A marriage contract is often an important component of an integrated estate plan. Frequently the discussion arises when the children of the first or second generation in a successful family business begin to marry, particularly where those children are beneficiaries of a discretionary family trust that holds common shares in the family business. The generation(s) that built the family wealth understandably wish to protect it from claims by the spouses of subsequent generations in the event of marriage breakdown.
Whatever the initial impetus for considering a marriage contract, the treatment of the family home is often a central consideration. If a family home is a “matrimonial home” for purposes of the Family Law Act (“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 own a primary home in the city and one spouse owns 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 qualify as “ordinary occupation” for this purpose.
When married spouses separate, or when one of them 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”. In general terms, the equalization processes equalizes the increase in value of property during the marriage; it does not divide property in specie. The equalization is effected through a cash payment, known as an “equalization payment”, from the spouse who had the greater increase in net worth during the marriage to the spouse with the lesser increase in net worth during the marriage. The amount of the equalization payment is 50% of the difference between the two changes in net worth. For example, if spouse A has an increase in net worth of $100,000 and spouse B has an increase in net worth of $60,000, spouse A makes an equalization payment to spouse B of $20,000, which is 50% of the difference between $100,000 and $60,000.
An important exception to the general rule that it is the increase in value of property that is equalized on marriage breakdown is a matrimonial home that is brought into the marriage and also owned on the date of separation. In that case, 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.
A simple example illustrates the distinction. Assume spouse A owns a home worth $1 million on the date of marriage, and it is a matrimonial home. In addition, Spouse A and spouse B both have investments of $100,000 on the date of marriage. Neither has debts. Accordingly, spouse A has a net worth of $1.1 million on the date of marriage and spouse B has a net worth of $100,000 on the date of marriage. The spouses separate 5 years later. Spouse A 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 has debts. Accordingly, spouse A has a net worth of $1.8 million on the date of separation, while spouse B has a net worth of $200,000 on the date of separation. The growth in spouse A’s net worth is $700,000 while the growth in spouse B’s net worth is $100,000.
If the matrimonial home was treated the same as any other property, spouse A would owe spouse B an equalization payment of $300,000, being 50% of the difference between $700,000 and $100,000. However, because spouse A 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 spouse A has net family property of $1.7 million, as opposed to $700,000, and in fact owes an equalization payment of $800,000 as opposed to $300,000. Interestingly, if spouse A had sold the original home after the date of marriage and the spouses were accordingly living in a different 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.
The difference in outcomes set out above may seem unfair to the spouse who is bringing a home into the marriage. Not surprisingly, addressing that imbalance is often one of the reasons for entering into a marriage contract. In my next blog, I will look at some further differences in how a matrimonial home is treated when married spouses separate.
 There are exceptions to this general rule (i.e. instances where a division of particular property may be ordered), but they are outside the scope of this blog.