This Blog has been written by Darren Lund, Partner at Fasken LLP

As we turn the page on 2023 and look ahead to 2024, the cost and availability of housing continues to be a pressing issue for many Canadians. While there have been some recent headlines that suggest the housing market is slowing, even in traditionally hot markets, the future remains uncertain.

How does the state of the housing market impact wealth planning? The rise in housing prices over the past few decades has made it more difficult for many Canadians to save for a down payment; specifically, a down payment that is large enough to make mortgage payments manageable. This has, in turn, put more pressure on parents to provide assistance, either as an inter vivos gift or a loan. In addition, an inheritance may represent the best opportunity for some Canadians to make their first home purchase, or to make a meaningful lump sum payment on an existing mortgage.

If parents are making significant inter vivos gifts to a child, or when benefitting a child through their estate, they typically want to do so in a manner that will keep the wealth within their family line. If that is the intention, then if a gift or inheritance will be applied to the purchase of a home or a cottage, or to pay down a mortgage, it is important for the parents to understand how it will be treated for family law purposes, whether or not the child is currently in a relationship.

Under Ontario’s Family Law Act (“FLA”), a “matrimonial home” is any real property in which a person has an interest (including through a corporation), and which the person ordinarily occupies with their married spouse as a family residence. A person can have more than one matrimonial home; for example, a primary home and a cottage.

In the event of a relationship breakdown, matrimonial homes are treated differently than other assets in several respects. In this blog, I am focusing on how matrimonial homes are treated in terms of property equalization.

In Ontario, the statutory equalization scheme applies only to married spouses. While there are nuances to the calculation, in general terms each spouse determines the increase in their net worth during the marriage (i.e. date of separation net worth minus date of marriage net worth), and the spouse who had the higher growth in value is required to make a cash payment to the other. The cash payment is one-half of the difference between their respective increase in net worth, such that after the payment their relative growth (i.e. not the date of separation asset value) is equalized.

The value of certain property that a spouse owns on the date of separation is not included in the value of the spouse’s date of separation net worth. This is referred to as “excluded property”. The most common form of excluded property is a gift or inheritance received from a third party during the marriage. If the property subsequently changes form, it can still generally be excluded so long as it is traceable and owned by the spouse. For example, if a cash gift received during the marriage is used to buy a car, the car is excluded.

So far, so good…until we come to the matrimonial home. If a matrimonial home is received as a gift or inheritance during the marriage, it is not excluded property (think of an inherited cottage). The default rules in the FLA also do not permit excluded property to be traced into a matrimonial home. This means, for example, that if a parent makes a cash gift to a child during marriage to be used as a down payment, or if a child uses an inheritance received during marriage to acquire a home or cottage, the gift or inheritance is no longer excluded property once it is applied to the matrimonial home. The same result occurs if the gift or inheritance is used to pay down a mortgage – excluded property status is lost without additional planning.

If a parent assists a child with the acquisition of a matrimonial home before marriage, the parent and child should still both be aware of future family law considerations. While the Ontario system generally equalizes the growth in value of each spouse’s net worth during the marriage, if a spouse brings a matrimonial home into the marriage, and the same property is a matrimonial home at the time of separation, the full value of the home on the date of separation is included in the equalization calculation, with no deduction for the date of marriage value.

Some parents may opt to make a loan rather than a gift, but loans between a parent and child are susceptible to challenge unless they are truly loans (i.e. payment terms, interest, etc.), and in any event such loans are often forgiven on death.

The good news is that the FLA permits spouses to modify the default property equalization rules by means of a marriage contract. In this context, a marriage contract could provide greater protection by modifying the equalization scheme to exclude gifts or inheritances that are either in the form of a matrimonial home or traced into a matrimonial home.

Unless there is a significant decline in housing prices, it is likely that gifts and inheritances from family members will continue to be an important piece of the puzzle for many Canadians in terms of home ownership. If the donors of those gifts and inheritances intend to preserve that wealth within their family line, family law considerations should always be top of mind.