Do I Need A Marriage Contract (Prenuptial Agreement)? Ontario Family Law
By Mason Morningstar - 5 Minute Read
Every married spouse in Ontario has a marriage contract by default. They may not have signed anything, but there is a legal landscape that governs their entitlements and obligations should they separate. A marriage contract is used to modify some of the laws that would otherwise apply. As a result, understanding how those laws would apply to you upon separation is the first step to deciding whether a marriage contract is appropriate. See this article for a primer on how property division works for married couples.
For many people, the law in Ontario relating to property division is generally fair - only the wealth accumulated during the marriage will be shareable by the spouses. The law relating to spousal support can also be fair, but is often greyer than property issues. Spousal support functions to ensure one partner is not suddenly left without means when they were dependent on their spouse throughout the relationship, and to compensate one spouse for sacrifices they may have made for the benefit of the other spouse. However, because spousal support issues are less black and white, this means that spousal support waivers or modifications in marriage contracts can be shaky depending on the circumstances. Provisions relating to children and child support in a marriage contract are rarely if ever enforceable.
Marriage contracts are often beneficial in the following situations:
1. Inheritance or gift received before marriage: The issue here is timing. If the inheritance or gift were received after the parties married, then the asset would be “excluded” from the spouse’s net family property on separation. Because the asset is received before marriage, it will instead be “deducted” from the spouse’s net family property on separation. This difference is crucial:
a. Where property is excluded, the entire asset (including anything it can be traced into, except a matrimonial home), will be removed from that spouse’s net worth when determining property division. In other words, the growth of that asset will not be shareable with the other spouse (with some exceptions). This could result in a significant difference in the equalization payment that would otherwise be payable.
b. Where property is deducted, the only protection afforded to it is the value of the asset at the date of marriage. Any growth of that asset throughout the marriage then becomes shareable with the other spouse upon separation. This is where a marriage contract can be beneficial: people may simply agree that the inheritance or gift will be treated as an exclusion, so as to avoid an unfairness that would result based on the timing of the asset being received.
2. Estate freezes: An estate freeze is a complicated tax planning tool where the owner of an asset “freezes” the value of that asset as of a specific date, while simultaneously freezing the associated tax liability as of that same date. The future growth of that asset (along with its tax implications) are then transferred to other people, often the owner’s children. A spouse may be on the receiving end of their family’s estate freeze, which means that they will acquire an asset (typically called “growth shares”) that may be subject to equalization.
a. Growth shares are often gifted to the recipients, in which case the asset should be excluded under section 4(2) of the Family Law Act. However, care must be taken to ensure it is a valid gift in both name and form, failing which the exclusion can be lost.
b. If the growth shares are gifted to the spouse before marriage, a similar problem as the one found in paragraph 1 above could arise: the value of the shares will only be “deducted” as of the date of marriage, and the growth in value of the shares will be shareable with the other spouse after all. Marriage contracts could provide added certainty that the family’s tax planning initiatives are not defeated, either by a simple timing issue or by operation of law.
3. Inheritance or gift received during marriage: Managing the inheritance or gift without advice and without a marriage contract could lead to the exclusion being lost. For example, spouses often wish to pay down the mortgage on the matrimonial home with their inheritance – perhaps a wise life decision, but one that may cause unexpected consequences in the family law world. In this situation, the “exclusion” of the inheritance funds will be lost upon separation, pursuant to section 4(2) of the Family Law Act. This rule can be overcome with a marriage contract.
4. Unequal contributions to the purchase of a home: Spouses often take title to their real properties as “joint tenants”, which provides them with a right of survivorship upon the death of one spouse. This could be a useful tax and estate planning tool, but it could lead to unfairness upon separation where one spouse has contributed more to the purchase of a home. For example, assume the wife contributes $500,000 towards the down payment of the home, while the husband contributes $100,000. When the property closes and title of the home is registered as “joint tenants” between the spouses, they will each be immediately entitled to 50% of the equity, though the wife contributed $400,000 more than the husband. This could result in a windfall to the husband upon separation, which often leads to expensive litigation. Marriage contracts are routinely used to provide for a fair division of a property’s equity, considering the spouses’ respective contributions to the home.
5. One spouse owns a home solely before they marry: There is an interesting rule that few lawyers and judges find fair: the “matrimonial home” cannot be “deducted” from a spouse’s net family property when calculating equalization, according to section 4(1)(b) of the Family Law Act. Practically, this means that the entire equity of the matrimonial home must be shared between the spouses upon separation, even when one spouse was the sole owner of that property when they married. A marriage contract can be used to opt out of this rule and provide for a date of marriage deduction for the matrimonial home (or even a full exclusion if the spouses wish to do so).
6. Protecting business interests: A business is an asset like any other, in that spouses are entitled to share in the increase in value of the business throughout the marriage. Business owners also typically have much of their wealth tied up in the business, which may require them to liquidate or refinance their business to satisfy family law obligations. Marriage contracts can be used to provide special treatment for business interests upon separation. For example, spouses may agree to exclude the business from equalization completely, or that only a portion of the increase will be shareable, or that a percentage of the increase will be shareable in stages, which grow incrementally as the length of the marriage increases. Spouses also often include terms barring the non-owner from making “equitable” claims seeking an ownership interest in the business.
Marriage contracts allow for creativity, particularly when dealing with a sensitive asset like a business, or where the operation of the law would result in unfairness. Negotiating and signing a solid marriage contract can prevent messy and expensive future litigation. However, marriage contracts are not always necessary. If you are unsure as to whether a marriage contract is appropriate, err on the side of speaking to a family lawyer to obtain peace of mind.
As always, none of the above is legal advice; it is information only. If you have questions about your situation, speak to a knowledgeable family lawyer for assistance.
Written by Mason Morningstar, Toronto Family Lawyer