Advise common-law clients to plan for split

Common-law spouses enjoy the same spousal support rights as married couples under the Family Law Act (Ontario) if they’ve lived together continuously for more than three years or had a child together.

But in Ontario, common-law spouses don’t enjoy the same property rights as their married counterparts.

Read: 4 tips for common-law couples

And if you fail to advise clients of how the law handles separation for common-law couples, they could face nightmarish legal battles lasting years and costing tens of thousands of dollars.

But this War-of-the-Roses scenario is avoidable.

Susan Jack of the Smith Family Law Group explained the ins and outs of common-law separation at a seminar on estate planning presented by the Toronto branch of STEP Canada. Her advice enables advisors to spare clients the legal, financial and personal troubles that lack of planning invariably leads to.

That’s awkward!

Seinfeld fans will remember Cosmo Kramer’s advice to George Costanza when the bald-headed schemer asked him how to sabotage his engagement to Susan Ross: “Ask her to sign a pre-nup,” he replied, as this would surely lead her to break off the engagement.

Joint family venture

This venture is a pooling of the spouses’ efforts to accumulate wealth.

Proving there’s a joint family venture is not enough to win a settlement—you also have to show unjust enrichment. In other words, just because the spouses are working together to accumulate wealth doesn’t necessarily mean one spouse is keeping more than his or her fair share.

The Supreme Court has identified four factors to determine if there is a joint family venture. Jack notes these are “only guidelines, and as the case law develops we’ll see that the concept of joint family venture, and the evidence needed to establish it, will develop as well.”

1. Mutual effort

• Were the spouses working together toward a common goal?
• Did they have children and raise them together?
• Were the domestic duties equally divided? For example, was one spouse more responsible for the home, freeing up the other to pursue earning opportunities outside the home?

2. Economic integration

• Was there a joint bank account for common expenses?
• Did they have a family business?
• Did they share expenses?
• Did they put the welfare of the family ahead of their individual interests?

3. Intent

• Do they consider themselves equivalent to a married couple?
• Do they present themselves to the community as married?
• How was title to property held?
• Does the intent behind their estate plan suggest there is no joint family venture?

4. Priority of the family

• Have the parties prioritized the family in decision-making?
• Did one party rely on the future of the relationship for the benefit of the family? For example, did he or she leave the workforce to raise the children; move to another city to accommodate their spouse’s job transfer; or forgo a career opportunity for the benefit of the family?

Source: Susan Jack

The scheme didn’t work as planned, but Kramer’s advice is on the mark for common-law spouses. Any offence caused by a proposal to create a cohabitation agreement—the common-law equivalent of a pre-nup—is far outweighed by the toll a court-fought separation will take.

So how ugly does it get without an agreement? Jack’s explanation of the legal process will likely have your clients’ pens at the ready.

Unjust enrichment

If common-law spouses separate, and one spouse is unhappy with the amount of property she got after the separation, she would have to establish what is referred to as “unjust enrichment.”

“The purpose of unjust enrichment claims is to prevent one of the parties from unjustly retaining, after separation, a disproportionate share of the wealth accumulated during the relationship,” Jack explains.

Unjust enrichment occurs when one spouse benefited at the expense of the other. This would occur if one spouse left work to stay home with the children—forgoing an income—enabling the other to go to work.

Read: Upcoming estate law changes

The remedy is either a monetary award or a transfer of property.

Monetary or proprietary award

Jack explains that prior to the Supreme Court decisions in the Kerr v. Baranow and Vanasse v. Seguin cases, monetary remedies were given on a fee-for-service basis. For example, a dollar value would be placed on the child care duties performed by the spouse who gives up a career to raise the kids.

The courts now use a test that asks if the spouses were working together in what is known as a joint family venture (see “Joint family venture,” right).

In this case, the court will grant a monetary award that’s in line with the spouse’s contribution to the family’s wealth accumulation. Jack notes that determining a dollar figure can be extremely difficult, and the courts have not been able to come up with a formula to guide the process.

“As more of these cases are litigated, it’s clear that outcomes are subjective and based on a particular judge’s sense of fairness on a given day,” she says.

Ideally, there would be a record of cases settled along clear and predictable lines. That makes it relatively straightforward to come to an agreement without going to trial, because you can predict what the client will get if he goes to court.

But if there’s no precedent, it’s worthwhile for a client to take his chances and let a judge decide. His former spouse can’t say, “You need to agree to a lower payout because the courts have decided this is what you’ll get if we go to trial.”

Sometimes property is the payout for an unjust enrichment claim. But for this to happen the spouse has to show evidence she contributed to the acquisition, preservation, maintenance or improvement of the property, and that a monetary award alone would not be sufficient.

In some cases this will mean partial ownership—fertile ground for further clashes between former lovebirds.

Overall, unjust enrichment awards range between 10% and 50% of assets, though the 50% mark is seldom reached. Awards are on the high end of the range when children are involved.

A cautionary tale

This year marked the conclusion of a common-law court battle that lasted five years and went all the way to B.C. Supreme Court. The spouses’ experience should be enough to convince your clients to set aside their understandable misgivings and work out a cohabitation agreement.

The couple, Margaret Kerr and Nelson Baranow, were in a common-law relationship for 25 years and had no children together. Both had jobs most of the time they were a couple, but Kerr suffered a stroke and needed long-term care. For a time this was done in the home, with Baranow doing most the housework and care-giving.

Read: Young couples opting for separate accounts

The relationship became strained and Baranow moved Kerr into an extended-care facility. When they separated, Kerr received none of the property she and Baranow shared.

Kerr made an unjust-enrichment claim seeking both real estate and spousal support. Baranow made a counterclaim, saying his spouse benefited from his care-giving services.

At the first trial in 2007, Kerr was awarded a one-third interest in a home Baranow owned.

But he appealed. The decision was quashed and a new trial ordered. After a trip to the Supreme Court, it awarded Kerr a 25% interest in that same home, instead of one-third. The difference was around $60,000.

In a legal sense, Baranow was the victor: he managed to whittle down the award. But by any practical measure he was pummelled.

“I haven’t seen his bill, but I would venture to guess the $60,000 he saved was long gone after paying his lawyer and his former spouse,” Jack notes.