The value of gifts or inheritances that you or your partner received during your marriage are excluded from the division of property upon separation or divorce. You may not know, however, that you have to treat those gifts or inherited items in a specific manner in order to take advantage of that exclusion.
Keep Gift & Inheritance Money in a Separate Account
First, you have to be able to show that the gift or inheritance is still in existence at the date of separation. Otherwise, there will be nothing to exclude. Therefore, if the gift or inheritance comes in the form of cash, you should always keep that money separate.
Open a separate account for the money, use it to buy stock which you keep separate from your other investments, or lock it into a long-term investment. If you place that cash into your regular chequing or savings account and it is mixed in with the rest of your funds—some of which are spent over time—then you will be unable to show which portion of that account can be traced back to the inheritance or gift. When this happens, it creates complicated accounting issues and part of the exclusion will most likely be lost.
Furthermore, if you place that money into a joint account or use it to purchase property which you then place in both of your names, then the court will presume you intended to make a gift of half of that money to your spouse, as per section 14 of the Family Law Act. You can then only exclude the half that is still yours.
Do Not Use Gifted Money or Inheritance for the Matrimonial Home
Most importantly, you should never put gifted or inherited money toward the matrimonial home and, if you inherit or are gifted a home, never move into it as a matrimonial home.
The Family Law Act treats the matrimonial home differently from all other property. Its value will always be shared between the spouses unless a valid domestic contract stipulates otherwise. Therefore, if you use inherited money to pay down your mortgage; as a down payment on your home; on a home line of credit; or even on renovations for the home, then you will no longer be able to exclude those funds.
See our article "The Matrimonial Home" for more information about the unique treatment of the family home under the law.
Using Gifts/Inheritance to Purchase Property
You do not need to keep the gift or inheritance in the same form in which it was received. You can use cash from a gift or inheritance to purchase any property (other than a matrimonial home) and still maintain your right to exclude that portion of the item that can be traced back to the original gift.
Tracing can be somewhat complicated, however, if the item was purchased with a combination of inherited or gifted funds and other family funds.
For example, if you inherit $20,000 and use it to purchase a vintage sports car for $30,000 and the value of that car has increased to $40,000 at the date of separation, then you will be able to exclude the portion of the $40,000 that can be traced back to the original $20,000 gift. Generally, since 2/3 of the car at the time of purchase was traceable to the gift, then 2/3 of the current value of $40,000 would be excluded.
What Was the Value of the Gift/Inheritance at the Time it Was Received?
Remember that it is the value of the gift or inheritance at the date of separation that will be excluded.
If you inherited art that is worth more on the date of separation than it was at the time it was gifted, then it is the separation date value of that art that will be excluded. The same rule holds if the item has lost money since the date of inheritance.
However, income from a gift or inheritance is not excluded unless the person giving it has specifically indicated in writing that income from the gift is also to be part of the gift and excluded from net family property. Therefore, rental income from a rental property; interest on money in savings; or dividends from stock will have to be included in your date of separation assets.
Pre-Marital Gift & Inheritance Money
If you acquired a gift or inheritance before marriage that appreciated during the marriage, then the value acquired during the marriage will need to be included in your net family property, because there is no special treatment accorded to gifts or inheritance received before the date of marriage. The pre-marriage value of a gift or inheritance will be deducted from your net family property like any other pre-marriage asset.
See our article "Equalization and How it Is Calculated" for more information.
Contact an Ontario divorce lawyer at (905) 581-7222 to learn more! Feldstein Family Law Group P.C. serves clients across Ontario, including in Newmarket, Aurora, King City, and the entire the York Region, as well as Unionville, Thornhill, Kleinberg, Woodbridge, Richmond Hill, and beyond. We have offices in Vaughan, Mississauga, Oakville, and Markham to serve you.