Equalization Payments

Understanding the Basics of Calculating your Equalization Payment for your Divorce

Calculating your equalization payment for your separation or divorce is not only a very common step to obtain accuracy and fairness but is also necessary. This step is very important for clarity between parties. After the equalization is done and well explained and discussed, clients tend to de-escalate tension.

The money that the spouse with the higher total has to pay the spouse with the lower total is shown in the “equalization payment.” The purpose of an equalization payment is to put both spouses in an equal position. The result is that both spouses end up owning the same percentage of their assets, but they can agree differently in mediation. We also discuss how the money will be paid to the other person and when.

There can be many issues regarding the value and ownership of a spouse’s assets. This is also a very important step; a lot of clients call me to mediate with the intention of buying the other person’s interest in the main residence. This cannot be properly determined until the equalization payment is clear. Consulting with our accountant can provide insights into tax implications and financial strategies related to the equalization process. You can also provide all this information to your accountant or financial advisor.

The following steps are intended to give you a basic understanding.

STEP ONE: IDENTIFY AND VALUE THE ASSETS

The first step in calculating your equalization payment for your divorce is to make a list of all your assets.

This may include:

– Personal property
– Real estate
– Bank accounts
– Shares in corporations
– Pensions, including Registered Retirement Savings Plans

The value of most assets can be easily determined by reference to the current fair market value. However, there are some assets for which the determination of value can be quite complex, such as pensions or shares in companies that are not publicly traded. The Family Mediation Center will either work with your accountant if preferred, or we have a professional accountant we can outsource this task to.

STEP TWO: Factor in your total debt

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Subtract the total debt, including:

– Credit cards
– Loans
– Any outstanding credit
– Family debts
– Car leasing

STEP THREE: Calculate your Net

Calculate your net by adding up your total assets minus debt.

STEP FOUR:

Adjustments and considerations, such as gifts or how to pay the other party (for example, in cash or after selling the house through RRSP), need to be taken into account.

It’s worth noting that this process is fairly complicated. This is why we normally go through it together in the mediation process before the separation agreement has been signed. You can show the results of the equalization formula to your accountant, who will provide you with advice if necessary. We also offer accounting services to analyze tax implications; an accountant is part of our team if their services are needed. This additional information will be attached to the separation agreement for clarity and future reference if needed.

An example of sample couple John and Beth:

So the combined Net Assets between John and Beth is:

$ 54 000 + $ 23 000: $ 77000

Each one should finish with $ 38 500

John will need to pay to Beth $15,500

John position : $ 54 000 – $15,500 :$ 38 500

Beth position: $ 20 000 + 15,500 : $ 38 500

Is this 50 % and 50 % what the divorcing couple consider right and fair ?

How much and when Beth will get paid?

How this payment may affect John?

What tax implication may have the RRSP?

Should the equalize be done with RRSP or Cash or a debt?

Is Beth’s mother loan acceptable for both of them?