MenuThis article was originally published by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.
Finding an affordable home or cottage continues to be inaccessible to many young couples. If parents want to help with a down payment or with regular monthly contributions, they need to understand what will happen to their contribution if the couple eventually separates.
In Ontario, how assets are divided if there is a separation or divorce is different if the couple is married or living common law.
Married couples
Married couples equally divide the assets that they have each accumulated during the marriage, whether the asset is in one person’s name or in both names, as provided in the Family Law Act.
However, assets received by gifts or inheritance during the marriage are excluded and do not need to be shared with the separating spouse. Assets that were received by gift or inheritance before the marriage are treated the same way as other pre-marriage assets, such that the growth in the value during the marriage is shared.
An important exception is that if a gift is applied towards the couple’s matrimonial home, either before or during the marriage, there is no exemption and the entire value of the gift is shared. There can be more than one matrimonial home; a cottage is usually found to be a matrimonial home.
Unmarried (common law) couples
In Ontario, the division of assets is based on ownership and there is no law giving couples the right to equalize the assets accumulated during their relationship.
If this results in an unfair situation — for example, if a spouse made significant contributions to the maintenance or increase in value of the assets of the other — they have to resort to equitable principles, namely “unjust enrichment,” to address their claims of inequitable distribution of assets upon the breakdown of the relationship.
Since an important decision of the Supreme Court of Canada in 2011, Kerr v. Baranow, [2011] 1
S.C.R. 269, unmarried spouses can now resort to the concept of “joint family venture.” To be able to establish that there was unjust enrichment arising from a joint family venture, the person who is not on the title must demonstrate that a joint family venture existed and that there is a link between that person’s contribution to the joint family venture and the accumulation of wealth or assets.
If the cottage was gifted to spouse No. 1 only, and spouse No. 2 is not a registered owner, spouse No. 2 could make such a claim to try to receive a portion of the assets of the other, including a gifted house or cottage. They would have to demonstrate fairly significant contributions towards the family unit and/or this particular asset.
How to provide a gift to the children
If the intention of the parents’ financial contribution is to help their children and their spouse, which is common, then no planning is required. Parents can provide a sum of money for a down payment or make contributions to mortgage payments. If there is a separation, the separation regime that applies to the situation will follow its course.
If the intention is not to share the gift with the child’s spouse if there is a separation, there are a few options.
The best protection is for the couple who receives the gift to enter into a cohabitation agreement or marriage agreement to recognize the gift and to agree that if they separate, the gift will be returned to the donor. Strict rules apply to the negotiation of such agreements.
Another vehicle is to enter into a formal loan agreement with the child and if possible, also with their spouse. Such family loans are not always accepted as valid loans if there was no real intention that they will be repaid.
Parents can maintain the title of the house or cottage in their name. This may result in undesirable capital gains taxes, though.
Finally, setting up a trust that will own the house or the cottage where the couple can live is another option. Choosing how to set up the trust and the beneficiaries is complex. This may not be the type of complicated setup parents have in mind when deciding to help their children. The interplay of trust laws and family law is extremely complex and requires collaboration between advisers who practise in these various fields.
In these types of situations, it’s best for parents to be clear about their intentions and to work with the child and their spouse collaboratively at the time of making the financial contribution to maximize the chances of the gift ending up where it is intended.