The Supreme Court of Canada has recently confirmed that only married spouses have defined property rights pursuant to the Family Law Act. While the courts are increasingly recognizing that common law spouses have property entitlements with respect to each other on breakdown of a relationship, these entitlements are not often readily ascertainable or predictable, and they are very specific to the peculiarities of any given relationship.

The property scheme of the Family Law Act treats marriage as a partnership. To the extent that the spouses’ financial position improves over the course of the marriage, without being attributable to sources treated as external to the marriage, the value of that improvement is equalized between the spouses.

The calculation is as follows:

1. the first step is to identify a “valuation date”. Typically, this date will be the date the spouses separate without a reasonable prospect of reconciliation. Although this date is usually fairly clear, from time to time, spouses do not agree on it. In cases were there is a significant difference in the respective financial positions of the spouses at the conflicting valuation dates, it is necessary to examine in detail the relationship between the spouses, so as to determine which of the valuation dates should be used. Sometimes, a trial will be necessary to resolve the conflicting positions of the spouses;

2. once the valuation date is identified, each spouse completes a court form financial statement, fully setting out his or her property and debts and/or liabilities as of the valuation date, together with the corresponding values or amounts. Sometimes, there are disputes regarding the ownership of property. For example, where one spouse legally owns property, in that title to it is registered in his or her name, the other spouse may argue that he or she has acquired over the course of the relationship a beneficial or equitable ownership interest in the property. Such a situation may arise in the context of a family-run business, or with respect to the ownership of a home. Depending upon the circumstances, a court may use its discretion to acknowledge equitable ownership of property. This ownership is then reflected by each of the spouses on their financial statements.

   There may also be issues regarding whether and how property or debts or liabilities should be reflected on a financial statement. For example, a spouse may not be entitled to claim as a liability at valuation date the full amount of a personal guarantee given in conjunction with a primary corporate liability, if there was no reasonable prospect at valuation date of the personal obligation being called upon by the creditor. More often, there may be significant valuation issues. Of note, valuation of property occurs as at valuation date, presumed to be without consideration of events taking place subsequent to the valuation date. Significant opposing valuation arguments may arise in circumstances such as:

   1. the property in issue was not liquid at valuation date;

   2. the property in issue was a contingent and/or an unvested interest at valuation date;

   3. the property in issue is capable of more than one method of accepted valuation process, giving rise to significantly different values; and

   4. income taxes and costs of disposition would be incurred if the property valued at valuation date were disposed of at that date. This issue is often very contentious. The courts’ approach to date is to value property at valuation date, as if it were then disposed of, but to discount the liabilities inherent in that property by reference to the likely date of disposition. The “likely” date of disposition is determined by considering any intentions existing at valuation date as to disposition and any current intentions as to disposition. For example, it may be necessary to dispose of property to satisfy an entitlement to an equalization payment. As a result, in valuing liabilities at valuation date, post valuation date events may be relevant.

3. on the court form financial statement, each spouse fully discloses his or her property and debts and/or liabilities as of the date of the marriage, together with the corresponding values or amounts. In doing so, issues may arise similar to those considered above in relation to valuation date issues;

4. each spouse identifies on the court form financial statement property owned on valuation date which is defined by the Family Law Act to be “excluded” property. Such property is defined to be:

   1. property, other than a matrimonial home, acquired by gift or inheritance by a third person after the date of the marriage;

   2. income from property referred to in paragraph (i), if the donor or testator has expressly stated that it is to be excluded from the spouse’s net family property;

   3. damages or a right to damages for personal injuries, nervous shock, mental distress or loss of guidance, care and companionship, or the part of a settlement that represents those damages;

   4. proceeds or a right to proceeds of a policy of life insurance, as defined in the Insurance Act , that are payable on the death of the life insured;

   5. property, other than a matrimonial home, into which property referred to in paragraphs i) to iv) can be traced; and

   6. property that the spouses have agreed by a formal marriage contract or cohabitation agreement is not to be included in the spouse’s net family property.

   Significantly, the onus of establishing that property is excluded, as defined, is on the spouse claiming the entitlement to an exclusion. Significant issues sometimes arise.

5. each spouse then calculates on the court form financial statement his or her “net family property”, by:

   1. calculating the total value of his or her property as at valuation date;

   2. deducting from that total value the total amount of his or her debts and/or liabilities as at valuation date;

   3. deducting from that net value as of valuation date the net value of his or her property at the date of marriage; and

   4. deducting from that amount the value of any excluded property, as defined by the Family Law Act.

Once each spouse determines his or her net family property by this process, the difference between the net family properties of the spouses is equalized.

Where an equalization of net family properties would result in unconscionable circumstances, an unequal share of the difference between the spouses’ net family properties may be awarded to a spouse. According to the Family Law Act, the following factors are to be considered in this analysis of unconscionability:

1. a spouse’s failure to disclose to the other spouse debts or other liabilities existing at the date of the marriage;

2. the fact that debts or other liabilities claimed in reduction of a spouse’s net family property were incurred recklessly or in bad faith;

3. the part of a spouse’s net family property that consists of gifts made by the other spouse;

4. a spouse’s intentional or reckless depletion of his or her net family property;

5. the fact that the amount a spouse would otherwise receive by way of equalization payment is disproportionately large in relation to a period of cohabitation that is fewer than five years;

6. 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;

7. a written agreement between the spouses that is not a formal marriage contract or cohabitation agreement; and

8. any other circumstance relating to the acquisition, disposition, preservation, maintenance or improvement of property.

The threshold of “unconscionable” is very high. Significantly, the test is not one of fairness. The onus is on the spouse seeking the deviation from equalization to demonstrate unconscionability. Not surprisingly, these issues are often very contentious.

Once the amount of an equalization payment is calculated, the spouses must consider how the payment will occur. If necessary to avoid hardship, the courts have discretion to order that the equalization payment be paid in instalments during a period of up to ten years, or that payment of all or part of the amount be delayed for a period not exceeding ten years. Typically, spouses will negotiate a resolution of issues related to payment, often by combining a transfer of ownership of property (for example, a matrimonial home) and a cash payment, whether lump sum or payable over a period of time.