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COVID financial crisis

Watch out for ex-spouse using COVID-19 to their advantage

Thursday, May 28, 2020 @ 11:52 AM | By John P. Schuman

John P. Schuman %>
John P. Schuman
While the pandemic represents a time of struggle for most people, for some separating or recently separated spouses, it represents a time of opportunity. Those spouses may try to take advantage of the situation, and the operation of Part 1 of Ontario’s Family Law Act, to try to get all of their ex’s wealth. Assisting clients during these difficult times requires an understanding of how that can happen. Separating spouses need to make the right plans.

Until COVID-19 hit, when it came to property matters, separated spouses were more concerned about what happens when assets increase significantly after separation, and when those separated spouses share in that increase and when they don’t.

Unfortunately, due to the COVID-19 pandemic, the economy is facing the opposite situation, with people’s RRSPs and other investment savings plummeting in value. Even with the courts almost completely closed, many spouses are making legal claims to try to get all of what their ex has left.

While the law allows this, many separating spouses may feel it is unfair and need guidance to protect their interests. This type of action is not unique to COVID-19. It is also a concern whenever the economy takes a downturn. It was also a problem in 2008 and 2009.

To understand how his scam works, it is necessary to understand how property division works after a marriage. There is no property division for common law couples under Ontario’s Family Law Act. To briefly summarize and simplify how property division works, with some exceptions, married couples share the increase in their net worths from their date of marriage to the day they separate. That makes those two dates very important.

With the possible exception of matrimonial homes, married spouses start counting how much they have, and really how much what they have is increasing in value from the date of marriage. For the purposes of property division under Ontario’s Family Law Act, they stop considering their increase in net worth on the date they separate. But, in these troubled times, that same law means that they stop counting any decrease in net worth on the date of separation too.  

The value of what a spouse owns before the date of marriage and after the date of separation doesn’t matter. All that matters is what the married spouses had on those two dates. That fact is what allows one spouse to take a disproportionate share of the family’s wealth.

Ontario family law recognizes that spouses do not have to physically separate, meaning one spouse walking out of the home, for the spouse to be separated. The law recognizes that spouses can live “separate and apart under the same roof.” The law says that when the spouses move apart is not necessarily the important date for property division, the date is when they stop living together as husband and wife, even if they continue to reside under the same roof.

That gives at least one spouse a big incentive to say the marriage was over, and the parties stopped living as husband and wife before the COVID-19 crisis hit. It gives an incentive to say the marriage ended before the value of their spouse’s assets plummeted — and to say that they were just sharing the same space as co-tenants, not as spouses anymore.

To illustrate the advantage this gives, consider a situation where one spouse had $500,000 in investments, but no other significant assets on Jan. 1, 2020 and the other spouse had very little. By the end of March, those investments have fallen to $250,000 in value and the stress of being isolated together in the home means that one spouse walks out.

But the spouse with no assets does not want to share in $250,000. That spouse wants to share in $500,000. So, that spouse says they separated — stopped living like spouses — on Jan. 1, when the investments were worth $500,000. Under Ontario’s property equalization scheme, that means that spouse would be owed an equalization payment of half the assets on Jan. 1 — $250,000 — or all of what his or her ex has left.

That is an extreme case just to illustrate the point. In most separations the problem will not be that dramatic. But, in almost all situations, one separating spouse will be upset if the other spouse gets even a small benefit in that way.

Of course, the opposite it also true.  If the spouses had a big fight on New Year’s Day, never got along afterward and stopped living like spouses then, the spouse with the investments has a significant incentive to try to reconcile the relationship, even briefly, while the investment value has cratered. This is because if the spouses rekindle their relationship, even for a couple of days or nights, the date of separation becomes that last date of their brief “reconciliation.”

Using that new date of separation, the spouse will share in the low value for the assets. That could be a big help for a spouse whose net worth has declined during the pandemic. It is particularly helpful if everyone’s investments rebound after the crisis because then the spouse could be sharing his or her net worth when it was at its lowest point in years or even decades.

The law is not so unreasonable as to allow one spouse to pick the date of separation that benefits him or her the most. If the parties cannot agree, a judge or family arbitrator will decide. With so much money potentially at stake, there is clear incentive for one spouse to advance the position that gives him or her the biggest financial advantage. Consequently, judges try to look at the facts objectively and ask themselves: “When would an objective person, who knew the couple, say the relationship was over?”

In determining that, it is not just when the couple stopped having sex, or even when one spouse started having an affair (some relationships recover from that). The judge (or arbitrator) looks at factors such as:

  • when the spouses stopped eating together,
  • when they stopped going out or vacationing together,
  • when they stopped showing signs of affection for each other,
  • when they stopped referring to each other as spouses,
  • when they took the wedding rings off
  • when they separated their finances (opened separate accounts or stopped paying each other’s bills)
  • many other possible factors depending on the family’s situation.

Determining when spouses separated in these difficult circumstances can be open to argument. Also, the separation date can be very dependent on the specific facts of the individual case. Since there can be a lot of money at stake, separating spouses need good advice from their lawyer that enables them to make the best decisions.

Good lawyers will be able to advise clients not just on what will happen when they separate, but when to separate in these difficult times. Good legal advice can save a spouse thousands, even hundreds of thousands, of dollars, which is all the more important in the uncertain financial times that COVID-19 has created.

John P. Schuman is a certified specialist in family law and is the partner leading the family law and education law groups at Devry Smith Frank LLP with several years’ experience in both areas of law. He is also the author of the book, Guide to the Basics of Ontario Family Law and is the host of the Ontario Family Law Podcast.

Photo credit / suwichaw ISTOCKPHOTO.COM

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