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.
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.