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To determine the equalization payment, each spouse must calculate their net family property, which takes into account the value of their debts and assets on both the separation date and the date of marriage. When a party claims to owe a debt, courts can assess the value of that liability and, in some cases, may discount the value of the debt. Courts have determined that it is necessary to consider the reality of the situation and that the value of a debt is related to the likelihood that it will be enforced against the debtor. Since a debt can reduce the net family property of the spouse claiming the debt, assigning the value of the debt will directly impact the equalization payment.
Parties Disputed the Characterization of Debts the Appellant Owed
In Robson v. Pellerin, the parties were married in 2001 and separated in August 2016. The appellant claimed a $508,000 debt owed to his mother as of the valuation/separation date. This included $53,000 that the appellant received before the marriage, and $455,000 that was advanced in three payments after the date of the marriage but before the valuation date. The parties contested the characterization of these funds. The respondent did not deny that the funds were advanced, but claimed that they were gifts and could be traced into the matrimonial homes, and therefore could not reduce the appellant’s net family property according to section 4(2)(5) of the Family Law Act (FLA).
The trial judge concluded that the $455,000 was traceable into the parties’ matrimonial homes. The judge then examined whether the funds were loaned or were gifts. The judge concluded that the funds were loaned by the appellant’s mother “subject to repayment if she needed the money”. Yet, the judge found that upon the mother’s death in 2015, the debt was forgiven. This meant the appellant no longer owed the debt by the valuation date. The consequence was that the debt was no longer payable, and the judge gave it no value in the appellant’s net family property calculation. However, the $53,000 that he owed his mother on the date of marriage was included. On appeal, the appellant argued that the judge erred in finding the debts had been forgiven by the mother’s estate, and therefore was incorrect in discounting their value to zero.
Trial Judge Discounted the Value of the Appellant’s Debt
The Ontario Court of Appeal found that the trial judge’s approach was consistent with past jurisprudence. In Poole v. Poole, the Court wrote that “even though a debt may have a specified face value, if the evidence indicates that it is unlikely that the promissor will ever be called upon to pay the debt, the value of the debt should be discounted to reflect that reality”. The Court went on to explain that it is necessary to look at the reality of the situation. A debt reduces the net family property of the spouse claiming the debt, which impacts the amount of the equalization payment. But “fairness dictates that [a party] should not receive a credit for a debt, with the financial benefits that flow from that credit, if [they] will never be called upon to pay the debt”.
The appellant accepted that the trial judge applied the correct framework, but claimed that she erred by not accepting that he notionally repaid the loan. However, this involved challenging the judge’s findings of fact, and those findings were entitled to deference. It was clear that the trial judge considered the evidence on the issue before deciding the loans were forgiven by the mother’s estate. The judge considered that the appellant had paid monthly interest on the loan before his mother’s death, but that he had not made any payments after her death. Additionally, he never received a demand for payment from the estate, and the executor’s statement did not list the debt owed by the appellant. The judge also concluded that even if there was some contingent liability outstanding until the estate was fully administered, it was unlikely that the estate would demand repayment of the loan. The court did not find that the judge made any palpable and overriding error in concluding that the loans had been forgiven before the valuation date.
FLA does not Permit Reassessing a Debt to Avoid Unfairness
The Court turned to the appellant’s alternative argument. Here, the appellant suggested that if the judge did not err in finding that the estate had forgiven the loans, it was an error to treat the loans differently on the date of marriage and the valuation date. He argued that by including the $53,000 pre-marriage debt, when the judge also concluded that all loans from the appellant’s mother were forgiven by the estate at her death, the judge’s analysis was inconsistent. The Court of Appeal disagreed. The process for calculating net family property for equalization purposes is set out in the Family Law Act. And the definition of “net family property” in the Act requires that a spouse’s property be calculated both as of the date of marriage and on the valuation date. The judge concluded that the debt was forgiven at the time of the appellant’s mother’s death, which was 15 months earlier than the valuation date. The result was that there was no debt owing on the valuation date. However, a $53,000 loan that existed at the date of marriage needed to be included as a debt at that time.
The Court emphasized that these results flowed from the application of the Act and the judge’s factual findings. The decision in Serra v. Serra reiterated that the equalization provisions in the FLA were intended to promote certainty, predictability, and finality in resolving property issues. Moreover, there is a high threshold of unconscionability to depart from that framework. Section 5(6) permits judges to award an uneven division of net family property in circumstances of unconscionability. But Serra made it clear that circumstances that are unfair, harsh, or unjust would not meet this test, and that the threshold would be crossed if an even division of property were to “shock the conscience of the court”.
In this instance, the Court determined that the appellant was asking the court to do indirectly what could not be done directly under the FLA, which was to “reassess what was clearly a debt at the date of marriage with the benefit of hindsight to avoid unfairness”. However, as the Court pointed out, unconscionability, rather than unfairness, was the threshold for departing from the application of the equalization formula in the Act. For that reason, the appellant’s argument had to fail. The trial judge did not err in determining that the $53,000 owed by the defendant to his mother at the time of the marriage needed to be included when calculating his debts, property, and liabilities at the time of marriage.
Courts Consider the Likelihood That a Debt Will Have to Be Paid
Although a debt may have a specified face value, judges can consider whether the debtor will be called upon to repay the debt. Ultimately, when calculating the equalization payment, a party should not receive a financial benefit for a debt that they will not be required to pay.
Experienced Net Family Property and Debt Valuation Family Lawyers
Navigating the complexities of net family property, including the proper valuation of assets and debts such as loans from family members, requires precise legal guidance to ensure a fair equalization payment. The team at Johnson Miller Family Lawyers in Windsor understands that each separation or divorce presents its own unique challenges and can help you assess your financial situation and protect your assets, ensuring that the division of family property is handled correctly.
If you are facing a property division dispute where the legitimacy or value of a debt is at issue, trust our experience to assess the reality of your situation and protect your interests. To discuss your matter further or arrange a consultation, please complete our online questionnaire or contact the firm at 519.973.1500.
