SOMETHING TO KEEP IN MIND WHEN CHOOSING SPOUSAL ELECTION

When your spouse passes away, you often have way too much on your plate to worry about money. However, once the time comes to deal with your finances, it is important to know what options you have available under current Ontario legislation.

If your spouse had a valid Will when they passed away, you can easily collect your entitlement. However, if for some reason this is not what you were hoping for, rather than challenging the Will or going through the trouble of a dependant support claim, you can choose to use the Family Law Act (FLA) to your benefit.

Under s.6 of the FLA, surviving spouses have the right to choose between their entitlements under the Will, or claiming an ‘equalization payment’ as if they were getting a divorce. This is called spousal election.

Now, determining the value of an equalization payment can be a little tricky, especially once tax implications become involved. Generally speaking, this payment will be comprised of the difference between each spouse’s net family property (NFP). If the deceased spouse has a higher NFP, the surviving one is entitled to that difference.

Therefore, it is in the surviving spouse’s best interest to minimize the value of their NFP as much as possible.

Deducting Disposition Costs in NFP Calculations

If there is a large asset that will be expensive to liquidate, a common issue is how to add this to the NFP. Can this asset’s value be reduced by listing the ‘capital gains’ as a liability, even if the asset is not disposed of just yet?

This was one of the issues in a 1994 Ontario Court of Appeal case called Sengmueller v. Sengmueller. Here, it was noted that tax consequences are appropriate to take into account when determining net family property amounts.

However, strict rules apply:

  • “There must be satisfactory evidence of a likely disposition date of the assets.”
  • “The costs of disposition will be inevitable when the owner disposes of the assets or is deemed to have disposed of them regardless of whether the asset needs to be realized to make an equalization payment.”

So, for example, if a surviving spouse is about to sell her home, ‘capital gains’ can be listed as a liability as of valuation date, regardless of whether she needs to sell the home or not. As long as there is enough evidence that the sale of the home is likely, the costs of this sale can be used to reduce her NFP.

This was more recently affirmed in Tremblay v Tremblay, where the court acknowledged that ‘disposition costs should be deducted in determining the value of an asset for equalization purposes unless it is unclear when, if ever, the value of the property will be realized.’ It was determined that ‘the value of the asset for equalization purposes is the net value after tax and other disposition costs’.

So, make sure to keep this in mind when deciding between spousal election or collecting your entitlement under the Will – sometimes tax law makes all the difference!

 

Colleen Dowling

 

Nothing contained in this post constitutes legal advice or establishes a solicitor-client relationship. If you have any questions regarding your legal rights or legal obligations, you should consult a lawyer.