{"id":2701,"date":"2020-05-11T09:00:47","date_gmt":"2020-05-11T13:00:47","guid":{"rendered":"http:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/?p=2701"},"modified":"2020-06-04T14:14:36","modified_gmt":"2020-06-04T18:14:36","slug":"decline_in_asset_value_after_separation","status":"publish","type":"post","link":"https:\/\/stage.tbkdev.com\/dev\/davismartindale.com\/src\/decline_in_asset_value_after_separation\/","title":{"rendered":"COVID-19: Taking into Account Post-Separation Declines in Value: Serra v. Serra"},"content":{"rendered":"

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\n\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\tBlog 7\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\t\t\t\t

\n\t\t\t\t\t\tCOVID-19 Mini Series\t\t\t\t\t<\/h2>\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t
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In this blog, we discuss what happens if there is a decline in asset value after separation, equalization payments and the meaning of unconscionable.<\/p>\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t<\/div>\n[\/alternating_content_container][basic_container container_size=”container container-narrow”][vc_column_text]<\/p>\n

This is the seventh blog in Davis Martindale\u2019s \u201cCovid-19 Mini Series\u201d.<\/strong><\/em><\/h4>\n

In our previous Covid-19 blogs, we discussed:<\/strong><\/p>\n

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  1. The timeline of the build up to the current social distancing measures<\/a>;<\/li>\n
  2. Use of hindsight in valuation \u2013 whether knowledge of the economic impact of Covid-19 can be incorporated into a value determination<\/a>;<\/li>\n
  3. Potential Covid-19 disclosures, and reporting options that you may see in valuation reports<\/a>;<\/li>\n
  4. Impact of forecasting the recovery on valuations<\/a>;<\/li>\n
  5. Valuation techniques<\/a>; and<\/li>\n
  6. Support obligations in the context of Covid-19<\/a>.<\/li>\n<\/ol>\n

    In this blog, we\u00a0<\/strong>discuss what happens if assets decline in value after separation.<\/strong><\/p>\n

    In Ontario \u2013 and elsewhere \u2013 the Court system has been directly impacted by concerns over the COVID-19 pandemic. On March 17, 2020, the Superior Court of Justice suspended all regular operations, including all non-urgent criminal, family, and civil matters. And while there may be short-term concerns around an overburdened Court system and the need to reschedule Court dates, the long-term financial implications may be far more severe.<\/p>\n

    At the time of writing, there is admitted uncertainty regarding the long-term economic impacts of COVID-19. Some economists predict an economic recovery in the second-half of 2020, while others paint a bleaker picture. The only certainty, quoting the late J.P. Morgan, appears to be that the market is going to continue fluctuating[1]<\/a>.<\/p>\n

    Declining stock portfolios and business interests, with no clear indication of when they may return to pre-COVID-19 levels, has many Canadians worried about the future. Furthermore, the impact of these declines may be magnified within the context of a relationship breakdown.<\/p>\n

    Equalization Payments and Post-Separation Declines<\/h4>\n

    Upon the dissolution of marriage, one spouse may need to pay the other an equalization payment. This payment is calculated by determining the degree to which the net worth of each spouse grew during the marriage \u2013 in many circumstances, the spouse whose net worth grew by more must pay the other spouse one-half of the difference. In Ontario, the amount owed (i.e. equalization payment) typically crystalizes on the Date of Separation.<\/p>\n

    But what happens if assets decline in value after separation, but before the property division is finalized? For jointly owned assets, the answer is straightforward \u2013 both parties participate in the decline. For solely owned assets, however, the answer is not as straightforward. As a general principle, the sole owner of the asset bears the full post-separation decline of the assets value \u2013 and similarly, they would benefit exclusively from any subsequent appreciation of value.<\/p>\n

    There are, however, exceptions to this general principle. Paragraph 5(6) of the\u00a0Family Law Act<\/em>\u00a0provides the Court the authority to \u201caward a spouse an amount that is more or less than half the difference between the net family properties if the Court is of the opinion that equaling the net family properties would be unconscionable\u201d. But this leads to a further question \u2013 what exactly is \u201cunconscionable\u201d?<\/p>\n

    Unconscionability in Serra v. Serra<\/h4>\n

    In the landmark case Serra v. Serra (2009 ONCA 195), the Ontario Court of Appeal accepted that a post-separation market-driven decline in value should be taken into consideration. This was an important decision, as the legal question had not been previously decided by the Court.<\/p>\n

    Mr. Serra\u2019s business, Ajax Textiles, was valued between $9.50 million and $11.25 million, as at the Date of Separation. The value of the business, however, had decreased to between $1.9 million and $2.6 million by the trial date. For many reasons, including the fact that the separation date equalization payment ($4.1 million) was greater than Mr. Serra\u2019s entire net worth, the Court decided the equalization payment would be \u201cunconscionable\u201d, and reduced the payment to $900,000.<\/p>\n

    The following key factors influenced the Ontario Court of Appeal\u2019s decision:<\/strong><\/p>\n