Don’t Make This Big Real Estate Mistake Before Getting Married

Many Canadian home owners neglect to enter into a marriage contract before tying the knot, and that could prove costly in the event of a divorce.

By Josh Sherman | 5 minute read

Some 40% of marriages in Canada could end in divorce, according to one federal government estimate, and that has potentially huge implications for property owners.

When Ron Shulman began practicing family law about 20 years ago, there was a big stigma around marriage contracts, colloquially known as prenuptial agreements.

But, over time, the founder and managing partner of Shulman & Partners LLP has noticed a shift. “I find that nowadays it’s a lot more open to discussion — especially with the younger generation of people who realize that a marriage is really… a legal transaction.” he tells Wahi. 

In Ontario, where his firm has offices in Toronto and Ottawa, real estate is driving an increase in marriage agreements, which are a type of domestic contract. For one, sky-high real estate values mean there’s more to protect, but that’s not all. “We’re seeing many young people who are priced out of real estate, and they’re being helped by family,” says Shulman. It is often these family members who are pushing for legal agreements. In the event of divorce, they don’t want their financial contributions to end up in the other party’s hands. Marriage agreements are also more common in second marriages, where one partner may have built up considerable equity in their home, says Shulman.

Few people realize it, legal experts say, but unlike other assets owned prior to a marriage, under Ontario’s Family Law Act, the value of the matrimonial home is not exempt from equalization, a process through which the courts divvy up assets accrued during a marriage. So while more and more Canadians are entering into marriage contracts, too many existing homeowners are still neglecting to take this crucial step — whether due to lingering stigma or difficult conversations. That, Shulman and others suggest, puts them at risk of considerable financial losses during separation. 

The Matrimonial Home Exception 

“Basically, under Ontario family law — and this only applies to married couples — we effectively tally up what the parties acquire from the date of marriage to the date of separation,” Mathew Fordjour, a family lawyer, tells Wahi. “So the idea is whatever they acquire, whether it’s in separate names or its joint, it’s all added together,” he adds, noting some exemptions that can occur during a marriage, such as gifts or inheritances. Whichever party has the higher total ends up making an equalization payment to the other to balance the books. 

Each party typically receives a deduction for the value of assets they brought into the marriage, such as stocks or other investments. So, for example, if somebody had an RRSP that was worth $50,000 upon getting married, they would retain that value and split the gains realized during the length of the marriage. But the matrimonial home is the exception to the rule. “In general, a matrimonial home is defined as a property that the parties ordinarily reside in on the date of separation,” explains Shulman. “You don’t get a credit for the value you brought in [to the marriage on the matrimonial home], and that is huge,”  he adds.

In the case of the matrimonial home, it doesn’t matter whether the home was a gift or inheritance. “Another big one is people are shocked to know that their cottage that they may be bringing into the family could become a matrimonial home — you could have more than one,” Shulman notes.

The law varies from province to province. In B.C., for example, a home that one party brought into the marriage isn’t subject to equalization. “But if the property increases in value while you’re living together, that increase is part of the family property. That means the increased value is divided equally between the two of you if you separate,” according to non-profit organization Legal Aid BC’s website.

For common-law couples who separate in Ontario, equalization does not apply. But that doesn’t mean one’s real estate assets couldn’t be on the table. “There are various legal doctrines which basically try to ensure that there is at least some fairness between the parties, even if they’re common law,” says Fordjour. For instance, if one partner contributed to renovations or mortgage payments, they may be entitled to a portion of the value of the asset.

“There’s a principle called unjust enrichment, and it’s a whole body of case law,” says Fordjour. “That’s the idea that in some circumstances, it would be unfair for one person to have 100% rights to a certain property if the other person has contributed.” Common-law couples can enter into a cohabitation agreement, which functions like a marriage contract. The agreement can be drafted in such a way that it becomes a marriage agreement if the parties choose to wed.

Marriage Contracts: the Good, the Bad, and the Ugly 

A marriage contract is the most effective way for a homeowner to protect a real estate asset before tying the knot. “Marriage agreements are a great idea — period. The reason they’re great is they avoid ambiguities,” says Shulman. 

The documents outline the rights and responsibilities of each party entertaining a union to avoid arguments later. This is another reason Shulman thinks they’re a good idea, the fact that they spur talks about the what-ifs surrounding divorce. “I don’t think many people have that conversation, but they should.”

While marriage contracts are the best tool for the job, they aren’t 100% airtight in all circumstances, Shulman notes. “The best way to think of a marriage agreement is to think of an insurance policy,” he says. “It’s there to protect you. It’s there to create expectations and clarity. But nothing is bulletproof.”

For the best chance of the document holding up in court, it’s crucial for each party to seek independent legal advice before signing on the dotted line. That way, nobody can claim later that they didn’t understand what they were getting into, an argument that’s sometimes used during divorce proceedings when thing sour. “Number one, you can set aside a marriage agreement or domestic contract when there was no legal advice,” says Shulman. “We try to insist that both parties have their representation. They have their lawyers, [and] the lawyers sign legal-advice certificates to make sure that advice is there.”

Another common argument used to undermine a marriage agreement is duress. If someone is presented with the contract days or weeks before the wedding, they could later claim they signed it under duress. “We address that by making sure that we don’t do it last-minute. We give sufficient time for parties to consider,” says Shulman. (His firm won’t even draft a marriage contract if a client approaches him too close to the wedding date.) “The point of a marriage agreement is to avoid litigation, and we don’t want to create an agreement that causes litigation,” he adds, adding that you could still draft the contract after the wedding.

While the stigma around domestic contracts is fading, they’re still a sensitive subject for couples. If you’re considering bringing up a marriage contract with your partner, Shulman has some advice: “Broach it in a way that is not adversarial,” he says.

Instead of focusing on the assets you’re bringing into the marriage, he says to emphasize the predictability factor — how the contract sets out what each of you can expect should the marriage go south.

“[Say], ‘Look, we’re entering a marriage, clearly we want to make sure we both know what will happen… if we do split up or it doesn’t work — we don’t want to have to pay lawyers hundreds of thousands of dollars and be those horror stories,” says Shulman. “That’s the angle and the focus of the conversation I usually recommend to clients — it really benefits everyone.”