In Ontario, the Family Law Act 1990 (the “Act”) excludes certain property from the net family property calculation. The Act defines net family property as the value of the property that each spouse owns on the valuation date, after deducting debts and liabilities, net of the value of property at the date of marriage, after deducting debts and liabilities. The values will then be compared to produce an equalization payment. The general rule is that the spouse whose net family property is the lesser of the two net family properties will be entitled to one-half the difference between them.
What kind of property is excluded?
- Gifts or inheritances
The most significant property that is excluded from the net family calculation is property received by way of gift or inheritance. The gift or inheritance, aside from the matrimonial home, must be from a third party after the date of marriage, and gifted to one spouse to the exclusion of the other. If the gift or inheritance falls within those parameters, then the property is excluded from division.
However, the value of gifts and inheritances acquired before the date of marriage are included for the purposes of calculating the net family property value. The reason there is a distinction between gifts and inheritances acquired before and after marriage is the fact that the pre-marriage value of the gift or inheritance is deducted from net family property, like any other asset owned before the date of marriage. Therefore, any increase or gain accruing from the time of marriage to the valuation day from gifts or inheritances received before the date of marriage are subject to division and included in the net family property calculation.
It is important to note that if the gift or inheritance is used for the purchase or betterment of the matrimonial home, regardless of whether it was received before or after the date of marriage, it will no longer be excluded or deducted property. For example, if A receives a car from her father as a gift after the date of marriage and A eventually sells the car and the proceeds of the sale go towards making a mortgage payment, the exclusion is lost.
- Income from gifts and inheritances that the donor or testator expressly states is to be excluded from the spouse’s net family property
A donor is the person who donates property for the benefit of another person, and a testator is the person who has made a will.
According to this section, if a donor or testator explicitly states that the income from the gift or inherited property is to be excluded from the net family calculation, it will then be excluded from the property payment, with the exception of the matrimonial home. If the income from the gift or inheritance can be traced to the matrimonial home, it will not be excluded from the net family property calculation, despite any explicit statements by the donor or testator.
- Insurance proceeds and some court settlements
Damages, or a right to damages for personal injuries, nervous shock, mental distress or loss of guidance, care and companionship are excluded from the net family property calculation.
For instance, if A gets into a car accident and the insurance company pays $25,000.00 for personal injuries and nervous shock, the $25,000.00 is excluded from the net family property calculation.
- Proceeds from a life insurance policy, payable on the death of a spouse
When a spouse holds a life insurance policy, the proceeds from the policy are payable to the named beneficiaries upon the death of the insured. The value is then excluded from the net family property calculation.
- Property, other than the matrimonial home, that can be traced
Tracing is best defined through an example. A receives a car from her father and instead of selling the vehicle and using the proceeds to make a mortgage payment, A purchases a dining room table. That dining room table is now excluded because it can be traced to the original gift.
Tracing applies where the excluded property is converted into any other property, except a matrimonial home, which is identifiable on the valuation date. The kinds of property that fall under this category include: for example, gifts and inheritances, property that the donor or testator expressly states is to be excluded from the spouse’s net family calculation, insurance proceeds and proceeds from life insurance.
- Property that the spouses have agreed by a domestic contract is not to be included in the net family property calculation
In the case of a separation or a divorce, if the spouses mutually decide to exclude certain property in a marriage contract or separation agreement, it will be deducted from the net family property calculation.
- Unadjusted pensionable earnings under the Canada Pension Plan
The Family Law Act states that upon separation or divorce, the Canada Pension Plan falls under one of the property exclusions. Therefore, it does not go into the net family property calculation.
To conclude, the spouse that is seeking a deduction under s. 4(2) of the Family Law Act is responsible to prove that the exclusion falls within the approved categories.
Please contact José Bento Rodrigues if you have any questions regarding property exclusions under the Family Law Act or if you require assistance with a separation or divorce.