You and your spouse may have property that will be excluded from the division of family assets upon separation. Section 85 of The Family Law Act lists the types of property that are defined as “excluded property”:

(a) property acquired by a spouse before the relationship between the spouses began;

(b) inheritances to a spouse;
(b.1) gifts to a spouse from a third party;

(c) a settlement or an award of damages to a spouse as compensation for injury or loss, unless the settlement or award represents compensation for
(i) loss to both spouses, or
(ii) lost income of a spouse;

(d) money paid or payable under an insurance policy, other than a policy respecting property, except any portion that represents compensation for
(i) loss to both spouses, or
(ii) lost income of a spouse;

(e) property referred to in any of paragraphs (a) to (d) that is held in trust for the benefit of a spouse;

(f) a spouse’s beneficial interest in property held in a discretionary trust
(i) to which the spouse did not contribute, and
(ii) that is settled by a person other than the spouse;

(g) property derived from property or the disposition of property referred to in any of paragraphs (a) to (f).

A spouse claiming that property is excluded property is responsible for demonstrating that the property is excluded property. This can be difficult, especially if you need to “trace” excluded property. For example, if you had $20,000 in savings prior to the relationship that you put into an RRSP during the relationship, you may need to obtain bank statements from 5 years ago to prove that your spouse is not entitled to $20,000 of your RRSPs. If you had $20,000 in savings prior to the relationship and you used it all on family expenses or to purchase an asset that was worthless by the date of separation, your excluded property claim is lost.

If your excluded property increases in value during the relationship, your spouse will likely be entitled to 50% of the increase in value between the date you started living together and the date you reach an agreement or go to trial. Further to the example above, if you wisely invested your pre-marital savings of $20,000 and the investment grew in value to $100,000 during the relationship, your excluded property claim is still just $20,000. The increase in value ($80,000) is a family asset and your spouse is presumptively entitled to $40,000.00.

Any debts that either party had before the relationship are excluded debts if they still exist on the date of separation. For example, if your spouse had $20,000 in student loans when you moved in together and he or she paid off $15,000 of that debt during the relationship, your spouse would be solely responsible for the existing debt of $5,000.00. Although it may seem unfair; if your spouse enters the relationship with a large amount of debt and you generously pay off that debt during the relationship, you will not be entitled to a credit. If the debt no longer exists as of the date of separation, it is no longer relevant as far as dividing family assets and debts. In extreme circumstances, you could make an argument pursuant to s. 95 of the Family Law Act that an equal division of family property and family debt would be significantly unfair, but this is a challenging argument.

Gifts can also be a contentious issue. For example, if your parents give you and your spouse a large sum of money for a down payment, that gift could be considered a gift to you and your spouse jointly, in which case, it is family property. Many people receive “early inheritances” from their parents (inheritances received before their parents pass away). Early inheritances don’t necessarily qualify as “inheritances” under s. 85(b), and a spouse could claim that your parents made that gift to you both. If you receive a sizeable gift from a third party during your relationship, you and the third party may want to ensure that it’s clear to your spouse (in writing) that the gift was intended to be for you alone.

If you want to protect your excluded property, including any increase in value of your excluded property, it’s important that you get a marriage agreement or cohabitation agreement (“prenup”). It isn’t too late if you’re already married or living in a common law relationship. Spouses can make these agreements at any point during their relationship.