When couples decide to separate and divorce, there are many issues to be dealt with. One of these issues is how to deal with the property and debts of the relationship.
In Alberta, the legislation that deals with this for married persons is the Matrimonial Property Act. The basic scheme involves determining the value of all property and debts, and then dividing it between the spouses. Most property acquired during the marriage is divided equally, (There are some exceptions, to be dealt with in another post.)
There is a simple process that we use to plan for the equal distribution of matrimonial property. It has four basic steps:
- Inventory. You start by making a list of all of the property and debts involved. The assets include real property (your home), vehicles, bank accounts and investments, RRSPs, pensions and the like. A business (whether a sole proprietorship, a partnership or a shares in business corporation) is also an asset. The debts include mortgages, line of credit, vehicle loans and so on. This first step is important, but not usually difficult.
- Valuation. The next step is to take each item in the inventory and assign a value to it. This step is important because when all of the values of the assets and debts are sorted out, we can then know the “net” value of the property (assets minus the debts) to be equally divided. Some values will be known (for example, a savings account balance or the balance owing on a mortgage). Some values may have to be determined, such as the value of a home or of a business owned by one of the spouses. When the spouses cannot agree on the value to be assigned to a particular item, valuation by a disinterested third party with some relevant expertise is the best option. Of course, there will be some expense involved in getting a valuation.
- Allocation. The next step in the process of matrimonial property division is to decide what to do with each asset and debt. There are two parts to this step. First, you need to decide whether an asset that physically exists (such as a the home or a vehicle) will be distributed as it is (“in kind”) or whether it will be sold and converted into cash. Second, you need to decide who gets which assets and debts by allocating them to one spouse or the other. This includes assets that have been sold. There may be a good reason to sell an asset and equally divide the proceeds of sale, but (contrary to the common misconception) it is not necessary (or desirable) to do this for every asset. This part of the process allows for the most creativity by the spouses, and increases the potential for a “win-win” result: both spouses may be able to walk away with the mixture of assets and debts that is most beneficial for their future plans.
- Equalization. Once you have done the allocation of the property and debts, you need to equalize any imbalance between the net amounts that each spouse receives from the allocation. Each spouse is entitled to 50% of the net value of the property as a whole. Therefore, if one spouse gets more than half of the net value of the property in the allocation process, then that spouse has more than he or she is entitled to. The fix is a cash payment from the spouse who got more to the spouse who received less, in an amount to equalize them. Here is a simple illustration. If the net value of the matrimonial property is $800,000 in total, then each spouse is entitled to $400,000. If the wife receives net property worth $600,000 and the husband receives net property worth $200,000 when allocating the assets and debt, then the wife will need to pay an equalization payment of $200,000 to the husband so that they both end up with their equal shares.
Overall, it has been our experience at Patriot Law that taking a methodical approach to the division of matrimonial property makes the process easier to understand and to simpler to resolve.