Property Division When Married Spouses Separate: How to Protect Your Inheritance

In Ontario, when married spouses separate, property is divided pursuant to Part 1 of the Family Law Act (the FLA). A Net Family Property (NFP) calculation is completed between the parties — this is where each spouse’s debts and assets are calculated individually and then compared. Note this property division calculation does not apply to common-law partners.

Property Division

Typically, the value of debts and assets that each spouse owns as of the valuation date (usually the day that spouses separate) is combined and then subtracted from each spouse’s combined value of debts and assets owned on the date of marriage. This results in each spouse’s separate NFP. The default rule under the FLA is that the spouse with the higher NFP is to owe the other partner half of the difference between the NFPs, which is called an Equalization Payment.

The general principle surrounding this division is that, when a marriage ends, all property acquired during the marriage by either spouse is deemed to be the property of both spouses. However, there are exceptions to this rule.

Subsection 4(2) of the FLA lists excluded property that, if owned on the valuation date, cannot be considered in the NFP calculation. For example:

1. Property (other than a matrimonial home) that is acquired by gift or inheritance from a third party after the date of marriage;
2. Income from property (other than a matrimonial home) that is a gift or inheritance, where the donor or testator expressly states it is to be excluded from the spouse’s NFP;
3. Damages for personal injuries or settlement proceeds;
4. Proceeds from a life insurance policy;
5. Property listed above from #1-4 that can be “traced”; and
6. Property that spouses by way of a domestic contract have agreed to exclude (re: signing a marriage contract or prenuptial agreement).

Tracing of Gifts and Inheritance

Tracing arises when an individual does not keep a gift or inheritance in the same way that it was originally received.

A spouse can retain their right to exclude the portion of an item that was purchased, as long as it can be traced back to the original gift or inheritance. A spouse must be able to show that the gift or inheritance still exists on the valuation date (date of separation).

For example, if a spouse purchased a yacht with their inheritance, they must still have the yacht on the date of separation. The value of the yacht on the date of separation will be excluded. However, if the yacht has depreciated over time, only the value of the yacht on the date of separation will be excluded, not the original amount of inheritance used to purchase the yacht.

Tips To Protect Your Gifts & Inheritances During Your Marriage

1. Never use your inheritance to purchase a matrimonial home. When a marriage ends, there is a separate regime for dividing the matrimonial home. No amount of money put into a matrimonial home is traceable so it cannot be excluded.
2. Always keep inheritance money separate. Do not put it into a joint account with your spouse. Instead, create a separate account for savings, investments, or stocks. This will ensure that this money remains traceable to your inheritance.
3. Never purchase property with your inheritance and name both you and your spouse as joint tenants on title. If this occurs, a presumption arises that you intended to gift half of this money to your spouse and your traceable proceeds will be half.
4. If you inherit or are gifted a property, never move into it as your matrimonial home.

The rules of tracing and property division at marriage breakdown can be complicated. To assist you with protecting your inheritance and other property in the event of a subsequent separation or divorce, contact the family law team at Brown Beattie O’Donovan LLP.