected drop in the value of a major asset. Support arrangements should clearly articulate the income assumptions on which the settlement is based, so that there is no doubt if a future decline in income constitutes a “material change in circumstances” from that which prevailed at the time the agreement was signed.
- In order to avoid a dispute in the future as to what constitutes a “material change in circumstances,” the agreement should contain an acknowledgment that a change in either party’s income of X per cent or $Y is deemed to constitute a “material change.” The agreement should also formally acknowledge that a change in circumstances that was foreseeable at the time the agreement was signed may still constitute a material change in circumstances.
- When an agreement is being signed without full financial disclosure or without all of the information that would usually be required, it should clearly be expressed to be a temporary, without prejudice agreement that will stay in force until a future date or event (a further agreement, a future variation or review, or when the courts resume regular operations).
- Non-variable support agreements should be viewed with particular caution. In the past, many payors were prepared to pay a lump sum in exchange for a full and final spousal support release. Today, such agreements may be more fraught with risk. Even if the non-variation clause is drafted to permit a review if there is a “catastrophic” change in circumstances, that exception still leaves open the possibility of a dispute as to what constitutes a “catastrophic change.”
- Variation in child and/or spousal support can also be justified even if there have been no changes in the incomes of the parties. For example, s. 7 expenses that were previously being shared (childcare, summer camp, activities and access costs) may no longer be incurred. In the absence of these expenses, the level of both child support and spousal support may need to be adjusted.
- Given the health threat posed by the current pandemic, security for support and equalization payments takes on enhanced importance. The presence or absence of life insurance, the appropriate level of insurance and what insurance can be obtained at what cost if either party loses his or her employment are issues that should be canvassed.
- In a majority of cases, the time the children spend in the care of each parent will not need to be changed. However, where parents are now working from home, are not working at all because of the loss of their employment or the division of parenting time necessitates a change to the residential schedule, the impact of these changes on child and/or spousal support needs to be carefully considered.