Equalization Claim Procedures – Estate Litigation 7/9

Court Applications Under s.7

To enforce an equalization claim, the surviving spouse must file a court application under s.7 of the FLA. This application initiates the legal process and requires the following:

• Financial Disclosure:
  • Both parties must provide detailed financial information, including:
    • Assets and liabilities as of the date of marriage and the valuation date.
    • Any exclusions claimed (e.g., gifts, inheritances).
    • Dispositions of property made within two years before the application or during the marriage under s.8
• Burden of Proof:
  • The surviving spouse must prove the value of the deceased spouse’s Net Family Property (NFP) and their own NFP.

Unconscionability – When Courts Refuse Equalization

Courts may refuse to award an equalization payment if it would be unconscionable to do so. Factors considered include:

• Whether one spouse depleted assets to the detriment of the other.
• Whether the surviving spouse’s conduct during the marriage justifies a reduced award.

For example, in Von Czieslik v. Ayuso ONCA [2007], the court awarded the surviving spouse 100% of the difference in NFPs due to the deceased spouse’s improper depletion of assets.

Orders for Assistance

If the estate trustee refuses to provide necessary information, the surviving spouse can seek an order for assistance from the court. This order compels the trustee to:

• Disclose estate assets and liabilities
• Provide financial records relevant to the equalization claim

Restraining Orders

To prevent the depletion of estate assets, the court can issue orders to:

• Restrain the estate trustee from transferring or selling property.
• Preserve assets until the equalization claim is resolved under s.12

Security and Enforcement Options

If there’s a risk that the estate trustee may not comply with the court’s orders, the surviving spouse can request:

• Security:
  • The court may require the estate to post a bond or other security to ensure the equalization payment is made
• Enforcement orders:
  • If the estate trustee fails to comply, the court can enforce its orders through penalties or other remedies

Once the court determines the amount of the equalization payment, it has several options for enforcing the award:

1. Lump sum payments:
   • The estate may be required to pay the entire amount in one payment.
2. Deferred or instalment:
   • Under s.9(3), if a lump sum payment would cause undue hardship, the court may allow payments to be made over time, up to a maximum of 10 years
3. Property transfers:
   • Instead of cash, the court may order the transfer of specific assets (e.g., real estate, investments) to satisfy the equalization claim.

Special Rules for Business and Farm Properties

Courts are cautious about ordering the sale of operating businesses or farms, as this could harm their viability. Instead, the court may:

• Order a share of profits to be paid to the surviving spouse
• In the case of incorporated businesses, require the transfer of shares to the surviving spouse under s.11

Tax Liabilities and NFP Calculations

The deceased spouse’s NFP must account for income tax liabilities that arise on death, such as:

• Capital gains tax:
  • The Income Tax Act (ITA) deems the deceased to have disposed of all capital property at fair market value, triggering capital gains tax.
• RRSP/RRIF collapse:
  • Registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) are also deemed disposed of, resulting in taxable income.

These tax liabilities reduce the value of the deceased spouse’s NFP, which in turn affects the equalization payment.

Impact of Life Insurance and RRSP Rollovers

• Life Insurance Proceeds:
  • Under s.6(6), while life insurance proceeds are not included in the NFP calculation, they must be set off against the equalization claim if the surviving spouse is the beneficiary
• RRSP rollovers:
  • If the surviving spouse is designated as the beneficiary of an RRSP, the tax-deferred rollover rules under s.70(6) of the ITA may apply. However, the value of the RRSP must still be set off against the equalization claim.

Estate Planning Risks

Failing to account for tax liabilities can lead to disputes over the NFP calculation. For example, if the estate trustee doesn’t properly deduct taxes, the surviving spouse may receive a larger equalization payment than intended.