Existing law under matrimonial property legislation

[315] In this part, we will examine how other provinces deal with the issue of priority of payment in the context of a matrimonial property action brought as a

392 C.C.S.M. c. M-45.

393 In Re Bertra m Estate (1972), 30 D.L.R. (3d) 46 (Ont. S.C. in Bankruptcy) the court held that

“testamenta ry expenses ” includes c ompensa tion payable to the admin istrator of the e state prior to bankruptcy, as well as compensation for legal services provided by their solicitors.

394 See OLRC , Report on Administration of Estates of Deceased Persons, supra note 208 at 161-171.

result of the death of one of the spouses. Sections 14 and 15 of the MPA, which govern th e matter of p riorities in Albe rta, have alrea dy been discu ssed in

Chapter 3.

a. Manitoba

[316] Section 41(1) of The Marital Property Act³⁹² deals with th e matter of p riority of payment. It reads as follows:

41(1) Where a surviving spouse is entitled under this Act to an equalization payment from the estate of a deceased spouse, the equalization payment is deemed to be a debt of the deceased spouse, is payable after the other liabilities of the estate, and has priority over

(a) a bequest, gift or devise contained in a will of the deceased spouse;

(b) an obligation to pay maintenance under a maintenance agreement or an order of a court binding the estate of the deceased spouse; and (c) an order of a court under The Dependants Relief Act.

Manitob a goes fu rther than oth er province s by including s ubsection 4 1(1) (b). Th is subsection results in the different treatment of maintenance obligations that bind the estate and other debts. Subsections 41(1)(b) and (c) ensure equal treatment of orders granted unde r The Dependants Relief Act and any support obligations of the deceased spouse, present or future, which are binding on the deceased’s estate.

[317] The payment of funeral and testamentary expenses³⁹³ raises an interesting question. Section 36 of the Act states that funeral and testamentary expenses must NOT be included in the calculation of an equalization payment under Part IV. The result is that the surviving spouse’s share is calculated on the basis that funeral and testamentary expenses do n ot exist. This ensures that the surviving spouse’s share is not reduc ed by one-h alf of these expense s. Yet, section 41 does n ot specifically deal with priority of payment as against funeral and testamentary expenses. The usual rule for administration of estates is that funeral and testamentary expenses are paid before debts.³⁹⁴ If the equa lization payme nt is to be treated as a debt, it

395 Note that in calculating the balancing claim, the funeral and testamentary expenses are ignored: s.

36, The Marital Property Act, C.C.S.M., c. M45.

396 Ontario Report, supra note 133 at 128.

397 (1995), 11 R.F.L. (4th) 284 (Ont. Gen. D iv.).

398 Ontario Report, supra note 133.

399 R.S.O. 1990, c. F-3.

should, by implication, be paid after these expenses. It would be better if this point were made c lear.

[318] The result is a scheme that gives priority of payment to the following: (1) funeral and testamentary expenses, (2) claims of third party creditors, (3) the equalization claim³⁹⁵, (4) claims of dependants under family relief orders or maintenance orders that bind the estate, and (5) bequests, gifts and devises under the will.

b. Ontario

i. Priority as against creditors of the deceased spouse

[319] Although the Family Law Act does not specifically state this, the rights of creditors have priority over an equalization entitlement. Section 4(1) makes it clear that liabilities are de ducted fro m the spo use’s prop erty to determine the net fam ily property as of the valuation date. “This a pproach reflects the sta tutory rationale that spouses should share the value of wealth that they have created during the relation ship.”³⁹⁶ Gaude t (Litigation G uardian o f) v. Young Estate³⁹⁷ affirms this principle.

[320] The OLRC recommended that the existing law be codified and that “Part I of the Family Law Act should be amended to provide that the equalization obligation is a debt of the deceased spouse’s estate ranking subsequently to the claims of secure d, prefe rred an d ordin ary credito rs.”³⁹⁸

ii. Priority as aga inst beneficiar ies and dep endants

[321] Priorities only bec ome imp ortant wh en the estate is not large en ough to satisfy competing claims. Subsection 6(12) of the Family Law Act³⁹⁹ provides that the spouse ’s entitlemen t under sectio n 5 has prio rity over:

400 Family Law Act, R.S.O. 1990 , c. F-3, s. 6(13).

401 S.S. 1997, c. M-6.11, s. 35.

402 One of the factors listed in s. 21(3 ) of The Matrimonial Property Act, 1997, S.S. 1997, c. M-6.11 is: (o) any debts or liabilities of a spouse, including debts paid during the course of the marriage.

(a) the gifts made in the deceased spouse’s will, if any, subject to subsection (13)

(b) a person’s right to a share of the estate under Part II (Intestate Succession) of the Succession Law Reform Act

(c) an order made against the estate under Part V (Support of Dependants) of the Succession Law Reform Act, except an order in favour of a child of the deceased spouse.

[322] Subsection 13 makes an exception for contracts to leave property by will that are made in good faith and for valuable consideration. The spouse’s entitlement

“does not have priority over a gift by will made in accordance with a contract that the deceas ed entered into in good faith and f or valuable consideratio n, except to the extent that the value of the gift, in the court’s opinion, exceeds the

consid eration.”⁴⁰⁰

c. Saskatchewan

[323] Section 35 of the Saskatchewan Matrimonial Property Act, 1997⁴⁰¹

determines the priority of payment of the matrimonial property order. It reads as follows:

35. Money paid or property transferred to a surviving spouse pursuant to a matrimonial property order is deemed never to have been part of the estate of the deceased spouse where a claim is made against the estate:

(a) by a beneficiary under a will;

(b) by a beneficiary pursuant to The Intestate Succession Act, 1996;

(c) by a dependant pursuant to The Dependants’ Relief Act, 1996;

(d) by a claimant in an action pursuant to The Fatal Accidents Act;

(e) by any creditor of the deceased spouse or of the estate, except where the court directs otherwise in the matrimonial property order.

[324] Subsectio n 35(e) is so mewh at puzzling in that debts a re usually taken into consideration in the matrimonial property division. As in Alberta, the

Saskatchewan Matrimonial Property Act, 1997, does not require the court to make a deduction for debts. Debts are simply one factor the court considers when

deciding whether to exercise its discretion to vary from equal division.⁴⁰² As in Alberta, however, the Saskatchewan courts have developed a practice of deducting

403 For example, see Mitchell v. Mitchell (1988), 72 Sask. R . 255 (Q.B.).

404 Edwards v. Edwards Estate and Skolrood, supra note 63.

405 (1981), 13 Sask. R . 323 (Sask. Dist. Ct.).

debts from the assets when determining what is available for distribution.⁴⁰³ Personal debts of the spouses are routinely deducted for the purposes of the matrimonial property division. M oreover, the cost of fun eral and testamentary expenses are also deducted for the purposes of determining the matrimonial

property entitlement of the surviving spouse.⁴⁰⁴ Nonetheless, debts are still a matter subject to the discretion of the court.

[325] Given that sufficient assets are usually available for payment of debts, few situations arise in which section 35(e) operates to the detriment of creditors of the deceased spouse. Perhaps it is there to protect the surviving spouse against huge liabilities of the d eceased sp ouse. In suc h a situation, h oweve r, the creditors c ould place the estate into bankruptcy and then all creditors, including the claim of the surv ivin g spo use, wou ld sh are e qua lly.

[326] Simpson v. Simpson⁴⁰⁵ is one case in which a matrimonial property order adversely affected a creditor of the deceased spouse. In that case, the deceased spouse died with substantial assets and substantial debts. After enforcement of the secured debts, the deceased had assets of $138,312 and debts of $136,882, which amounted to $1430 in equity. The assets of the deceased included the matrimonial home, w hich was valued at $ 55,000. T he court ga ve two re asons in su pport of its order that the home vest entirely in the wife. First, the husband had dissipated matrimonial assets in the last year of his life. Second, the mortgage charging the home was paid by way of life insurance proceeds payable on the death of the husband. At the time the mortgage was placed, the wife had assigned her interest as a benef iciary in the policy to the mortgage e as security for th e loan used to build the hom e.

[327] The effect of the order was to reduce the size of the assets available for payment of creditors of th e decease d spouse. N ow the fa ct that most o f the equity in the home could be traced to life insurance proceeds, an exempt asset, may account f or this decisio n. The cas e law of S askatchew an sugge sts that it is only in

406 R.S.C. 1985, c. B-3 as amended and renamed by S.C. 1992, c. 27.

407 R.S.A. 1980, c. A-1.

408 Ibid., ss 43(17), 44.

409 Ibid., s. 49(1).

410 Miller v. Miller (1981), U.A.D. 1293 (Alta. C.A.) and Peterson v. Peterson (1995), 178 A.R. 70 (C.A.).

411 Robert A. Klotz, Bankruptcy and Family Law (Toronto: Carswell, 1994) Chapter 11. This text contains a d etailed discu ssion of the e ffect of ban kruptcy on p reviously gran ted matrimon ial property orders. Much de pends upon the terms of the matrimonial property orde r.

412 For a discussion of how a spouse goes about proving their matrimonial property claim in a bankruptcy, see Klotz, Ch apter 4, ibid.

exceptional situations that the payment of the matrimonial property order will take precedence over the payment of creditors of the deceased spouse.