How does Ontario law treat debts at separation?

It is not unusual for marriages to suffer because of a family’s financial difficulties, growing debt-loads, a spouse’s loss of employment, the reduction or loss of the wife’s employment income when children are born, and many other events that may occur within a family that place undue financial stress on the marriage.

In some cases, the financial stress may cause marital breakdown and separation. It is in these situations that a spouse who turns to counsel for legal advice discovers that Ontario property law does not provide that spouses are required to share their family debt.

Section 4(5) of the Family Law Act provides that:

“If a spouse’s net family property as calculated under subsections (1), (2) and (4) is less than zero, it shall be deemed to be equal to zero.”

In effect, spouses who are separating and who have an unequal distribution of debts amongst them, or a couple where the bulk of the family assets are held by one spouse, while the other spouse holds the family debt, are likely to suffer even greater hardship than they experienced prior to separation.

To illustrate this dilemma, the next two examples demonstrate cases of financial hardship under the present legislation.

Example A – Both Spouses End Marriage with a Significant Debt-Load

In this example, the husband in fact has a negative net family property of -$8,000.00 and the wife has a negative net family property of -$20,000.00.

Applying section 4(5) of the Family Law Act will result in each person being individually liable for the debts held in his or her name alone and be jointly responsible for the joint line of credit. In effect, this family’s debt is not equalized and will result in tremendous hardship on the wife.

If section 4(5) of the Family Law Act was repealed, then the husband would assume $6,000.00 in debt from the wife so that each spouse would equally leave the marriage with $14,000.00 in debt.

The result of section 4(5) of the Family Law Act offends the preamble of the Family Law Act that provides:

“Whereas it is desirable to encourage and strengthen the role of the family; and whereas for that purpose it is necessary to recognize the equal position of spouses as individuals within marriage and to recognize marriage as a form of partnership; and whereas in support of such recognition it is necessary to provide in law for the orderly and equitable settlement of the affairs of the spouses upon the breakdown of the partnership, and to provide for other mutual obligations in family relationships, including the equitable sharing by parents of responsibility for their children.”

Specifically, the application of section 4(5) of the Family Law Act to the facts of this case accomplish the exact opposite effect than intended by the legislation.

The result is that the spouses are not provided with an equal position, the marriage is not treated as a form of partnership and the settlement of the family’s debts is not equitable.

Example B – One Spouse Hold Assets – Other Spouse Holds Debt

In this example, the husband in fact has a negative net family property of -$170,000.00, but due to the application of section 4(5) of the Family Law Act, he is deemed to have a nil value for his net family property. This would result in the wife paying him $115,000.00 as an equalization payment – one half of her net family property of $230,000.00. After for accounting for the husband’s negative net family property of -$170,000.00, he would leave the marriage with $55,000.00 in debt, while the wife would have assets of $115,000.00.

Equalizing this family’s assets and debts – without regard to section 4(5) of the Family Law Act – would result in the wife paying the husband $200,000.00 as an equalization payment. Thus, repealing section 4(5) of the Family Law Act would result in each spouse leaving the marriage with $30,000.00 in assets.

The result of section 4(5) of the Family Law Act again offends the preamble of the Family Law Act as it applies to the facts of this case in that the spouses are not provided with an equal position, the marriage is not treated as a form of partnership and the settlement of the family’s debts is not equitable.

Mr. Justice Galligan stated in the Ontario Court of Appeal ruling in Berdette v. Berdette (1) that “the intent of this legislation is to establish partnership and equal sharing of property accumulated during marriage.” This can only be accomplished if family debt is not disregarded, but evenly shared by the spouses.

Repealing this provision will not prejudice either party, as wrongful conduct by one spouse may be addressed by section 5(6) of the Family Law Act which provides the court with the discretionary power to vary the sharing of the parties’ net family properties in cases where there has been intentional or reckless depletion of family property, debts incurred recklessly or in bad faith or where one spouse has incurred a much larger amount of debt than the other spouse for the support of the family.

Is now the time to review this legislation and repeal section 4(5) of the Family Law Act?

At Benmor Family Law Group, our multi-disciplinary team of divorce experts fully understands the emotional and financial impact of divorce. We will help you through separation, divorce, mediation, divorce coaching, and parent coordination, our full-service family law firm expertly supports you, guides you, and represents you – throughout your case.