How are debts handled when property is divided in Ontario?

Debts are not split down the middle in Ontario. Each married spouse subtracts what they owed on the valuation date from what they owned on that date, and the debts they brought into the marriage are taken into account too. The result changes the equalization payment, not who the bank or the Canada Revenue Agency can collect from.

How are debts counted in an Ontario property division, step by step?

Ontario does not divide assets and debts item by item. Instead, each spouse works out their own net family property under section 4(1) of the Family Law Act, and the spouse with the higher figure pays the other half the difference. Debts matter because they lower that figure. Our guide to how property is divided when a marriage ends sets out the whole process. Our property division page gives the broader picture. For debts, the steps look like this:

1. Fix the valuation date. In most cases it is the day you separated with no reasonable prospect of getting back together (s. 4(1)). Balances are taken at close of business on that day (s. 4(4)). If the date is in dispute, read our page on how the valuation date is chosen, because a different date can mean a different balance on every loan.
2. List every debt in your name on that date. Mortgages, lines of credit, credit cards, car loans, student loans, tax owing and money borrowed from family. Clause (a) of the net family property definition lets you deduct your "debts and other liabilities".
3. Add tax that will be owed later. The deductible liabilities include any applicable contingent tax liabilities in respect of the property (s. 4(1.1)), such as the tax that will be due when an RRSP is cashed in.
4. Go back to the wedding day. Work out what you owned on the date of the marriage, minus what you owed then. That net figure is also deducted (clause (b) of the definition).
5. Leave out the home's debts on the wedding-day side. Debts related directly to buying or significantly improving a matrimonial home are not part of the wedding-day calculation.
6. Apply the floor at zero. If your debts are bigger than your property, your net family property is treated as zero (s. 4(5)).

The full arithmetic, with every line of the formula, is on our page about calculating net family property. This page focuses on the debt side of that calculation.

Which debts count, and where do they go?

The court form makes the rules concrete. In a property case each spouse swears a Financial Statement (Property and Support Claims), Form 13.1, under rule 13(1.2) of the Family Law Rules. Part 5 of that form lists debts and other liabilities on three dates: the date of marriage, the valuation date and today. The form says not to net a mortgage off the value of the house in Part 4; the house goes in at full market value and the mortgage goes in Part 5.

The wedding-day rule surprises people. On Form 13.1, item 24 is your wedding-day assets minus your wedding-day liabilities, and item 25 adds that figure to your valuation-date debts to get your total deductions. If you owed more than you owned when you married, item 24 is negative and your deductions shrink. In plain terms, a student loan you brought into the marriage and paid off with family income is treated as value you built during the marriage, and it is shared.

Joint debts, lenders and the Canada Revenue Agency

Equalization is a calculation between spouses. When a court decides a property claim, it orders one spouse to pay the other (FLA s. 9(1)(a)); a lender is not a party to that order. If both names are on a line of credit or a mortgage, a separation agreement that says one of you will pay it does not, on its own, take the other name off the loan. Speak to the lender in writing before you rely on a promise in an agreement, and ask what it would take to release one borrower.

Form 13.1 asks for the value of your own interest in property, so a jointly owned home appears on each statement at that spouse's share. A joint debt is normally listed the same way. Both statements should use the same valuation-date balance, so that the same dollar is not deducted twice.

Tax debts carry an added risk. Under section 160(1) of the federal Income Tax Act, if one spouse owes tax and transfers property to the other spouse for less than its value, the receiving spouse can become jointly liable for that tax, up to the value received. Section 160(4) protects transfers made under a court order or a written separation agreement while the spouses are separated and living apart because the marriage broke down. Taking money or property from a spouse with a tax problem before the paperwork is signed can leave you exposed.

The family home has its own protection. Section 21(1) of the Family Law Act says a spouse may not dispose of or encumber an interest in a matrimonial home without the other spouse's consent, a release in a separation agreement or a court order. A new mortgage or a home equity line registered without consent may be set aside under section 21(2), subject to protection for a lender who acted in good faith without notice. Our page on whether a spouse can sell or mortgage the home without consent explains what to check on title.

What changes the answer

• Who has to prove the debt. A spouse claiming a deduction must prove it (s. 4(3)). A loan from a parent with no paperwork and no repayments can be challenged as a gift. Statements, loan agreements and proof of payments do the work.
• Debts hidden at the wedding. A spouse's failure to disclose debts or other liabilities that existed at the date of the marriage is the first factor in section 5(6), clause (a).
• Reckless or bad-faith borrowing. If debts claimed as deductions were incurred recklessly or in bad faith, the court may consider an unequal share under section 5(6), clause (b).
• One spouse carried the family's borrowing. Clause (f) covers a spouse who incurred a disproportionately larger amount of debt than the other for the support of the family.
• Depletion before separation. Intentional or reckless depletion of net family property is clause (d). The threshold for any of these is unconscionability, which is very high; our page on when a court can divide property unequally explains it.
• The zero floor. Because net family property cannot be below zero (s. 4(5)), a spouse with more debt than property does not pass part of that debt to the other spouse through equalization.
• Paying the award. If paying at once would cause hardship, the court may order instalments or a delay of up to ten years and may require security (s. 9(1)(b) and (c)). It may also order property sold to satisfy the award (s. 9(1)(d)).

A spouse's business can bring its own liabilities, such as bank guarantees and money owed to or by the company. Those questions are covered in our guide to a business owned by one spouse.

A worked example

For example, imagine a hypothetical couple, Alex and Jordan. They co-own a home worth $700,000 on the valuation date with a $500,000 mortgage, so each shows a $350,000 share of the home and $250,000 of the mortgage. Alex also has a $40,000 line of credit, and the tax on Alex's RRSP is an assumed $15,000 for illustration only. On the wedding day Alex had $30,000 in savings and a $45,000 student loan; Jordan had $20,000 in savings and no debt.

The difference is $50,000, so Alex owes Jordan an equalization payment of $25,000. Now look at the student loan. If Alex had brought no debt into the marriage, Alex's wedding-day figure would be $30,000, total deductions $335,000 and net family property $95,000. The difference would be $5,000 and the payment $2,500. Paying off that $45,000 loan during the marriage moved $22,500 to Jordan's side, which is exactly half of the debt that family income cleared. Note too that the mortgage reduces both figures equally, so it does not change the payment at all. Interest and costs are left out, and the tax figure is a placeholder, not an estimate of real tax.

Common mistakes with debts on separation

• Using today's balance. Net family property uses the balance at close of business on the valuation date. A credit card you ran up after separation is yours alone.
• Forgetting wedding-day debts. People list the savings they brought in and leave out the car loan or student debt they also brought in. Form 13.1 asks for both, and leaving debts out overstates your deduction.
• Counting the mortgage twice. Entering the home at its value net of the mortgage and then listing the mortgage again in Part 5 lowers your figure twice. The form says to show full market value in Part 4 and the mortgage in Part 5.
• Treating the agreement as a release from the bank. An agreement between spouses governs what they owe each other. Your lender's rights depend on your loan documents.
• Taking transfers from a spouse who owes tax. Before a signed agreement or order, section 160 of the Income Tax Act can make you liable for a spouse's tax debt up to what you receive.
• Arriving with no proof. The onus is on the spouse who claims the deduction (s. 4(3)). An undocumented family loan is easy to challenge.

What to do this week

1. Write down the date you consider your separation date and anything that shows it, such as a moving date or a written message.
2. Download the statement issued closest to that date for every mortgage, line of credit, credit card and loan. Rule 13(3.3), paragraph 12, requires these in a court case.
3. Find what you can about debts you had on your wedding day: old loan statements, a credit report or a bank's letter. Paragraph 13 of the same rule asks for any available documents.
4. Check every joint account and loan. Decide whether to ask the lender to freeze further borrowing on a joint line of credit, and keep a copy of your request.
5. If your spouse owes tax or has a business, do not accept transfers until there is a signed agreement or order.
6. Gather the papers that our financial disclosure guide lists, so your sworn statement is complete the first time.

Frequently asked questions

Do I have to pay half of my spouse's credit card?

Not as such. Your spouse deducts their own card balance from their own net family property, which lowers their figure and may lower what they pay you or raise what you pay them. Your obligation to the card company only exists if your name is on the account.

Does a loan from my parents count as a debt?

It can, if it was a real loan that was owed on the valuation date. You carry the burden of proving it (s. 4(3)), so a written agreement, a repayment history or a demand for payment helps. A transfer with no expectation of repayment is more likely to be treated as a gift.

Can I deduct the legal fees for this case?

Form 13.1 asks you to list unpaid legal or professional bills arising from the case among your debts. Whether they reduce net family property depends on whether they were owed on the valuation date, and bills for work after that date usually were not. Ask about costs orders separately.

What if my debts are bigger than everything I own?

Your net family property is treated as zero (s. 4(5)). Your spouse then pays you half of their own net family property, if it is above zero, and you keep your debts.

Do debts affect child or spousal support?

Support is based on income, which is worked out under the Child Support Guidelines rather than from your net family property; our page on what counts as income for support explains that. Separately, an unusually high level of debt reasonably incurred to support the family during cohabitation is one circumstance that may cause undue hardship under section 10(2)(a) of the Guidelines.

Can the court order the house sold to pay the family's debts?

The court can order property to be partitioned or sold if that is appropriate to satisfy an equalization order (s. 9(1)(d)). It can also give directions on ownership questions under section 10. Sale is one tool, not the default.

Sources

• Family Law Act, R.S.O. 1990, c. F.3, ss. 4, 5(6), 9, 10, 21
• Family Law Rules, O. Reg. 114/99, rule 13(1.2) and (3.3)
• Ontario Court Forms, Form 13.1: Financial Statement (Property and Support Claims), Parts 4 to 9
• Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), s. 160(1) and (4)
• Child Support Guidelines, O. Reg. 391/97, s. 10(2)(a)