Protect gifts toward a matrimonial home from divorce

Often, parents want to help a child who’s getting married by contributing to the cost of the matrimonial home. This may be in the form of money for a down payment on a house, assistance with reducing the mortgage, or even giving the house as a gift.

If a parent gives something to their child before the marriage, section 4(1) of the Family Law Act (Ontario) says that the entire value of the gift on the date of the marriage will be excluded from that child’s net family property if there is a divorce in the future.

Read: How gifts and inheritances are shared between spouses

However, if the gift relates to the matrimonial home of the couple, meaning the home that is ordinarily occupied by the couple at the time of separation, then no exclusion is permitted. This means that the entire value of the matrimonial home — even the portion owned by the child before the marriage — and any gift invested in the house will be divided equally between that child and his or her spouse if they later separate.

Gifts or inheritances received during the marriage are generally excluded property, but again this is not the case if the gift is made toward the couple’s matrimonial home. Section 4(2) of the Family Law Act indicates that the value of the matrimonial home (and any gift toward the matrimonial home made during the marriage) is equally divided between the two spouses in the event of a separation.

Read: Why family gifts and loans require planning

Possible solutions

Loan the money: If your client does not want the gifted funds to become communal property, he or she could loan the money to the child.

But be careful: if it appears there was never a real intention for the money to be repaid, it is likely the money would be characterized as a gift rather than as a loan. If that’s the case, it will be divided equally between the separating spouses.

To determine whether there’s a gift or a loan, a court would consider factors such as:

• whether there were any contemporaneous documents evidencing a loan;
• whether the manner for repayment is specified;
• whether there is security held for the loan;
• whether there are advances to one child and not others or advances on equal amounts to various children;
• where there has been any demand for payment before the separation of the parties;
• whether there has been any partial repayment; and,
• whether there was an expectation or likelihood of repayment.

Keep the title of the house: Some parents prefer to retain the title of the property in which their child and new spouse will reside. If there is a separation, the house does not go in either spouse’s net family property since it belongs to someone else.

However, if your client actually intends for the couple to have full ownership and lets them invest their own time and money to maintain the house (e.g., they perform repairs, improvements, etc.), there are instances when the separating son-in-law or daughter-in-law might be able to prove a claim in equity against the house and recoup some of the value of his or her labour.

Read: Estate freezes: when estate and family law converge

Hold the house in a trust: Another way to protect the value of the gift would be for the property to be owned by a trust. An asset held in a trust does not belong to a spouse and does not form part of their net family property.

However, according to Ontario laws, if a separating spouse is a beneficiary of that trust, it is likely a portion of the value of the assets in the trust could form part of his or her net family property.

Have a pre-nup: The safest way to protect the gift invested in a child’s matrimonial home is for the child to enter into a marriage agreement with his or her partner before the gift is given. A properly drafted marriage agreement would regulate what happens to the house, and any gifts, in the event of a separation.

Nathalie Boutet

Tax & Estate

Nathalie Boutet is a family lawyer, mediator and certified Family Enterprise Advisor™ specializing in high-net-worth families and business owners. She can be reached at nboutet@boutetfamilylaw.com.