How the COVID-19 Crisis Could Impact Spousal Asset Valuations
As those of you who read our Blog will know, when spouses decide to separate they embark on the legal process of dividing or “equalizing” the value of the property that they have brought into the marriage and have accumulated during its course. The exercise begins with the calculation of each spouse’s respective Net Family Property (NFP) values; it ends with equalization of those values, and with the court ordering that the spouse with the higher NFP must pay an appropriate amount to the spouse with the lower one in order to even things out.
In Ontario, this equalization process invokes an established legal rule about timing: The NFP calculation revolves around the value of each spouse’s assets on the date of separation – not the date of the eventual trial, which can be many months later. In normal times, that time gap will have no legal or practical significance: The value of the assets will be largely unchanged between the separation and trial dates, and the spouse with the higher NFP will be ordered to pay according to a straightforward calculation based on those values.
However, let’s assume a couple has separated before the start of the COVID-19 outbreak. Since Family courts still remain largely closed due to government lockdowns (with no end in sight), their trial date will still be many months away. By that time, there may have been a large decline in the overall value of some of their respective assets, or perhaps – depending on the type of assets being held – one spouse may be much harder hit than the other. If it’s the spouse with the higher NFP in the first place, this means that both spouses’ NFPs will have been calculated at the high-value mark (i.e. date of separation), but the spouse who has to pay to achieve equalization will be forking over at a time when the value of his or her assets will have suffered a significant decline (i.e. at trial).
Fortunately, the Family courts in Ontario have a tool in their arsenal to redress this source of potential unfairness. In some circumstances the court is entitled to override the normal rule on the timing of valuation, if it is adjudged to be “unconscionable” to equalize the NFPs in the customary way. This authority to order an unequal NFP division is embodied in the provisions of the Ontario Family Law Act.
The scope of the courts’ authority to do this was examined in a 2009 Court of Appeal decision in a case called Serra v. Serra. There, the husband owned a textile business that was very profitable on the separation date. But by the time the trial rolled around, the value of his shares in the company had suffered a very steep (and very likely permanent) drop, due entirely to market forces. The Appeal Court affirmed that in the face of this kind of market-driven negative change in the value of one spouse’s assets between separation and trial, it would be unconscionable to apply the equalization process in the usual way. Instead, the court could order an unequal division of the spouses’ NFPs.
As we speak, the Ontario Family courts are still largely at a standstill, and are just starting to grapple with how to clear the backlog of cases on their dockets. For those spouses who separated pre-COVID-19, it’s perhaps too soon to know the full impact of the pandemic on the value of their spousal assets for NFP equalization purposes. If those asset values are significantly influenced by market-driven forces, we may see an uptick in the number of judges who invoke the power to order unequal division of NFPs due to unconscionability.
For the full text of the decision, see:
Serra v. Serra, 2009 ONCA 105 (CanLII)