Protect your home from divorce

Perhaps you own a home or cottage that has been in the family for generations. Or maybe you’re considering helping your child purchase his first home. Protecting those residences from future marital breakdown can be complicated if they are matrimonial homes under Ontario’s Family Law Act (FLA).

Under Ontario law, the full value of a matrimonial home is included in determining your net family property (NFP), and how much your home was worth when you got married doesn’t matter. It isn’t deducted from the home’s value when your marriage ends.

Ontario says a matrimonial home is any property occupied by married spouses or by a spouse and their children as a family residence and in which at least one of the spouses has an interest. Married couples may have more than one matrimonial home.

Both you and your spouse also have a right of possession in a matrimonial home while married, regardless of whether either of you has an ownership interest in the property. A spouse who is not on title must also receive prior notice of, and consent to, any mortgage or sale of the property.

A marriage contract is one way to protect a residence in the event of separation or divorce.

Another planning option is a discretionary trust. In a 2012 case (Spencer v. Riesberry), the Ontario Court of Appeal ruled that where a discretionary trust holds a residence, a beneficiary does not acquire a direct ownership interest in that residence, which prevents it from being a matrimonial home under FLA.

Details of the case

Sandra Spencer and Derek Riesberry married in 1994. Before marrying, Sandra’s mother, Linda, purchased a property. The same day, she settled a trust called the Spencer Family Realty Trust (SFRT), to which she transferred the property’s ownership. Linda was the trustee as well as the beneficiary of the trust while she was alive.

Linda transferred three more properties to the trust — each of which was occupied by one of her four children and the child’s respective spouse. SFRT’s capital would be divided equally among her children upon Linda’s death. Sandra and a sister eventually replaced Linda as trustees.

Derek and Sandra separated in 2010. If the home Sandra and Derek had lived in were a matrimonial home, Sandra would need to include its full value in her net family property. Both the trial judge and Court of Appeal agreed that Sandra’s only interest was in SFRT and not in any specific asset held by it — so the home didn’t qualify as a matrimonial home.

Since the property wasn’t a matrimonial home, the value of Sandra’s interest in SFRT on the day she married Derek was deductible from her net family property. Only the increase in value of her interest during marriage was subject to being divvied up in the divorce.

The Court’s decision has other important implications: Derek would have had no right to remain living in the home for a time upon separation, and his consent would not have been needed if the property had been sold or mortgaged during the marriage.

If you’re considering a trust to protect an interest in a property that could qualify as a matrimonial home, seek professional assistance to ensure the trust is properly implemented under local laws, and to ensure other matters such as tax implications, are thought through. Also consider whether other assets outside the trust would be available to satisfy any equalization payment.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.