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The Matrimonial Home: Not an Ordinary Asset
Broaching the topic of a marriage contract may not be the easiest conversation to have with your spouse, but it can be critical to safeguard your financial future in the event of a marriage breakdown.
Marriage contracts are also commonly called “prenuptial agreements” or “prenups”, which are misleading descriptions because you can enter into a marriage contract even after tying the knot.
Marriage contracts can be particularly useful to address what happens to the matrimonial home upon marriage breakdown. The “matrimonial home” is the home that was ordinarily occupied by the spouses at the time of their separation, which one or both spouses have an interest (i.e., one or both spouses must have some kind of ownership in the home—a property that spouses are renting would not be a matrimonial home). Ontario law (specifically, the Family Law Act), also allows spouses to designate a home as the matrimonial home, even if they do not live there. It is also possible for more than one property to be considered a matrimonial home.
The Ontario Family Law Act requires spouses who are separating to “equalize” their “net family property”. The objective of this is for each spouse to walk away from the marriage with an equal share of the assets and property that was accumulated during the marriage, regardless of who owns the asset or property. There are certain exceptions to this. One main exception is the matrimonial home. The Family Law Act requires that the entire value of the matrimonial home be equalized. The impact this can have on equalization is illustrated below using a very simplified example:
Tim and Laura were married. When they married, Tim had $100,000 invested through a tax free savings account. Over their ten year marriage, he continued to add to this account. When Tim and Laura separated, Tim had $150,000 in this account. Assuming neither Tim nor Laura had any other assets or debts, they would share equally the $50,000 that Tim accumulated during the course of their marriage. Therefore, Tim would have to pay Laura an equalization payment of $25,000.
This changes when a matrimonial home is added to the scenario. Say that Laura owned a home that had $100,000 in equity on the date of their marriage. Tim and Laura moved into it together and lived there until they separated; while it was still owned by Laura, it became the matrimonial home under the Family Law Act. When they separated, the matrimonial home had $200,000 in equity. Unlike Tim, who deducts his $100,000 in pre-marriage investments from his net family property, Laura does not get to deduct the $100,000 in equity that she had in the matrimonial home on the date of marriage. Ontario law requires that full value of the matrimonial home at the date of separation be equalized, regardless of who owns the home, who purchased it, or when it was purchased. This changes the equalization calculation. In this scenario, Laura owes Tim an equalization payment of $75,000 (Tim’s net family property being his $50,000 increase in his investments, and Laura’s being $200,000 in equity in the home. The difference between the two ($150,000) is divided equally to get to the equalization payment). This result is produced because Laura’s assets at the time of marriage happened to be a home, which became the matrimonial home, rather than in a bank account.
It is important to note that Laura’s obligation to share half of the equity in the matrimonial home with Tim does not mean that Tim “gets half the house” or that Laura must sell the home and provide half of the proceeds of the sale to Tim. If Laura is able to pay her equalization payment to Tim from other assets, she would not be obligated to sell the home to satisfy her equalization payment.
The treatment of the matrimonial home in Ontario law can catch separating spouses by surprise. A home is often the largest asset that an individual or a couple has. If parties jointly own the home and contribute equally to it, then equalizing its value may not cause any concerns, but that is not always the case. Spouses may move into a home that is already owned by one spouse, potentially with significant equity (like Laura in the example), or one spouse may make a significant financial contribution to the home, potentially even using funds that ordinarily would not have been included in their net family property (such as an inheritance).
There is a way to avoid potentially unfair or undesirable consequences related to the equalization of the full value of the matrimonial home: negotiating and signing a marriage contract. Marriage contracts allow spouses or prospective spouses to decide what they want to happen with the matrimonial home if they separate in the future. Marriage contracts can also address other property, assets, and/or spousal support issues.
Here are just a few general examples of how spouses may consider addressing the matrimonial home in a marriage contract:
- Protecting the equity that one spouse has in the matrimonial on the date of marriage from being part of net family property for the purposes of equalization. Say Laura and Tim had a marriage contract that excluded the $100,000 in equity that she had in the home on the date of marriage from her net family property. This means Laura and Tim would only share in the increase after the date of marriage. This treats the matrimonial home like Tim’s date of marriage investments. In this new marriage contract scenario, Laura’s equalization payment would be $25,000 (the difference between her net family property of $100,000 and Tim’s net family property of $50,000, divided by two) rather than the $75,000 of the original example.
- Protecting inheritance or a gift to one spouse. For instance, one spouse inherits money (which is not equalized under Ontario law), and invests that money in the matrimonial home. The spouse would lose the ability to deduct the inheritance from their net family property because the inheritance becomes tied up in the matrimonial home. Likewise, if a home is inherited by or gifted to one spouse, and it becomes the matrimonial home, its full value will be equalized upon separation. A marriage contract can address these situations.
- Protecting one or both spouses’ investment in the matrimonial home. A marriage contract could provide that the value of the matrimonial home be unevenly split so that the spouses recoup their proportional investment (for instance, a marriage contract could provide that a spouse that contributed 70% to the down payment and the mortgage on the matrimonial home receive 70% of the net proceeds upon its sale, rather than an equal split).
- Spouses may also wish to designate a certain property as the matrimonial home (which they may not ordinary reside in at the time of separation). Spouses could choose to designate a vacation home or a home that they rent out, for instance. Spouses must agree on which property to designate and file this designation with the proper land registry office. A marriage contract could set out the agreement to make the designation (note that the designation would still need to be filed by both spouses), and could also provide for what occurs if the designation is cancelled by one spouse (in which case the matrimonial home will revert to the property that meets the definition within Ontario’s Family Law Act).
There are a range of options available and any contract should be tailored to match the parties’ unique circumstance and objectives. These examples are over-simplified and are intended only to give a broad overview of some of potential scenarios in which a marriage contract may be helpful.
If you are considering using a marriage contract to address matrimonial home issues, it is worth noting that such a contract can only address property rights. Marriage contracts cannot alter a spouse’s possessory rights to the matrimonial home. There are special sections of Ontario’s Family Law Act that prevent one spouse from selling or mortgaging the matrimonial home without the consent of the other, and prevent one spouse from evicting the other (even if the evicting spouse owns the home). This is intended to protect spouses during a marriage and a separation. Once a separation agreement is finalized in which one spouses releases their rights to the home, these possessory rights end.
It is critical to obtain independent legal advice when considering a marriage contract. Whether independent legal advice was obtained is one important factor that courts consider if asked to determine whether to uphold a marriage contract.
If you are considering a marriage contract to address any property and/or support issues, contact one of the McKenzie Lake Family Law team, and we would be pleased to advise you.