Disclaimer: This article aims to provide educational information surrounding excluded property. It is not intended to serve as legal advice. Consult with a lawyer and exercise your discretion before taking action based on the information provided in the blog.
You may have entered marriage with the idea that “what’s mine is yours” is often a starting point for many couples. However, things can get complicated when a marriage ends, and property needs to be divided.
This is where the concept of “excluded property” becomes crucial. You may ask how gifts and inheritances come into play. What about the property that you brought into the marriage?
Under the Family Law Act, understanding what property is excluded can make a significant difference when dividing your assets.
In this article, we’ll break down this concept, explain why it’s essential, and why it matters to help you protect your assets.
This concept comes up when determining your net family property. The question then arises: what is your net family property?
What is your “Net Family Property” (or NFP)?
Net family property (NFP) is a fundamental concept used to determine how assets are divided upon separation of a married couple. It is based on the principle that each spouse is entitled to share equally in the increase in wealth and property that the spouses accumulated during their marriage.
It represents the difference between the value of your properties, debts and liabilities at the date of separation and the value of same at the date of the marriage, after taking into consideration, if applicable, an excluded property.
The spouse with the higher net family property figure will owe an equalization payment to the other, such that after payment of the equalization payment, each spouse will have benefited equally from the marriage. Therefore, the equalization of net family property is calculated as follows:
Equalization payment = (net family property of spouse one – net family property of spouse two) / 2
What is “excluded property”?
In Ontario, “excluded property” refers to certain property or assets that you would deduct when calculating a spouse’s net family property (NFP). These assets are excluded from the equalization process, the division of property between spouses upon separation or divorce. Understanding what qualifies as excluded property is crucial, as it directly impacts how you divide your assets.
Excluded property differs from included property in that it is not subject to equalization. Included property refers to assets acquired during the marriage or cohabitation. Its value is used when calculating your net family property. Excluded property, on the other hand, remains the sole possession of the spouse who owns it and is not divided equally.
The Act lists the following items to be excluded from the net family property calculation:
- Property that a spouse receives as a gift or inheritance from a third person after the date you got married.
- Income from property referred to above if the donor or testator expressly excluded it from the spouse’s net family property.
- Personal injury damages, including damages for nervous shock, mental distress, or loss of guidance, care and companionship
- Proceeds of a life insurance policy
- If property acquired through gifts, inheritance, income, personal injury damages, or life insurance proceeds was used to purchase or invest in another type of property, that new property may also be excluded.
- Unadjusted pensionable earnings under the Canada Pension Plan.
Two considerations to note:
- When we mention “property” above, it does not include the marital home or family residence.
- If you have agreed by a domestic contract that specific property or assets are not included in the net family property, then that property would also be excluded.
How gifts and inheritances are treated under the Family Law Act
One question that frequently arises is how to treat gifts and inheritances received before the date of separation but after the date of marriage. This can include property, assets, cash, investments or anything inherited. An inheritance refers to something you receive from a will or through intestacy (meaning your relative did not have a will).
Gifts received during a marriage are generally excluded from the recipient’s NFP, however,whether a gift qualifies for exclusion can depend on various factors, including the donor’s intentions, how the gift was used, what was done with it and who the gift came from. The onus to prove the gift should be excluded is on the person claiming it was a gift for them, not the family.
Generally speaking, an inheritance is excluded. However, it becomes more ambiguous when that inheritance has become intermingled with other family assets.
The exclusion of inherited assets depends on several factors, including whether the inheritance was received before or during the marriage, how it was used, and whether it can be traced and separated from other marital property. For example, suppose your relative bequeaths you a sizable inheritance. You use the funds to pay down the mortgage on your family home. That inheritance is likely no longer excluded.
To protect gifts or inheritances received during your marriage, you may need to create or amend a marriage contract to address this issue, or be very careful as to what you do with any such gifts or inheritances..
Property and assets owned before marriage
What about assets that are brought into the marriage? Property owned by one spouse before marriage is typically treated as a deduction from the equalization process. They may or may not still exist as of the date of separation. However, they must be documented and identified to qualify for deduction. Failing to do so may mean they are included in the NFP calculation.
It is wise to have a family law lawyer prepare a domestic contract outlining what property you bring into the marriage.
Protecting your assets with Plat Simionati LLP
For all your family law needs, especially when understanding excluded property and safeguarding your assets, consult the experts at Plat Simionati LLP. With our extensive knowledge and experience in family law, we can provide you with valuable insights and guidance to ensure that your assets are protected.
Don’t leave your financial future to chance; let us help you navigate the complexities of family law.