[vc_row][vc_column][vc_column_text]February 27, 2009

By Brad Smith

When married spouses separate, the property settlement (known as an equalization payment in Ontario) is based upon two dates: the date of separation and date of marriage. If an asset is owned by only one spouse, this normally means the owner spouse has the benefit, or burden, of an increase or decrease in value of the asset after the separation.

If there is a loss in the value of an asset, can the owner spouse use the loss of value after the date of separation to reduce his or her equalization payment to the other spouse? On February 4, 2009, the Ontario Court of Appeal stated very clearly in Serra v. Serra, yes.

Will a non-owner spouse be able to make a claim against the increase in value after the date of separation? Possibly. Will this result in a flurry of reductions in equalization payments because of the bursting of the market bubble and reduced value of assets? Not likely.

The legal test and the facts necessary to reduce an equalization payment as a result of post separation loss of value is very high and not easily achieved. The Ontario Court of Appeal stated a post-separation change in the value of an asset and an unequal division may be made when:

• The circumstances giving rise to the change in value relate (directly or indirectly) to the acquisition, disposition, preservation, maintenance or improvement of property.
• Equalizing the net family property would be unconscionable.

The Ontario Court of Appeal stated the threshold test of unconscionable is very high. The equalization payment must “shock the conscience of the court”. Circumstances which are “unfair”, “harsh” or “unjust” are not sufficient.

In the circumstances of the particular spouses, the single largest asset was owned by the husband. It declined in value after separation to approximately 25% of its value on the date of separation. The decline was completely market driven. The husband was not at fault or responsible in any way. Other factors a Court will take into account in determining whether the circumstances are unconscionable and the amount of the adjustment (if any):

• The amount of the change in value
• The reasons for the change in value
• Whether the change in value is temporary and the possibility of increase in the future
• Whether the owner spouse could have disposed of the asset
• The non-owner spouse’s claim to the property (for example a trust claim)
• Other financial obligations to the non-owner spouse (such as interim payments) and the ability to satisfy those obligations
• The length of marriage
• The assets or means of the non-owner spouse

The husband was permitted to reduce the debt he owed his wife to approximately 27% of the original Judgment.

The language used by the Court of Appeal is neutral. It is did not state that the post separation change relates to only a decrease in value of the asset. It is arguable that a non-owner spouse may use section 5(6) of the Family Law Act to increase the equalization payment because of a post separation increase in value.

The Ontario Court of Appeal also stated the nature of the drop in value was not “temporary” and “this case is not about whether a significant post-separation drop in the value of an individual’s stock portfolio, precipitated by a deep but temporary recession, will amount to unconscionability”. This suggests the Ontario Court of Appeal intended to distinguish market losses suffered by many investors. Arguably, market losses are temporary as history indicates the markets eventually recover all losses.

Thus a reduction in stock market investments may, as a question of law, give rise to unconscionability. But whether a stock market loss can be established on the facts as unconscionable will be very difficult to establish. Every case will have to be determined on the facts.[/vc_column_text][/vc_column][/vc_row]