In a prior blog, I began a discussion of the use of marriage contracts as part of an integrated estate plan to preserve and protect family wealth. In particular, that blog began a discussion of the legal regime that governs a “matrimonial home” under the Ontario Family Law Act (“FLA”), and how a matrimonial home is treated differently than other property in important respects.[1] This blog continues that discussion.

The FLA defines a category of property, known as “excluded property”, that, as one might expect, is excluded from the equalization of a spouse’s net family property upon marriage breakdown (which includes the death of a married spouse). In other words, if a spouse owns property on the date of marriage breakdown that qualifies as excluded property, the value of that excluded property is not included in the spouse’s net family property. The most common category of excluded property is property that a spouse acquires by way of 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.[2]

To take a simple example, assume Asif is married and receives an inheritance of $100,000 during the marriage (and the will expressly excludes income on the inheritance). Asif invests the inheritance in a segregated account (to which no other funds are contributed) and the income is reinvested each year. Asif uses a portion of the funds to buy a boat which is registered in his name alone. A marriage breakdown subsequently occurs; on the date of marriage breakdown Asif continues to own the boat and the investment account has grown to $175,000. The value of the investment account is excluded from Asif’s net family property, as is the value of the boat because it is traceable to the inheritance (i.e. it was acquired with the excluded inheritance).

Absent a marriage contract, the outcome would be different if there is a matrimonial home involved. Specifically, if a matrimonial home is acquired 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, it is no longer excluded property in the first instance. That is to say, excluded property cannot automatically be traced into a matrimonial home.

Using the above example, if Asif takes the $100,000 inheritance and makes a lump sum payment against the mortgage on his matrimonial home, the $100,000 contribution is no longer excluded property. For the sake of illustration, let’s also assume that Asif inherited a cottage property in Prince Edward County that was used seasonally by his family during the marriage. Notwithstanding that the cottage was inherited during the marriage, it would not automatically be excluded property because it is a matrimonial home.

Fortunately, the concept of excluded property in the FLA has flexibility built into it. A further category of excluded property in the FLA is property that “the spouses have agreed by a domestic contract is not to be included in the spouse’s net family property”.[3] This flexibility permits spouses to enter into a marriage contract to exclude property from equalization that would not otherwise be automatically excluded.

Returning to Asif, let’s assume Asif anticipated receiving the cottage as part of his inheritance, and further that Asif anticipated using the liquid portion of his inheritance to either acquire a matrimonial home or pay down the mortgage. Asif and his spouse 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. As housing prices continue to rise and more couples are relying on family wealth to finance home purchases, this is indeed a common motivation for entering into a marriage contract.

[1]       Please refer to the first blog for a review of the definition of “matrimonial home”, a high-level overview of the concept of “equalization of net family property”, and the distinct treatment of a matrimonial home that is owned on both the date of marriage and the date of a marriage breakdown.

[2]       The other categories prescribed in the FLA include certain types of damages, proceeds or a right to proceeds of life insurance, and unadjusted pensionable earnings under the Canada Pension Plan.

[3] Paragraph 6 of subsection 4(2) of the FLA.