Private loans and promissory notes are considered property under the Ontario Family Law Act. Even if a loan is high-risk or the borrower is in default, the ‘right to collect’ has a value that must be included in your equalization. Valuing these requires assessing the likelihood of repayment and the interest rate compared to current market standards.
Many couples in Ontario, particularly in affluent areas of Richmond Hill, Oakville, or Windsor, engage in private lending. You might have loaned money to a family member to help them buy a home, or perhaps you act as a private mortgage lender for real estate investors. In a divorce, these ‘private debts’ owed to you are actually ‘assets’ that must be divided. 🤝
Dividing a bank account is simple, but dividing a promissory note is not. You cannot simply ‘split’ a note in half if the borrower hasn’t paid it back yet. In Ontario, the law requires you to determine the ‘fair market value’ of these loans as of your separation date. This process can be contentious, especially if one spouse claims the loan will never be repaid.
How Promissory Notes Impact Equalization
Under the Ontario system of Net Family Property (NFP), every asset is assigned a dollar value. A promissory note is a legal contract. Even if the borrower is your brother-in-law and there is no formal payment schedule, the law generally presumes the loan is an asset unless you can prove it was a ‘gift.’
The Difference Between a Gift and a Loan
In Ontario courts, transferring funds without consideration often triggers the ‘presumption of resulting trust.’ This means the law presumes the recipient is holding the funds as a trustee for you (the beneficial owner), rather than as a gift. While this is legally distinct from a debtor-creditor loan relationship, it still means the transfer is not considered a gift by default. To exclude these funds from your family assets, you must provide clear evidence of a gift, which is often difficult without a written ‘Deed of Gift.’ ㉉
Steps to Value a Private Lending Portfolio
Valuing a private mortgage or a personal loan requires a deep dive into the financial health of the borrower and the terms of the agreement.
Step 1: Collect All Documentation
Gather the original signed promissory note, any mortgage registrations (if the loan is secured against property), and a record of all payments made to date. If the loan was ‘verbal,’ you will need to provide bank statements showing the initial transfer of funds. 📂
Step 2: Determine the ‘Collectibility’
Is the borrower solvent? If you loaned $50,000 CAD to a corporation that has since gone bankrupt, the value of that note on your V-Date may be $0. However, if the borrower is a successful business with assets, the note is worth its full face value plus accrued interest.
Step 3: Apply a ‘Discount Rate’ for Risk
In professional legal accounting, a loan that isn’t due for 5 years is worth less than cash today. A lawyer or forensic accountant might apply a ‘discount rate’ to find the present value. They also factor in the risk of default. A high-risk private loan might be valued at only 70% of its face value to account for the chance it won’t be paid. 📉
Step 4: Decide on ‘Assignment’ or ‘Buy-out’
Once a value is agreed upon, you have two main choices: one spouse keeps the note and pays the other 50% of its value (buy-out), or the legal right to the loan is ‘assigned’ so that both spouses receive 50% of the payments as they come in from the borrower.
Cost of Dividing Lending Portfolios
The cost depends on whether the loans are ‘performing’ (being paid on time) or ‘non-performing.’ 💷
| Expert Involved | Role | Typical Cost (CAD) |
|---|---|---|
| Forensic Accountant | Valuing high-risk or complex note portfolios. | $2,000 – $5,000+ |
| Family Lawyer | Drafting the assignment of the debt or settlement. | $1,500 – $3,500 |
| Private Investigator | Verifying the borrower’s assets (if default is suspected). | $1,000 – $2,500 |
Frequently Asked Questions (FAQ)
What if the loan was to my parents and they won’t pay it back?
This is a common issue in Ontario family law. If there is a written loan agreement, the court will likely treat it as a real asset. If you cannot collect the money, you may still be ‘charged’ with the value of that loan in your equalization, effectively meaning you ‘buy out’ your spouse’s interest in the money you gave your parents.
Can we just wait until the loan is paid to split the money?
Yes, spouses can enter into a Separation Agreement that allows for ‘deferred’ equalization. This means you agree to share the proceeds only when the borrower finally pays the debt. However, this requires significant trust and clear legal wording to protect your interests.
How does interest affect the value?
Any interest that accrued on the loan from the date it was given until the date of separation is part of the asset value. Interest earned after the separation date is typically considered income for the spouse who owns the note. 📈
What if the promissory note is ‘on demand’?
An ‘on demand’ note means you can ask for the money back at any time. In the eyes of the Ontario Superior Court, these are usually valued at 100% of the face value because you have the immediate right to the cash. 🏢
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