When a marriage breaks down, financial division becomes a key concern. Many individuals have a particular interest in protecting inherited wealth and gifts during separation. If you have received an inheritance or substantial gift from a third party during your marriage, it is important to understand your rights and obligations under Ontario law and know how to best protect your financial assets in the event of separation. How you treat gifts and inherited items determines whether you will be able to exclude them from the equalization process.
Equalization: The Basics
Ontario’s Family Law Act sets out the regime for division of property for married spouses whereby each spouse’s growth in net worth from the date of marriage to the date of separation is calculated (“net family property” or “NFP”). The spouse with the higher NFP pays the spouse with the lower NFP half the difference. See our article “Equalization of Net Family Property” for more information on the equalization process.
Equalization is only available to married or formerly married spouses. For information on how property is divided in the context of common law separation, see our article “Common Law Relationships & Division of Property”.
Excluded Property
Specific treatment of gifts and inheritance can significantly reduce your NFP which is beneficial for both the payor and the payee. For the payor, a lower NFP that is closer to your spouse’s NFP means less money to be paid to your partner upon equalization. For the payee, the lower and further your NFP is from your spouse’s NFP, the more money you receive from the equalization.
In order to exclude gifts and inheritance from your NFP, the first step is demonstrating that the gift or inheritance is still in existence at the date of separation. The value of the gift or inheritance at the date of separation is the amount that is to be excluded from your NFP.
In claiming that certain property should be excluded from your NFP, you must provide necessary documentation to prove the claim. For example, to claim that money you hold in a bank account is inheritance, you need to provide explicit proof that you were the beneficiary of the inheritance (such as a will) as well as documents that show funds were transferred into the bank account. If your inheritance was used to make a purchase such as a vehicle or a rental property, clear and uninterrupted documentation tracing the flow of the asset is very important. If you are unable to trace the asset, the exclusion might be lost.
When an Exclusion is Lost
You may lose some or all of the right to exclude your gift or inheritance by depositing it into a joint account, using it to make a joint purchase, or using it to pay off a joint debt. This is known as “co-mingling” assets. By doing so, the court will presume that you have intended to give your spouse half of that gift or inheritance. These uses also complicate the ability to trace money back to the original gift or inheritance which would leave you unable to demonstrate its precise value and existence. This leaves you in a position to exclude only half of the amount of the asset you are trying to protect.
The Family Law Act also has special rules for the matrimonial home. Since a matrimonial home’s value will always be shared between spouses in the absence of a domestic contract, contributing gifts and inheritance to the matrimonial home will result in a loss of the right to exclude. For example, if you received a monetary gift from a third-party during your marriage and subsequently used that gift to build a pool in the backyard of the matrimonial home, that gift is subject to equalization regardless of whether you have kept clear tracing documentation.
Conclusion
Gifts and inheritance are not automatically protected under the equalization regime. You need to be diligent in how you preserve your assets to avoid sharing in them post-separation. Best practices include maintaining detailed tracing records, keeping property you wish to exclude separate from joint accounts, expenses, and purchases, and avoiding contributing your gifts and inheritance to the matrimonial home. If you have received or expect to receive gifts or inheritance from a third party, consider speaking with a family lawyer to preserve your exclusion rights.