Private Client Services Bulletin
Heading into the summer and autumn months undoubtedly means that wedding season is among us. But, as we all know, a marriage entails more than just a beautiful wedding.
When two individuals become married they alter their legal rights vis-à-vis one another. These rights become most relevant in the event of a separation and divorce. In Ontario, the Family Law Act contains standardized rules that govern individuals' rights upon a marriage breakdown. These include certain financial-related rights such as property and support rights. These rights can also impact the treatment of any family residences upon separation.
Yet, many couples would agree that no two families are the same, and that the "one-size-fits-all" approach that the law generally applies may not be appropriate for all family dynamics. For example, as a result of inflation and a corresponding increased cost of living, some younger couples today may be receiving financial assistance derived from family wealth (e.g. applying funds gifted from parents to a down payment on a new home).
Accordingly, parties can ensure that the terms of their marriage suit their personal circumstances and desires by entering into a marriage contract that modifies the terms of the existing law. This bulletin will discuss the flexibility marriage contracts can provide to couples as they foster an agreement that is appropriate for the terms of their particular family dynamic. While the terms possible to include in a marriage contract are vast, we provide insight on some common provisions pertaining to, in particular, division of property and spousal support obligations.
Division of Property
In Ontario, there are rules that govern the division of married spouses' property rights upon marriage breakdown. This is done through the calculation of each spouse's net family property. Net family property is, essentially, the amount by which a spouse's net worth increases over the course of the marriage (specifically, between the date of the parties' marriage and the date of the parties' separation). On separation, the spouse with the lower net family property value is entitled to an equalization payment from the spouse with the higher net family property. The equalization payment is one half of the difference between the two spouses' net family property.
There are rules in Ontario that stipulate what property a spouse must include and what property a spouse must exclude from their net family property calculation. For example, gifts and inheritances are commonly excluded property, but income generated from such gifts and inheritance is not (unless the terms of the gift/inheritance specifically provide for such an income exclusion). Without a marriage contract, spouses must divide their property in accordance with these rules. However, spouses can modify what property is or is not to be included in their net family property calculation through the provisions of a marriage contract. Parties commonly exclude interests in family corporations and family trusts from being considered as part of net family property, so as to ensure that the contract only deals with wealth actually acquired and/or created by the parties.
Usually, an equalization payment is the "main" property right spouses have. Otherwise, ownership of property is usually determined in accordance with legal ownership (e.g. title). What this means is that, unlike other jurisdictions, the spouses are not entitled to "half" of all of their collective property. Instead, one spouse usually owns the other an equalization payment, and to the extent each spouse can prove that they solely own any particular property they get to keep that property. If a property is jointly-owned, or if ownership is otherwise unclear, the spouses will have to come to a resolution for such property as part of their separation agreement.
That being said, there are certain claims spouses can make against one another with respect to property ownership even where one spouse is not on title. For example, if only one spouse is on title to the family residence but the other spouse made contributions to the improvement of the family residence, the non-title spouse may nonetheless be able to make an equitable claim for the recognition of an ownership interest in the home. Of course, the process for making such claims can be time, cost and resource-intensive. One should also be mindful of the emotional tolls that drawn-out litigation can take.
Conversely, a marriage contract can prevent both spouses from making any such claims. It provides certainty to the parties going into the marriage. The contract can stipulate how ownership of assets is determined. It can even determine that upon separation one of the parties is to receive a particular asset even if they're not on title. For example, where there is a significant gap in wealth among the parties, the contract may stipulate that one spouse is to receive the family residence provided certain conditions are met (e.g. the parties have been married for a certain number of years and/or there are children of the marriage).
Family Residences and the "Matrimonial Home"
On the topic of family residences, a common provision in marriage contracts related to specific provisions regarding the spouses' "matrimonial home". Section 18 of the Family Law Act defines the "matrimonial home" as the home that is "ordinarily occupied" by the spouses as their "family residence". There can be more than one matrimonial home (i.e. cottages and other vacation properties can also be considered a matrimonial home).
First, note that if the spouse is the sole owner of the same matrimonial home on the date of marriage and on the date of separation, then the entire value of the spouse's interest in the matrimonial home is included in their net family property for the purposes of calculating any equalization payment. A marriage contract can modify this in numerous ways, including by excluding all matrimonial homes from net family property entirely, or by giving the owner spouse a "credit" for the value of their interest in all matrimonial homes owned on the date of marriage (meaning that only the growth in value of that spouse's interest will form part of that spouse's net family property).
Note that under Part II of the Family Law Act, both spouses have an equal right to "possess" the matrimonial home, even if only one spouse is on title to the home. What this means is that while the parties remain spouses (i.e. until they become legally divorced), they are both entitled to occupy the matrimonial home, and both parties must consent to any encumbrance (e.g. mortgaging) or alienation (e.g. sale) of the matrimonial home. Under the Family Law Act, a marriage contract cannot modify a spouse's Part II rights.
A marriage contract can nevertheless still be useful in other ways regarding matrimonial homes. For example, the parties can agree to the treatment of a matrimonial home from a property perspective. One party may have the first option to "buy out" the other party's interest in the matrimonial home, or the parties may agree to sell it to a third party. The contract can also provide how the home is to be valued in these scenarios.
If the home is sold, the contract can mandate how the proceeds of sale are to be distributed among the parties. It is common to see contracts where, for example, each party first receives back any gifts from family that they applied toward the acquisition of the matrimonial home, and then the remaining proceeds of sale are divided equally—without a contract, if the parties jointly owned the home then they typically would each be entitled to half of all proceeds of sale. The contract can provide similar provisions for contributions made personally by each party, or can take a different approach altogether.
Spousal Support
Upon separation, another type of claim that a spouse can make is for spousal support payments from the other spouse. These payments are usually made on a monthly basis, but can be made in other intervals.
Spousal support is determined primarily based on the income of the parties, and the Government of Ontario's Spousal Support Advisory Guidelines (SSAG) serve as a starting point from which the court will make spousal support calculations. However, despite the SSAG, the court has immense discretion in making final orders on spousal support, including with respect to the duration and quantum of payments. The court will consider a wide variety of circumstances, such as the length of the relationship, whether the spouses have children, whether either spouse suffered economic loss or hardship as a result of the marriage or separation, and how well each spouse can independently support themselves.
Given the diverse and often complex circumstances a court may consider in determining spousal support issues, marriage contracts can provide spouses with greater certainty by setting pre-determined parameters for spousal support. The parties can agree to provisions such as income inclusions and exclusions for the purpose of calculating spousal support, payment schedules (e.g. lump-sum payment vs. interval-based payments), and minimum and maximum amounts for spousal support. Some of these provisions may correspond to the length of the marriage (e.g. if there is a lump-sum payment, then a longer marriage will result in a larger payment).
Other Considerations
There are numerous other things that the parties should consider with respect to marriage contracts, including:
- While marriage contracts can address spousal support, they cannot address child support. However, certain provisions in the contract may be related to whether or not there are children at the time of separation (e.g. provisions surrounding matrimonial homes).
- The spouses should also consider what should happen if one of the spouses passes away during the marriage. Some contracts preserve all rights that each spouse may have against the other's estate, and other contracts may see the parties waive all such rights. In addition, one of the spouses may be required to maintain a life insurance policy. The circumstances of the parties will dictate the appropriateness of these provisions.
- Note that while common law spouses do not have the same rights as married spouses, they can still enter into cohabitation agreements (which are similar to marriage contracts). Common law spouses are not entitled to equalization payments, but may still have other rights related to property (e.g. equitable claims, as described above). And although there is no concept of a "matrimonial home" for spouses, if they jointly own any property the contract can still govern the treatment of such property on separation. In addition, both married spouses and common law spouses have spousal support rights, meaning that a cohabitation agreement can also deal with spousal support.
- Lastly, there are numerous requirements that any marriage contract (or cohabitation agreement) must meet in order to be valid. Both parties need to have independent legal advice. They also need to provide "full and frank" disclosure of their finances (i.e. income, assets and liabilities) to one another. The contract has to be negotiated in a fair fashion. And the contract itself cannot be patently unfair to one of the parties; if it is, there are remedies that a party may pursue in order for a court to overturn the contract. Yes, a contract can provide for a complete waiver of the parties' marital rights (i.e. no equalization payment entitlement, no spousal support entitlement etc.), but if there is a significant wealth imbalance between the parties then a court may very well invalidate such provisions.
Conclusion
Marriage contracts give couples the opportunity to tailor the preset legal rules in Ontario that govern financial and property entitlements upon marriage breakdown. Couples may want to do this so they can have certainty in the event of a worst case scenario, and to reduce the time, money and energy spent during the divorce process. Where family wealth is involved, more spouses are realizing that a marriage contract that protects such family wealth is an absolute must.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.