Post Separation Date Decline in Assets and the Equalization of Net Family Property

You have separated from your spouse. Market forces beyond your control have dramatically reduced the value of your assets since your separation. Will the equalization of net family properties still be determined by the value of assets on the date of separation? Maybe not!

The rationale for the equalization of net family properties is articulated in Section 5(7) of the Family Law Act: “inherent in the marital relationship there is equal contribution, whether financial or otherwise, by the spouses to the assumption of responsibilities, entitling each spouse to the equalization of net family properties” (R.S.O. 1990, c.F.3). The date of separation is chosen as the valuation date to reflect this rationale, as any changes to the value of a spouse’s assets after the separation date are not related to contributions to the marriage.

But what if, between the date of separation and the divorce, market forces dramatically reduce the value of a spouse’s assets? Although an equalization of net family properties based on their values on the date of separation is the general rule, there are exceptions enumerated in Section 5(6) of the Family Law Act. These factors grant Ontario courts limited discretion in departing from the separation-date equalization to be applied only “if the court is of the opinion that equalizing the net family properties would be unconscionable.”

In February 2009, the Ontario Court of Appeal exercised its discretion and applied Section 5(6) in Serra v. Serra (2009 ONCA 105). Mr. Serra owned a successful textile business valued at approximately $10 million on the date of separation. Between separation and the trial, the value of Mr. Serra’s business had dramatically dropped to approximately $2 million. The trial court initially held that Mr. Serra was obliged to make an equalization payment to Ms. Serra based on a separation-date valuation. Accordingly, Mr. Serra was to pay Ms. Serra more money than his total net worth. He appealed.

Subsequently, the Ontario Court of Appeal was satisfied that the equalization of net family properties based on a separation-date valuation would be unconscionable. Mr. Justice Blair, speaking for a unanimous court, cited several facts which jointly gave rise to the application of Section 5(6).

Firstly, the dramatic drop in the value of Mr. Serra’s business occurred by no fault of his own. Market forces far beyond his control had crippled the textile industry in Canada putting many firms out of business. Secondly, the downturn in the textile market was not temporary: the Court found that there was very little chance that Mr. Serra’s business would recover. Thirdly, Mr. Serra took many steps to keep his business afloat (he borrowed money, laid off employees, etc.). Finally, on the basis of Ms. Serra’s trust claim to the business, a preservation order was made, ultimately prohibiting Mr. Serra from selling his failing business. The preservation order prevented Mr. Serra from mitigating his losses by selling his business as the market downturn progressed.

Mr. Justice Blair acknowledged that the goals of the Family Law Act are to create certainty, predictability, and finality in the determination of support obligations and property division. To many, judicial discretion over the value of awards conflicts with these goals. In light of this, Mr. Justice Blair held that in order to depart from separation-date valuation, the result must “shock the conscience of the court” (para. 47). A stringent test was established, holding that a court may only take into account post-separation date changes in the values of assets if:

1. the circumstances are exceptional;
2. the circumstances giving rise to the change in value relate to the acquisition, disposition, preservation, maintenance or improvement of property, in accordance with Section 5(6)(h) of the Family Law Act; and
3. Equalization would be unconscionable, having regard to the circumstances (para. 46).

In conclusion, the Court of Appeal was satisfied that the requirements of the test had been met and that separation-date equalization would be unconscionable. Accordingly, the Court dramatically reduced the value of the equalization payment owed to Ms. Serra to an amount considered fair, just and equitable, reflecting the dramatically lower value of Mr. Serra’s business.