After separation, disentangling your personal and financial affairs can be a long and difficult process. This blog focuses on how gifts and loans you received from third parties during your marriage can affect property equalization. When it comes to dividing property, it matters whether you were legally married. Only married spouses can equalize property under the Family Law Act (the “Act”). I’ll talk more about the rights of common law spouses in a future blog!
What do we mean by property “equalization”?
If you were married, the Act recognizes that you each contributed to the marriage in different ways, and one party often leaves the marriage poorer than the other. So, the Act says that the total wealth accumulated during a marriage is divided equally between the separating spouses. The spouse with the higher net family property value must pay an equalization payment to the poorer spouse.
Net family property is not simply adding the value of the assets each spouse owns at separation. There are deductions and exclusions, such as:
- assets brought into the marriage
- debts owing at separation
- gifts and inheritances from third parties (and property deriving from those gifts and inheritances)
The matrimonial home is an exception to these exceptions.
Family often helps a married couple out. But was that cash a loan or an outright gift? It makes a big difference when the couple separates.
Let’s say the wife receives $150,000 from her parents to purchase a rental property. That property is placed solely into her name. When she separates, the rental property is worth $175,000.00. If the $150,000 was a gift, she can exclude $175,000.00 from her net family property. If the $150,000 was a loan, then only the value of the loan is deductible (as a debt) and the additional $25,000 will be shared with her husband.
Gift or loan? It depends on what the parents intended at the time. Frequently, in a family, nobody documents the arrangements – there are simply some verbal promises. The parent may not even be sure what they intend. The difficulty is there is nothing to show whether the parents gave a gift (and excluded the growth) or made a loan. The fight over whether the funds were a gift or a loan can be extremely costly to everyone.
Yet it is relatively simple to prepare documents to evidence a gift or a loan. A loan should be backed by a mortgage or a promissory note. A Declaration of Gift prepared by a lawyer will evidence a gift and exclude the growth in value. There may be other evidence – proof of repayments, witness statements, etc. – but the cost to litigate the issue will be high.
Families should always “paper” the gift or the loan. Without the paper, the cost of fighting the issue may be more than the value of the gift itself!