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The Family Law Act, R.S.O. 1990, c. F.3 (“FLA”) defines a category of property known as “excluded property” that is excluded from the equalization of a spouse’s net family property upon separation and marriage breakdown, which can also include the death of a married spouse if the surviving spouse chooses an election under the FLA.

 

If a spouse owns property on the date of marriage breakdown that qualifies as excluded property, the value of that excluded property is excluded from the total calculation of that spouse’s net family property subject to equalization. The most common category of excluded property is property that a spouse acquires by way of a gift or inheritance from a third person during the marriage, income from such a gift or inheritance if expressly excluded by the donor, and property into which such a gift or inheritance can be traced including damages, proceeds, a right to proceeds of a life insurance policy, and unadjusted pensionable earnings under the Canada Pension Plan.

 

Paul’s Inheritance

 

Let’s apply this scenario to a real life situation. Paul is married to Mandy and he receives an inheritance of $350,000 during the marriage and the Will expressly excludes income on the inheritance. Paul decides to invest the inheritance in a separate account to which no other funds are contributed, and the income is reinvested each year to the exclusion of his spouse, Mandy. Paul decides to use a portion of the funds to buy a sports car, which is registered in his name alone. Paul and Mandy subsequently separate. On the date of the marriage breakdown, Paul continues to own the sports car and the investment account has grown to $495,000. The value of the investment account is excluded from Paul’s calculation of net family property, as is the value of the sports car because it is traceable to the inheritance, and it was acquired with the excluded inheritance funds.

 

The outcome of the above example would be markedly different absent a marriage contract if a matrimonial home is involved. If a matrimonial home is acquired by Paul by way of gift or inheritance during the marriage, it will not automatically qualify as excluded property. Similarly, if property that is otherwise excluded property in accordance with the FLA is used to acquire a matrimonial home that Paul and Mandy ordinarily occupy as a family residence, it is no longer excluded property.

 

Using the above example, if Paul takes the $350,000 inheritance and makes a lump sum payment against the mortgage on his matrimonial home, the $350,000 contribution is no longer excluded property and is subject to equalization with Mandy because he used the inheritance to pay off a mortgage on a matrimonial home and therefore lost his right for exclusion of this portion of the inheritance.

 

For illustration, if Paul inherited a cottage property on Lake Joseph from his father that was used seasonally by spouse, Mandy and his family during the marriage, notwithstanding the fact that the cottage was inherited during the marriage, it would not automatically be excluded property because it was occupied by Paul and Mandy as a matrimonial home. In the FLA, you can have more than one matrimonial home.

 

The concept of excluded property in the FLA has some flexibility built into its application. A further category of excluded property in the FLA is provided at paragraph 6 of subsection 4(2), whereby property that “the spouses have agreed by a domestic contract is not to be included in the spouse’s net family property” can be excluded. This flexibility permits spouses to enter into a marriage contract to exclude property from equalization that would otherwise be subject to equalization, such as a matrimonial home.

 

Returning to our case with Paul, let’s assume Paul anticipated receiving the cottage as part of his inheritance, and further that Paul anticipated using the cash portion of his inheritance to either acquire a matrimonial home or pay down the mortgage. Paul and Mandy could enter into a marriage contract that specifically maintains excluded property status for both the cottage and any portion of the inheritance that is traced into a matrimonial home. This is a common motivation for clients choosing the advantage of entering into a marriage contact, especially as housing prices continue to rise in Waterloo Region and couples are relying on family wealth to finance home purchases. A marriage contract is beneficial documents for those entering into marriage, but especially helpful for those in blended families who wish to ensure that property is excluded both upon marriage breakdown and in estate planning.

 

Aubrey Sherman is the managing partner at Sherman Law LLP in Kitchener, Ontario. His practice focuses on family law, estate planning, and estate administration. The team at Sherman Law LLP in Waterloo Region has over 40 years of experience providing clients with creative and innovative solutions. If you wish to discuss your family law or estate planning matter in further detail, please contact our office to arrange for a consultation. We can be reached by phone at 519-884-0034 or by email.

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A marriage contract can often be an essential component of estate planning. Often, the need for this contract and related discussion arises during a consultation with a client when the children of the first or second generation in a successful small family business begin to marry and/or establish families of their own, particularly where those children are also beneficiaries of a discretionary family trust that holds common shares in the family business. Those generations that contributed to the family wealth often come to require our services with the goal to protect assets from claims under the Family Law Act, R.S.O. 1990, c. F.3 (“FLA”), in the event of a marriage breakdown by the spouses of subsequent generations.

 

The Matrimonial Home

 

The treatment of the family home is often a central consideration when considering the appropriateness for entering into a marriage contract. If a family home is a “matrimonial home” for purposes of the FLA, it will be treated differently than other property if there is an equalization of net family property in the event of marriage breakdown. A “matrimonial home” is any property in which one of the spouses has an interest that is ordinarily occupied by the spouses as their family residence at the time of separation. There can be more than one matrimonial home. For example, if the spouses jointly own a primary home and one spouse also owns a vacation property such as a cottage, each property is a matrimonial home provided the other components of the definition are met. Seasonal use of a recreational property such as a cottage will usually qualify as “ordinary occupation” for this purpose.

 

When married spouses separate or when one spouse dies, either spouse (or the surviving spouse in the case of the death of a spouse), can make a claim for an “equalization of net family property”. The equalization is effected through a combination of a cash payment and/or asset transfer, known as an “equalization payment”, from the spouse who had the greater increase in net family property during the marriage to the spouse with the lesser increase in net family property during the marriage. The equalization payment equalizes the increase in value of property during the marriage, but it does not physically divide property. The amount of the equalization payment is 50% of the difference between the two changes in net family property, often referred to as net worth. For example, if Tom has an increase in net worth of $200,000 and Sally has an increase in net worth of $70,000, Tom makes an equalization payment to Sally of $65,000, which is 50% of the difference between $200,000 and $70,000.

 

Bringing a Home into the Marriage

 

A noteworthy exception to the general rule is when a matrimonial home is brought into the marriage and also owned on the date of separation. In this circumstance, the FLA does not permit a deduction from net family property for the value of the matrimonial home on the date of marriage, effectively equalizing the equity on the date of separation, as opposed to the increase in the equity during the marriage.

 

Let’s apply this reasoning to an actual situation. Assume Bob owns a home worth $1 million on the date of marriage, and it is a matrimonial home. Bob and Shirley also have investments of $100,000 on the date of marriage. Neither spouse has debts. Accordingly, Bob has a net family property of $1.1 million on the date of marriage and Shirley has net family property of $100,000 on the date of marriage. Bob and Shirley separate after 8 years of marriage. Bob owns the same matrimonial home as on the date of marriage, but it is now worth $1.6 million. Each spouse’s investments have grown to $200,000. Neither Bob nor Shirley has any debts. Therefore, Bob has net family property of $1.8 million on the date of separation, while Shirley has net family property of $200,000 on the date of separation. The growth in the value of Bob’s net family property is $700,000, while the growth in Shirley’s net family property is $100,000.

 

If the matrimonial home was treated the same as any other property, Bob would owe Shirley an equalization payment of $300,000, being 50% of the difference between $700,000 and $100,000. However, because Bob owned the same matrimonial home on both the date of marriage and the date of separation, its value on the date of marriage is not deducted. That means Bob has net family property of $1.7 million, as opposed to $700,000, and in fact owes an equalization payment to Shirley of $800,000 as opposed to $300,000. It is worth noting that if Bob had sold the original home after the date of marriage and the spouses were living in a different matrimonial home on the date of separation, the date of marriage deduction for the value of the original home would be permitted, and the equalization payment would be $300,000.

 

These differences in outcomes illustrated in the above example may seem unfair, especially to a spouse who is bringing a previously owned home into the marriage. Addressing the imbalance of how the home will be valued and divided upon marriage breakdown is often one of the central reasons for a party to decide the necessity of entering into a marriage contract as part of estate planning particularly for blended families or those entering into subsequent marriages.

 

Aubrey Sherman is the managing partner at Sherman Law LLP in Kitchener, Ontario. His practice focuses on family law, estate planning, and estate administration. The team at Sherman Law LLP in Waterloo Region has over 40 years of experience providing clients with creative and innovative solutions. If you wish to discuss your family law or estate planning matter in further detail, please contact our office to arrange for a consultation. We can be reached by phone at 519-884-0034 or by email.

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Modern families and those trying to conceive have benefited from technological advances in helping women become pregnant who have previously been unable to do so. These types of advances in technology can frequently come with challenging questions for the courts to consider during marriage breakdown as to property division and ownership. In a recent decision of S.H. v. D.H. (2019 ONCA 454), the Ontario Court of Appeal overturned a 2018 Ontario Superior Court of Justice decision, which had ruled that the wife should be awarded custody of her frozen embryos after the ending of a marriage.

 

The relationship

 

The parties identified only as D.H. and S.H. married in February 2009. The couple wanted to have a family and had trouble conceiving. The case arose in 2011 when the couple paid $11,500 US for the purchase of four embryos created from anonymous sperm and egg donors in the United States. Two were viable. One was implanted in the wife known as D.H. and resulted in a now 6 year old son. The second embryo was frozen.

 

The couple separated in December 2012 after the birth of their son. Following the separation the wife who was in her 40s, sought to gain possession of the second embryo so she could have another child and her son could have a biological sibling. She had agreed not to pursue child support from the husband known as S.H. should she have another child, but he refused to provide his consent.

 

At Trial

 

In July 2018, the wife argued that her ex-husband had signed an agreement that even in the event of a separation; the wife’s wishes to have a child would prevail. The husband argued that he had paid for the embryos and they belonged to him. The husband stated that he had changed his mind post-divorce and now wanted the frozen embryo to be donated.

 

On July 9, 2018, the Honourable Mr. Justice Robert Del Frate of the Ontario Superior Court (2018 ONSC 4506) released his written reasons for the judgment and sided with the wife relying on the contracts that the couple had signed when they embarked on the fertility process. “There is no law on point that has considered how to dispose of embryos when neither party has a biological connection to [them], Del Frate J. wrote in his decision. “It would be contrary to contract law were I to decide that the wishes of the parties at the time of entering into this contract were other than what they agreed to.” Del Frate J. said that the wife could have the embryo if she reimbursed the husband $1,438 US – representing half of the cost of its creation.

 

The Appeal

 

The husband appealed this decision, arguing he had changed his mind after signing the contract and that the law allowed him to do so. He argued that his ex-wife would be committing a criminal offence if she had the embryo implanted over his express objection. The wife argued that his consent was no longer required because they were no longer spouses.

 

“The idea that donor consent can become frozen in time, rendered unsusceptible to changes of mind, belies the central importance placed upon consent in the statutory scheme.”

 

-The Honorable Mr. Justice Fairburn for the appeal court

 

The Honourable Mr. Justice Michael Fairburn wrote for the appeal court. The court began its analysis by stating that neither contract nor property law principles govern this case adding that “Parliament has imposed a consent-based, rather than a contract-based, model through legislation and regulation.” The court acknowledged the difficult decision faced by the trial judge, but pointed out that the Assisted Human Reproduction Act should be considered in this case. “The appellant’s unmitigated right to withdraw his consent overtakes any prior contractual agreement to the contrary, and is dispositive in this case,” Fairburn J. wrote. “I do not accept that donors may simply contract away their right to withdraw consent under the criminal law.” The Act states that a donor’s written consent is necessary, and it “prohibits the use of an in vitro embryo for any purpose without regulation-compliant written consent.”

 

The court found that both former spouses retained rights to the embryo to which neither were genetically related. Spouses who obtain embryos are considered “donors” even if neither of them have a biological connection to the embryo. The wife therefore could not have a purchased frozen embryo implanted over the objections of her ex-husband.

 

Aubrey Sherman is the managing partner at Sherman Law LLP in Kitchener, Ontario. His practice focuses on family law, estate planning, and estate administration. The team at Sherman Law LLP in Waterloo Region has over 40 years of experience providing clients with creative and innovative solutions. If you wish to discuss your family law or estate planning matter in further detail, please contact our office to arrange for a consultation. We can be reached by phone at 519-884-0034 or by email.

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