December 8, 2022 – Equalization & Bankruptcy

“There is nothing in the Family Law Act, R.S.O. 1990, c. F.3 (“FLA”) or the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”) that specifically prevents a spouse from making a claim for equalization of net family property after she has declared bankruptcy. However, the interaction of the two statutes requires further examination.

Property of a bankrupt person vests in the trustee. Once the assignment in bankruptcy is filed, a bankrupt can no longer dispose of or otherwise deal with their property: see BIA, s. 71.

A right to claim an equalization payment falls within the broad statutory definition of “property” in s. 2 of the BIA which defines “property” as: “any type of property…and includes money, goods, things in action, land and every description of property, whether real or personal, legal or equitable, as well as obligations, easements, and every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property.”

The right to claim an equalization of net family property arises when the triggering event of a marriage breakdown occurs. The right to enforce an equalization claim is not exempt from the reach of the trustee, even though it is described as being “personal” between the spouses under s. 7(2) of the FLA: see Blowes v. Blowes (1993), 1993 CanLII 8521 (ON CA), 16 O.R. (3d) 318 (C.A.); Liddell v. Liddell, 2011 ONSC 586.

A discharged bankrupt has no capacity to assert an equalization claim because all of her property has already vested in the trustee on her assignment to bankruptcy: see Green v. Green, 2015 ONCA 541.

The bankrupt spouse has no capacity to pursue an equalization claim that has vested in the trustee. Unless the trustee joins in the proceeding, or has executed an assignment of these rights, the bankrupt has no cause of action. An abandonment of the cause of action is not sufficient, nor is the trustee’s consent to continue the claim. The bankrupt’s discharge or the discharge of the trustee, does not re-vest in the bankrupt any rights which have previously accrued to the trustee: see Robert A. Klotz, Bankruptcy, Insolvency and Family Law, 2nd ed. (Toronto: Carswell, 2001), at 6-36.

In this case, the wife argues that she is still entitled to equalization because the matrimonial home and the husband’s RRSPs were exempt from bankruptcy. She also submits that the husband’s business properties were in his name alone, and therefore were not swept into her bankruptcy. She claims that she is entitled to “equalization to assets”.

It is true that certain property of a bankrupt is excluded from bankruptcy, including a principal residence with less than $10,000 equity, and RRSPs (except for contributions during the last year): see BIA, s. 67Execution Act, R.S.O. 1990, c. E.24, s. 2.

However, the wife’s submissions fail to take into account the fact that separating spouses are not entitled to a proprietary or beneficial interest in the other’s assets. Instead, separating spouses are entitled to receive one-half the value of the property accumulated during the marriage. If the spouses did not own assets of equal value, one spouse must make an equalization payment and a monetary debt is owed: see Schreyer v. Schreyer, 2011 SCC 35, [2011] 2 S.C.R. 605.

When one spouse declares bankruptcy, the claim for that monetary debt vests in the trustee. Whether or not any assets are exempt from the bankruptcy is irrelevant.”

            Kinsella v. Mills, 2017 ONSC 7093 (CanLII) at 19-28