Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice, contact me (Michael Carabash) or David Mayzel.
It’s important for dentists who are married, or who are contemplating getting married, to understand how their finances can be affected if that relationship ever breaks down. Under section 5(1) of the Ontario Family Law Act, when a married couple gets a divorce or is separated and there is no reasonable prospect that they will resume cohabitation, their “NET FAMILY PROPERTY” (the couple’s net increase in wealth during the course of their marriage – with a few adjustments) is divided in half. This translates into an “EQUALIZATION PAYMENT” which each spouse is entitled to. We’ll discuss how net family property is calculated in the next 8 steps…
Step 1: Determine the Value of the Property on the Separation Date
The first step to calculating net family property involves looking at the end of the marriage. What property did each spouse own at the end of the marriage? Property will include things like real property (e.g. land, buildings, homes, cottages, condos, etc.) or personal property (e.g. money, securities, RRSPs, paintings, chattels, cars, boats, collectibles, etc.).
Importantly, Ontario courts have consistently held that a license to practice dentistry does not constitute property which can be valued and added to net family property. In Caratun v. Caratun,  O.J. No. 1982, the Ontario Court of Appeal held that a dental license is not property because it doesn’t fit the definition of property in various ways: the license is not transferable (whereas property is), the license requires the personal efforts of the dentist in order to be of any value in the future (and work to be performed by either spouse in the future is not included in the definition of net family property), and the only difference between the license and any other right to work is in its exclusivity (but any such attainment should not be considered “property” under the Act). Apart from these difficulties, the Court of Appeal also noted the inherent difficulty of trying to value a dental license:
22 It is clear from the considerations referred to above, that there are substantial difficulties, both practical and conceptual, in treating licences as “property”. In addition, the valuation of such a right would be unfairly speculative in the matrimonial context. A myriad of contingencies, including inclination, probability of success in practice of the profession, length of physical and mental capability to perform the duties of the profession, competition within the profession, and many others, all render a fair valuation of the licence unusually difficult. But a further potential inequity arises: support orders may be varied if circumstances change, but no amendment of an equalization payment is possible regardless of changed circumstances.
25 For all of the above reasons it is my view that a professional licence does not constitute property within the meaning of s. 4 of the F.L.A.
The Court of Appeal’s view that a dental license is not “property” for the purposes of calculating net family property was reiterated by the Ontario Superior Court of Justice in David v. David  O.J. No. 5022 and Thompson v. Thompson,  O.J. No. 1038.
Once each spouse puts together a list of their property, they need to determine the VALUE of that property. Determining VALUE requires two things: (1) a valuation method and (2) a date on which to value the property. The valuation method is typically FAIR MARKET VALUE. In other words, what would it cost to go out in the market and buy this piece of property from a complete stranger (instead of a friend or family member who would give you a deal)? We don’t care about the book value (i.e. what was the original cost of the property) because this won’t reflect the fair worth of the property. The DATE on which the property is being valued is the earliest of the following dates:
If both spouses own property together (e.g. joint bank account), half of the value of that property is attributed to each spouse.
Now some assets are going to be hard to value (e.g. pensions, securities, business interests, etc.). You may need the assistance of a professional valuator / appraiser to figure this out. In David v. David  O.J. No. 5022, the Ontario Superior Court of Justice heard two different views from valuators about the asset value of a dental practice. The court ultimately fixed a midpoint value between the two opinions at $102,500 for the goodwill and a total value of the dental practice at $249,000 at the date of separation. In coming to that conclusion, the court took into consideration: the age and location of the dental practice, the patient base, the management style and office protocols of the dental practice, data from another similar practice which the dentist had previously sold, a commonsense and market comparison capitalization rate (i.e. the yield of income to capital). To this valuation, the court added accounts receivable (i.e. money which was owed to the dental practice by patients) of $20,046.
Finally, it’s important to keep in mind that not all property is to be included in this calculation. There is some property (e.g. pre-marital assets, gifts or inheritances received during the course of the marriage, life insurance proceeds, etc.) that are NOT TO BE INCLUDED – but I’ll get into this below. It’s just a good idea to keep in mind.
So with all this in mind, lets say, for arguments’ sake that here are the values of the two spouse’s property as of the date of separation:
Step 2: Subtract Debts on the Separation Date
Recall that we’re looking for the NET INCREASE IN WEALTH for each spouse during the course of the marriage. That’s why we need to subtract the total debts of each spouse from their property values as of the date of separation. This will give us a net amount for each spouse as of the Separation Date. This would include things like credit card debts, lines of credit, loans, and business expenses and liabilities (e.g. rent, leases, associate pay, employee wages, etc.). In David v. David  O.J. No. 5022, for example, the court deducted $164,605.71 worth of expenses related to a dentist’s practice (e.g. for employee wages, associate payments, lab charges, taxes, condominium charges, equipment rental, etc.). The court also deducted a $51,281 line of credit which the dentist had used to finance the dental practice.
Going back to our example above, let’s assume that the husband had debts of $100,000 and the wife had debts of $50,000. That means that each of their net asset value as of the date of separation would be as follows:
Step 3: Determine the Value of the Property on the Date of Marriage
By this stage, we now have the final figure to be used in determining what the NET INCREASE IN WEALTH for each spouse was during the course of their marriage. Now we need to do the same thing AT THE BEGINNING OF THEIR MARRIAGE! So we start off by listing the property and determining the value of that property at the beginning of the marriage. We would use, however, the FAIR MARKET VALUE of the property on the DATE OF MARRIAGE (not the current date). So lets assume the following values can be attributed to each spouse at the beginning of their marriage:
Step 4: Subtract Debts on the Date of Marriage
As with when you’re trying to find the NET WEALTH of each spouse on the date of separation, you must also do the same for each spouse on the date of their marriage. That means you must subtract their debts and liabilities from their assets as of that date. So let’s assume that the husband had debts of $50,000 and the wife had debts of $100,000. Taking into consideration their assets (Step 3), that would mean that the husband and wife were worth the following at the beginning of the marriage, respectively:
Now, just to clarify, how is it that a person can have a negative net worth at any given point? Well, they can have assets (e.g. car, home, money in bank account). But their debts and liabilities are simply greater than their assets. Perhaps they have lots of credit card bills. Or maybe they borrowed money to acquire some of their assets. Or maybe they spend more than they earn so they don’t have disposable income. That explains why the Wife, in this example, had a negative net worth of $75,000 at the date of the marriage.
Step 5: Determine Net Family Property
Now that we have a starting figure (net wealth of each spouse at beginning of marriage) and an ending figure (net wealth of each spouse at end of marriage), we can find out the difference. This figure represents the net family property of each spouse. Now don’t get ahead of yourself: you still need to make certain adjustments (Step 6), but this is the starting point. So based on our example above:
Now, if net family property for a spouse is a negative number (e.g. the Husband above), then he or she is given a “0″. In other words, there is NO NEGATIVE VALUE attributed to his or her net family property. It can never be a negative number. Only “0″ if the spouse was actually worth LESS on the date of separation than they were at the date of marriage. That’s what section 4(5) of the Ontario Family Law Act says. So now our NET FAMILY PROPERTY for each spouse would be:
Step 6: Subtract Certain Items
Now before we go ahead and find the difference between each spouse’s NET FAMILY PROPERTY, we need to exclude certain items. This is what the Ontario Family Law Act says. Here are the things to exclude:
testator has expressly stated that it is to be excluded from the spouse’s net family property;
OK, so in our example, since the husband had a net family property of $0, there’s no point in deducting anything else. We simply look at the wife’s net family property of $25,000 and see if we can deduct the value of any of the above. If we assume, for example, that the wife inherited $5,000 as a gift from her father’s estate after he died, then we can exclude that (assuming that there’s nothing in prenup, marriage contract, or separation agreement that says otherwise). This means that the wife’s adjusted net family property will be $20,000 ($25,000 – $5,000).
Step 7: Find Difference Between Net Family Property
OK, so now that we have both spouse’s net family property, we find the difference between the two. In this case, the difference is $20,000 (the husband had $0 and the wife had $20,000).
Step 8: Divide Difference of Net Family Property by 2
The final step is to divide the difference between the Husband and the Wife to create an EQUALIZATION PAYMENT which each spouse is entitled to when they separate. Dividing $20,000 by 2 means that each spouse is entitled to $10,000.
That, my friends, is a detailed example of how property generally gets divided pursuant to an EQUALIZATION OF NET FAMILY PROPERTY REGIME under Ontario Family Law. You find the NET INCREASE IN WEALTH for each spouse, take the difference between the two spouses, and then divide that figure by two to determine the EQUALIZATION PAYMENT which each spouse is entitled to.
So now that you understand how property is GENERALLY DIVIDED, in the next section, I’ll talk about how this REGIME can be altered through a Prenuptial Agreement (entered into before marriage) or Marriage Contract (entered into during the marriage), which are also known as “Domestic Contracts”. The regime can also be altered through a Separate Agreement (entered into upon the breakdown of the marriage). All of these agreements are called domestic contracts and are governed by the Ontario Family Law Act.
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