For many families, an inheritance reflects savings and assets that have been carefully preserved across generations and are intended to provide security for their children; not to become a part of a future marital dispute. In Ontario, inheritances are not automatically protected under the equalization regime and can be unintentionally lost.
How inherited funds are handled, where they are deposited, and whether they are mixed with family assets can dramatically effect whether they remain excluded from property division in the event of a separation or divorce.
How Inheritances are Treated Under Ontario Law
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”.
What is Protected?
An inheritance received during the marriage is generally excluded from property division as long as it can be clearly identified and traced. Examples include money received from an estate and investments or assets purchased using inherited money.
However, there is a major exception: the matrimonial home. Since a matrimonial home’s value will always be included in equalization, if inherited funds are used toward the purchase, renovation, or mortgage of a matrimonial home, the exclusion is typically lost.
Tracing: Why Documentation Matters
Tracing refers to the ability to track inherited funds from the original source to their current form. For example, an individual receives an inheritance of $100,000, deposits those funds into a separate investment account, and later uses the investment funds to purchase shares of a business. If the individual can show a clear paper trail, those investments may remain excluded.
Alternatively, if the inherited funds are deposited into a joint account, mixed with employment income, and used for family expenses, tracing becomes more difficult. Without clear documentation as to the tracing and form of the funds, a court may determine that the exclusion is lost.
The Risks of Co-Mingling
Co-mingling occurs when inherited funds are mixed with joint or family property. Mixing funds in this way can create complicated tracing disputes. Once co-mingled, it can be argued that the inheritance was intended to benefit the family which would weaken or eliminate the exclusion claim. For example, when an individual deposits inheritance into a jointly held bank account, the funds have been co-mingled and they lose the right to exclude half the value of the inheritance.
For these reasons, inheritance funds should be held in a separate sole account, and all estate documentation should be retained.
Conclusion
While Ontario law does provide protection of inheritance during separation or divorce, that protection depends heavily on how the funds are managed. Some of the biggest risks of losing these protections are when inheritance is used toward the matrimonial home, co-mingled with other shared assets, or when individuals are unable to retain proper documentation as to the tracing of funds.
If you have received or expect to receive an inheritance from a third party, consider speaking with a family lawyer to preserve your exclusion rights. Obtaining legal advice early could make a significant difference in what you are able to protect.
Attention Legal Counsel: Professional Mediation Services
When your clients have reached an impasse in settlement discussions, Andrew Feldstein offers third-party mediation services specifically designed for cases where both parties have independent legal representation.
Why lawyers refer cases to Andrew:
- 30+ years family law litigation experience providing courtroom-informed reality testing
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Cases we handle: Negotiation stalemates, complex asset division, support calculation disputes, parenting arrangements, multi-jurisdictional matters, and post-separation modifications.
Refer your next mediation: Call Andrew directly at 905-415-1635 ext. 255 or email info@separation.ca. Virtual and in-person sessions available throughout the GTA.