Valuing Debt at the Date of Marriage

In the case of Zavarella v Zavarella, the Ontario Court of Appeal was faced with making a decision in a situation in which the wife had debt on the date of marriage and made an assignment into bankruptcy shortly before the marriage. Within months, the wife was discharged without having made any payments on her debt. The court had to determine how much, if any, of the debt should be treated as debt in calculating her net family property (“NFP”).

Section 5 of the Family Law Act provides that spouses are to share equally in any increase in the value of family property between marriage and the date of separation, which results in an equalization of the spouses’ net family property. Thus, any debt a spouse brings to the marriage will affect that spouse’s entitlement in the equalization calculation.

An example of the calculation of equalization of net family property is as follows: Jamie and Jordan get married. Jamie enters the marriage with $50,000 in debt (and no assets) and Jordan enters the marriage with assets valued at $150,000 (and no liabilities). At the date of separation Jamie’s debt has been expunged and her assets are valued at $200,000, while Jordan has increased his net worth to $400,000.

A strict interpretation of the Family Law Act leads to the following NFP calculation:

Jamie: 200,000 – (-50,000) = $250,000

Jordan: 400,000 – 150,000 = $250,000

Accordingly, neither spouse is required to make an equalization payment to the other.

However, had Jamie’s debt been expunged prior to marriage, her NFP would be reduced to $200,000. Accordingly, Jordan would be required to make an equalization payment.

Thus, the treatment of a person’s debt at the date of marriage can significantly impact the NFP calculations.

In a majority decision in this case, the Court of Appeal found that the trial judge erred in treating the debt at the date of marriage as debt for the purpose of the NFP calculation.

The Court of Appeal referred to case law with respect of contingent liabilities. In Poole v Poole, the court stated: “Just because an asset or a debt has a certain face value, it does not automatically follow that the court must insert that face value in the net family property calculation.” The value of debt ought to be based on the probability that it would be collected. As such, where evidence indicates that it is unlikely that the promissor will ever be called upon to pay, the debt should be adjusted accordingly.

Expert evidence led by both parties showed that the wife was never be called upon to pay the debt. Thus, it was held that the trial judge erred in attributing any value to the wife’s date of marriage debt and the wife should not have debt on the date of marriage for the purposes of determining the equalization of net family property.

It is worth noting that, in dissent, the legislative intent of the Family Law Act was stressed.  In the dissent opinion, the formulaic approach to equalization of family property should have been applied rather than a ‘hindsight’ approach.