Many people believe that when you get a divorce all property is divided down the middle.
This is not the case.
In Ontario lawyers use something called equalization to ensure that each party gets what they are entitled to. Equalization is a fancy legal term that is essentially the payment from one spouse to another to make life equal.
So how does it work?
Lawyers will take a picture the of both party’s net worth at both the date of marriage and the dated of separation. Net worth is defined as assets (financial property) minus liabilities (debts or other financial obligations).
Lawyers will take a look at these two pictures because the law dictates that you must look at the increase in net worth of each party from marriage to separation. If both parties end up increasing their net worth the same amount throughout the marriage neither of them owe anything to the other. If there is anything held in joint names, like a house, it must be sold, or if both parties agree, there can be a buy out.
However, in most cases there is an increase in net worth for both parties but one will have increased more than the other. This happens if one person has more assets than the other or if they have the same amount of assets, but one person has more debt.
The law says that marriage is a partnership and so any increase that one has over the other has to be shared. The way it is shared is by the person with the higher net worth paying their spouse a chunk of money. The money can be paid by writing a cheque, rolling over money from one spouse’s RRSP to the other, of even through the sale of the matrimonial home.
Two other terms that you want to be aware of during the equalization process are deductions and exclusions.
Deductions are things that people own at the date of marriage. If you come into the marriage worth something it is deducted from what you own at separation. Anything from a car, to an RRSP to a house that you owned at the date of marriage can all be deductions.
Exclusions are things that we include at the date of separation but then get factored out. The law dictates that certain things should not be shared and are therefore taken out of the equalization calculation. In Ontario life insurance proceeds, gifts from a third party and inheritance are all examples of exclusions.
And there you have it, the equalization process in a nutshell.
Having good legal counsel during a divorce will help you hammer out all these financial details and ensure that you leave the marriage with what you deserve.
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