DATE:  20020725
DOCKET: C36633

COURT OF APPEAL FOR ONTARIO

ROSENBERG, SHARPE and CRONK JJ.A.

BETWEEN:

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LINDA MARIE COLLIER

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Todd Jenney for the appellant

Petitioner

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(Respondent in appeal)

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KEITH ROBERT TORBAR

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Joel Skapinker for the respondent in appeal

Respondent

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(Appellant)

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Heard:  June 19, 2002

On appeal from the judgment of Justice Ruth E. Mesbur dated April 25, 2001.

SHARPE J.A.:

[1]   Before the parties were married, the respondent wife purchased land by means of a loan that met the requirements of a housing loan under the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1.  She built a house on the land, which later became the parties’ matrimonial home.  The issue on this appeal is the appropriate treatment of the housing loan in calculating the wife’s net family property under the Family Law Act, R.S.O. 1990, c. F.3.

LEGISLATION

[2]   The following are the relevant provisions of the Family Law Act:

Definitions

4. (1) - In this Part,

“net family property” means the value of all the property, except property described in subsection (2), that a spouse owns on the valuation date, after deducting,

(a) the spouse’s debts and other liabilities, and

(b) the value of property, other than a matrimonial home, that the spouse owned on the date of the marriage, after deducting the spouse’s debts and other liabilities, calculated as of the date of the marriage;

Equalization of net family properties

5. (1) - When a divorce is granted or a marriage is declared a nullity, or when the spouses are separated and there is no reasonable prospect that they will resume cohabitation, the spouse whose net family property is the lesser of the two net family properties is entitled to one-half the difference between them.
FACTS

[3]   In 1991, the respondent wife purchased land on which she later built a house.  The purchase of the land was financed by a loan from Triad International Freight Forwarding Ltd., which the wife and her business partner owned and operated.  The loan was not secured by a mortgage, but took the form of a housing loan that met the requirements of s. 15(2.4) of the Income Tax Act.  Under s. 15(2.4), the amount of a loan received from a corporation by a shareholder of the corporation need not be included in the shareholder’s income where the shareholder is an employee of the corporation and the loan is made to enable or assist the employee to acquire a dwelling.

[4]   The wife’s housing loan was transferred to Linda Collier Holdings Ltd., which was owned by the wife’s mother and was created to buy out the interest of the wife’s business partner. 

[5]   In the spring of 1994, the parties began cohabiting.  The parties were married on July 15, 1995.  The wife’s house became the parties’ matrimonial home.  When the parties married, the wife owed $513,748 to Linda Collier Holdings Ltd. on account of the housing loan.  The parties separated on April 30, 1997.  On April 27, 1998, the wife commenced divorce proceedings.

[6]   There is no dispute that in calculating the wife’s net family property, the wife must include the valuation date value of the matrimonial home and may not deduct its marriage date value.  Section 4(1) of the Family Law Act provides that a spouse must include the valuation date value of all property owned on the valuation date.  Section 4(1)(b) provides that a spouse must deduct from this value the marriage date value of all property owned on the marriage date, except a matrimonial home.

[7]   The issue in this case is whether the amount of the housing loan must be deducted from the marriage date value of the property owned by the wife on the marriage date.    Section 4(1)(b) provides that a spouse must deduct debts and other liabilities from the marriage date value of property owned on the marriage date.  The result of deducting marriage date debts from the marriage date value of property owned on the marriage date is that a spouse’s marriage date debts increase the spouse’s net family property.  Requiring the wife to deduct the amount of the housing loan from the marriage date value of the property she owned on the marriage date would increase her net family property by $513,748, the amount of the housing loan. 

[8]   The wife submits that this result would be harsh and inequitable since she is already required to include the valuation date value of the matrimonial home and is not permitted to deduct the marriage date value of the home.  She submits that this result could not have been intended by the Family Law Act.  The husband concedes that if the loan on the matrimonial home had been secured by a mortgage, the amount of the loan would not be deducted from the marriage date value of the property owned by the wife on the marriage date.  However, the husband submits that since the loan was not secured by a mortgage, the loan must be treated the same as any other debt not tied to the matrimonial home.

[9]   The trial judge accepted the wife’s argument and held that the amount of the housing loan should not be deducted from the marriage date value of the property owned by the wife on the marriage date.  The trial judge found that housing loans under the Income Tax Act “are clearly in the nature of an alternative type of mortgage.  Like a mortgage, they must be either paid off on the sale of the home or transferred to another home.  I see no reason to treat them any differently than a conventional mortgage.”

ISSUE

[10]          The issue on this appeal is whether the trial judge erred in holding that the wife was not required to deduct the amount of the housing loan from the marriage date value of the property she owned on the marriage date for the purpose of calculating her net family property.

ANALYSIS

[11]          One interpretation of s. 4(1)(b) would require a spouse to include a pre-marriage debt in the calculation of his or her net family property even where the debt was incurred to acquire a matrimonial home.  In Menage v. Hedges (1987), 8 R.F.L. (3d) 225 (Ont. U.F.C.), Fleury U.F.C.J. reluctantly held that he was bound to adopt this literal interpretation.  The husband had borrowed $35,000 from his father to purchase the matrimonial home.  Fleury U.F.C.J. held that he had no option but to include the debt in calculating the husband’s net family property.  At p. 255, he described this result as one of “the shortcomings” of the Family Law Act.  He then held at pp. 255-56:

While s. 4(1)(b) clearly eliminates the matrimonial home from consideration when computing the value of property owned on the date of the marriage, it does not show the same discriminatory bent when addressing the quantum of debts. No debts are eliminated from the calculation, be they related to the acquisition of the matrimonial home or to one of the items of excluded property. I can find no statutory authority that would allow me to ignore this $35,000 in computing the net property owned by the respondent at the date of marriage. …I have no jurisdiction to substitute what I might have included in this legislation for what the legislator clearly stipulated.

[12]          In subsequent cases, courts have distinguished Menage v. Hedges where the loan takes the form of a mortgage secured against the matrimonial home: DaCosta v. DaCosta (1990), 29 R.F.L. (3d) 422 (Ont. H.C.J.) varied on other grounds (1992) 7 O.R. (3d) 321 (C.A.), Hulme v. Hulme (1989), 27 R.F.L. (3d) 403 (Ont. H.C.J.), Reeson v. Kowalik (1991), 36 R.F.L. (3d) 396 (Ont. Gen. Div.).  See also Nagy v. Nagy, [2002] O.J. No. 1956 (S.C.J.).  But see Leeson v. Leeson (1990), 26 R.F.L. (3d) 52 (Ont. Dist. Ct.), where the court followed Menage v. Hedges even though the loan took the form of a mortgage secured against the matrimonial home.

[13]          In DaCosta v. DaCosta, Granger J. held that where the debt is secured against the land in the form of a mortgage, it should not be deducted from the marriage date value of property owned on the marriage date.  At p. 448, Granger J. stated:

In Menage v. Hedges the debt was not secured against the land in the form of a mortgage and accordingly was required to be deducted from the husband’s property as of the date of marriage.  In this case the mortgage was secured against the land and reduced the value of the matrimonial home. The house could not be sold without discharging the mortgage or at least reducing the value of the house.  In my opinion, to exempt the value of the matrimonial home from the value of Mr. DaCosta’s property as of 6th October 1980 but require him to reduce the value of his other property by the amount of the mortgage would ignore that the mortgage was attached to the land.  Such an interpretation would lead to an absurd result and would not be in keeping with the avowed intent of the [Family Law Act], which is to equalize the value of wealth accumulated during the period of cohabitation.

[14]          In Hulme v. Hulme, Walsh J. distinguished Menage v. Hedges on the same basis.  At pp. 406-7, Walsh J. held:

In this case, however, the husband seeks to further compound the wife’s problem by adding in the amount outstanding on the registered mortgages against the home, a figure of some $99,335.  He cites Menage v. Hedges (1987), 8 R.F.L. (3d) 225 (Ont. U.F.C.), in support of this proposition.  However, in that case, Fleury U.F.C.J. merely allowed the husband to deduct as a debt a personal loan from his father which was used by him as the down payment on the home.  That is clearly not the situation here, where we are dealing with mortgages registered against a matrimonial home on valuation date.  Clearly the intent of the legislature could not have been to doubly penalize the spouse who brought the matrimonial home into the marriage.

[15]          In Reeson v. Kowalik, Feldman J. followed the decisions in DaCosta v. DaCosta and Hulme v. Hulme.  At pp. 406-7, she held:

It has been held in some cases decided under the new Act, that although it is patently unfair for a spouse who brings a matrimonial home into the marriage to exclude the entire market value of the home from the deductions from net family property, and also to further reduce his or her deductions by the amount of the debt on the property, that that is the result mandated by the wording of the Act.  Counsel for the wife quite fairly submitted that although the law favoured his client’s position, this result clearly demonstrates a hole in the Act, and that the more logical and equitable result was the one reached in the case of DaCosta v. DaCosta … A similar conclusion was reached by Walsh J. in Hulme v. Hulme … .

I respectfully agree with this analysis on the basis that the value of debt-encumbered property for the purposes of ss. 4(1) and 4(2) of the Act is the equity in the property. Otherwise, the same anomalous result would arise under s. 4(2) but with an inequitable windfall to the owning spouse.  If, for example, a spouse were to inherit after marriage real property with a value of $100,000 and subject to a mortgage of $50,000 on V-Day, that spouse does not include the “value” of that property as part of his or her net family property.  If the section meant that the spouse excludes the $100,000 and also deducts from the value of his or her other property the $50,000 debt, the other spouse suffers a $25,000 loss on the equalization because of the inheritance.  In my view the Legislature did not intend either of these anomalous results, but rather intended that the term “value”, when used in respect of specifically encumbered property, means the encumbered value or the equity.  This result is achieved in respect of other property acquired with borrowed funds but not specifically encumbered, by deducting the total amount of the spouse’s debts from the full value of the spouse’s properties.

[16]          The decisions in DaCosta v. DaCosta, Hulme v. Hulme, Reeson v. Kowalik and Menage v. Hedges all recognize the unfairness of deducting the amount of a debt incurred to purchase a matrimonial home from the marriage date value of property owned on the marriage date.  Section 4(1)(b) of the Family Law Act imposes a special burden on the spouse who brings a matrimonial home into the marriage by not permitting the spouse to deduct the marriage date value of the home in calculating his or her net family property.  The legislature must have determined that the special character of a matrimonial home justified this special burden. 

[17]          However, to require the spouse to deduct a debt incurred to purchase the matrimonial home from the marriage date value of property owned on the marriage date would impose a double burden.  The spouse would receive no benefit for the marriage date value of the matrimonial home and would be further burdened by the marriage date amount of any debt attributable to the home.  I agree with the reasoning in DaCosta v. DaCosta, Hulme v. Hulme and Reeson v. Kowalik that the Family Law Act should be interpreted so as to avoid this obvious unfairness. 

[18]          As noted above, the husband has conceded that if the loan on the matrimonial home had been secured by a mortgage, the amount of the loan would not be deducted from the marriage date value of the property owned by the wife on the marriage date.  The wife submits that the trial judge correctly found that a housing loan that meets the requirements of the Income Tax Act is sufficiently similar to a mortgage that the amount of the housing loan should not be deducted from the marriage date value of property owned on the marriage date.  In the alternative, the wife submits that Menage v. Hedges should be overruled and that no debt incurred to acquire a matrimonial home, whether secured by a mortgage or not, should be deducted from the marriage date value of property owned on the marriage date. 

[19]          In my view, the trial judge correctly held that if the amount of a loan secured by a mortgage should not be deducted from the marriage date value of property owned on the marriage date, then the wife’s housing loan should also not be deducted from that value.  On the one hand, a housing loan under s. 15 of the Income Tax Act is not registered against a home and does not diminish the owner’s equity in the home, since the owner is free to dispose of the home without the constraints imposed by a mortgage to protect the security of the lender.  However, a housing loan must be documented to satisfy the Income Tax Act and the borrower is subject to significant income tax consequences when disposing of the home.  In my view, these constraints represent a sufficient link between the debt and the matrimonial home to bring the case within the principle from DaCosta v. DaCosta, Hulme v. Hulme and Reeson v. Kowalik.

[20]          Because of the foregoing conclusion, it is not strictly necessary to address the wife’s alternative submission that no debts incurred to acquire a matrimonial home, whether or not secured by a mortgage, should be deducted from the marriage date value of property owned on the marriage date.  However, since the issue was argued before us, I offer the following comments.  Although there is much to be said for treating all debts on the same basis regardless of the legal form they take, unsecured and undocumented family loans may require different treatment.  In general terms, it seems to me that if the borrower can demonstrate that he or she is subject to some legal or financial constraint linking the debt to the matrimonial home, the debt should not be deducted from the marriage date value of other property owned by the borrower.  While I do not wish to rule out the possibility of similar treatment for other debts incurred to purchase a matrimonial home, courts must closely scrutinize unsecured and undocumented family loans to ensure the integrity of the equalization provisions of the Family Law Act.

DISPOSITION

[21]          For these reasons, I would dismiss the appeal.  The respondent is entitled to her costs of the appeal which, in accordance with the agreement of the parties, I would fix at $2,500.

“Robert J. Sharpe J.A.”

“I agree M. Rosenberg J.A.”

“I agree E.A. Cronk J.A.”

Released: July 25, 2002