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All is NOT Fair in Love and War

Advising clients navigating a recent separation, often at their most vulnerable, can be challenging. Most clients who are experiencing their engagement with the family law legal system for the first time know little about the law. Clients overwhelming though have a strong sense about what is “right” and “wrong” and what is a “fair” outcome. Unfortunately, the main task of the lawyer is to manage a client’s expectations and sometimes that means advising clients to accept a settlement is unfair.

I often tell clients that it is a family legal system, not a family justice system. In other words, while the law and courts have developed in a way to treat spouses fairly, there are still some areas where one spouse might be disadvantaged and have no remedy legally.

One example is how the Ontario Family Law Act deals with the division of property on separation. If two spouses marry, they share in the increase or decrease of their property values over the course of the marriage. In other words they both get credit for the property they brought to the marriage and only share in the increase (or decrease) in value. There are however certain exceptions. Two of these exceptions do not seem “fair” in some circumstances.

The first is with matrimonial homes. Imagine one spouse brings a home worth $1m into the marriage and the other brings a bank account with $1m into the marriage. They separate five years later and the home and bank account are worth the same. It would seem that they are equal financially and should just walk away with their $1m each in value. Not the case. In fact, the spouse with the bank account gets the $1m in the account plus $500k in an equalization payment. The spouse with the home gets to keep the home but owes $500k to the other spouse. So one spouse has a net worth at separation of $1.5m and the other of $500k when they each contributed the same amount to the marriage. Matrimonial homes are one exception that can result in unfairness. To remedy this, the spouses need to enter into a marriage contract (which can be entered into before or during the marriage). When I was Chair of the Ontario Bar Association we lobbied the provincial government to address this anomaly but it remains the law to date. In my experience, women are disparately impacted by this since they are frequently the ones who purchase homes and bring them to a second marriage.

The second is with inheritances. If you inherit during the marriage, as long as you keep the inheritance separate, you do not have to share in it’s value with your spouse on separation (and probably not in the increase in value either depending on the terms of the will). It is excluded property. If you inherit the day before the marriage, the inherited property is not excluded and you will get credit for the value of the inheritance on the date of marriage, but your spouse will share in the increase in value, regardless of the terms of the will. In addition, if you use your inheritance to pay down the mortgage on a matrimonial home, even if it is in your name alone, you lose the ability to exclude the inheritance from calculating your net family property at separation.

These are only two examples and there are many. Getting legal advice prior to cohabitation or marriage allows parties to address the unfairness that may result. A valid cohabitation agreement or marriage contract can get around the unfairness and make a result more certain in the event of separation. Even more importantly however, particularly in second marriages, it is important to address what happens on the death of a spouse. On death, spouses can choose whether to take the amount entitled under the will (or if there is no will on intestacy) or under the Family Law Act equalization scheme. This can pit the spouse in the second marriage against the children from the first. It is preferable for everyone to address these issues in a contract so that the family is not in conflict later.