Imagine two sisters who each inherit $200,000 from their mother on the same day, both married and living in Brampton. One puts the money in an investment account in her own name and leaves it there. The other uses it to pay off the mortgage on the family home. Years later, both separate from their husbands. On these simple facts, the first sister may keep the entire inheritance out of the calculation. The second may find that the same money counts fully in the amount she has to share.
That hypothetical shows how Ontario treats inheritances and gifts. The source of the money gives it a possible protection. What you do with it decides whether the protection survives. Many people first hear about this rule when it is too late to change anything, so it is worth understanding before the money gets moved, if you have that chance.
This is general information, not legal advice. It applies to married spouses under Ontario’s Family Law Act. Common-law partners do not share in equalization at all, and they face different questions about property.
The rule in the statute
Equalization compares what each spouse’s net worth grew by during the marriage. Section 4(2) of the Family Law Act lists property that is left out of a spouse’s net family property. For gifts and inheritances, the three important parts are:
- Paragraph 1: property, other than a matrimonial home, acquired by gift or inheritance from a third person after the date of the marriage
- Paragraph 2: income from that property, if the donor or the person who made the will has expressly stated that it is to be excluded
- Paragraph 5: property, other than a matrimonial home, into which the gift or inheritance can be traced
Each phrase carries weight.
“From a third person.” A gift from your spouse is not excluded. If your husband gives you a diamond ring for your anniversary, the exclusion does not apply to it. It has to come from someone else.
“After the date of the marriage.” A gift or inheritance you received before you married is treated as something you owned on the date of marriage. That usually gets you a deduction instead of an exclusion. The difference is that an exclusion protects today’s value and growth, whereas a date-of-marriage deduction only credits the value on the wedding day.
“That a spouse owns on the valuation date.” The exclusion applies to what you still have when you separate. If the money has been spent, there is nothing left to exclude. You do not get credit for an inheritance you used for family holidays. Note too that something received after the valuation date is not part of the calculation in the first place.
Section 4(3) puts the burden on the person claiming the exclusion. If you say this money came from your father’s estate, you have to prove it.
Why the family home is the trap
The words “other than a matrimonial home” appear twice for a reason. The Act does not allow a spouse to exclude a matrimonial home, even if it was received as a gift or bought with inherited money, and it does not allow tracing into one.
A matrimonial home is any property in which a spouse has an interest and that was ordinarily occupied by the couple as a family residence at the time of separation. There can be more than one. In practice, the exclusion may be lost in situations such as these:
- You use an inheritance for the down payment on the family home.
- You use a gift to pay down the mortgage or a home equity line of credit secured on that home.
- You inherit a house from a parent and the family moves in.
- You inherit a cottage or a family property that you ordinarily use as a family residence at the time of separation.
Paying for renovations is similar. Money turned into a new kitchen in the matrimonial home is unlikely to be excluded, because the value is now in the home itself.
Many parents help with a down payment on a house in Peel, and Brampton prices often make that help significant. A family that writes a large cheque with one child in mind may not realize that it could end up in the equalization calculation if the marriage ends, unless the couple has a marriage contract that addresses it.
Tracing: following the money
Where the money stays out of a matrimonial home, you still need to connect what you own today with what you originally received. Tracing can be easy or nearly impossible, depending on what happened along the way.
It tends to be straightforward when:
- you have kept the funds in a separate account or investment in your own name
- the only deposits were the gift or inheritance, and its own returns
- you can show the estate distribution, the transfer and each later movement
- the money bought a specific item, such as a rental property or a vehicle, with a paper trail
It gets difficult when:
- the funds were deposited into an account used for pay and household bills
- several withdrawals and deposits have mixed the money over the years
- old records are gone (banks may keep statements only for a limited time)
- the money came in cash, or through a family member, without documentation
Consider the difference. If you sold shares you inherited and used the proceeds to buy a rental condo in Mississauga, the condo may be traceable, as long as you never lived there as a family residence. If you put the same amount into a chequing account that paid the mortgage, groceries and car payments for five years, the court may not be able to tell which dollar went where, and you carry the burden of proof.
A growing investment raises a helpful point. Where an excluded asset itself rises in value, the value that is excluded is what it is worth on the valuation date, so growth in the asset’s value generally stays protected too. Income is treated differently, as discussed below.
Joint names and joint accounts
Putting an inheritance into joint names creates a further risk, because you may be giving half of it away. Section 14 of the Act says that property held by spouses as joint tenants is proof, unless there is evidence to the contrary, that they were intended to own it that way. Money on deposit in both names is treated as being held jointly for the purposes of that rule.
So a spouse who deposits inherited money in a joint savings account “just for convenience” will have to overcome that presumption. Evidence of what you actually intended can matter, such as an email written at the time. The safer course is not to create the problem in the first place.
Once a gift has been made to your spouse, the money may be your spouse’s. There is no easy way to get it back simply because the relationship ended.
Was it a gift, and to whom?
Family money often comes with unclear intentions, and disputes tend to arise around three questions.
A gift to one spouse or to both? Parents may hand over money at a wedding, or give a cheque to the couple for a house. If it was a gift to both, the exclusion may not protect it for either spouse in the way that their own child expects. Evidence might include a letter of gift, the payee on the cheque, or what was said at the time. Wedding gifts of jewellery and gold are a common source of conflict in many Brampton families. Ownership may depend on who gave them, to whom and for what purpose.
A gift or a loan? If parents lent money rather than gave it, this is a debt that may reduce the borrower’s net family property. Courts are wary of a loan that is only described as such once the marriage fails. A signed loan agreement, a repayment schedule and actual payments carry far more weight than a statement made after separation.
Family help abroad. Some families in Peel hold property in another country or receive transfers from relatives overseas. Those funds can be excluded too, but they need proof. You may need foreign bank records, translated documents and evidence of who gave what to whom. Try to get these while the people who know the details are still available to help.
Income, estates and trusts
If an inherited investment earns dividends, rent or interest during the marriage, the income is not automatically excluded. Paragraph 2 protects it only if the donor or the person who made the will expressly said that it is to be excluded from the spouse’s net family property.
This is an area where a small step in advance can make a big difference. Someone preparing a will or giving a large gift can include a clear statement that the gift and its income are to be excluded. Parents who are thinking about estate planning may want to raise this with their own lawyer. Without those words, accumulated income may fall into the net family property calculation, and a spouse would have to separate the income from the capital.
Estates not yet paid out, and trusts
“Property” in the Family Law Act is defined widely and includes interests that are present or future, vested or contingent. So a person may have an interest in a parent’s estate before the money reaches their bank account. If a parent has died and the estate has not finished being administered when a couple separates, this interest may need to be listed, and it could qualify for the exclusion. A mere hope that a living parent will leave you something is a different matter. It is generally not property.
Family trusts raise more complicated questions, including what kind of interest the beneficiary actually has. Bring the trust document to any meeting with a lawyer.
The inheritance can still matter for support
An exclusion only affects the property calculation. Spousal and child support are decided separately, and they look at income and means. An inherited investment that pays you income may count in determining support. Under the Child Support Guidelines, a court may impute income where property is not reasonably being used to generate income, or where a parent is a beneficiary of a trust and is receiving, or will receive, income or other benefits from it. So a spouse who successfully excludes $500,000 from equalization may still have the returns considered when support is calculated.
Agreements that can solve the problem
Spouses can agree to something different. Paragraph 6 of section 4(2) excludes property that the spouses have agreed by a domestic contract will not be included in net family property. A properly made marriage contract can:
- exclude a named inheritance, gift or family property
- address what happens to money that goes into the matrimonial home
- exclude income and growth
- set out how values and records will be handled
The contract must be in writing, signed and witnessed, and each spouse should have full disclosure and independent legal advice. A contract made once the inheritance has already been spent on the house can still be useful, but the other spouse has to agree, and it may be a harder conversation.
What to do with the money, if you still can
If you are about to receive an inheritance or a substantial gift, and you want to keep the protection:
- Open a separate account in your own name only.
- Keep the estate letter, the cheque copy, the deposit record and all later statements.
- Do not mix it with your pay or household money.
- Talk to a lawyer before using it on the home, a joint account or a mortgage.
- Ask a parent who is giving you money to put the gift and their intentions in writing.
- Discuss a marriage contract with your spouse if you do want the money to help the family and still keep some protection.
None of this is an accusation against your marriage. Plenty of couples will deliberately decide to use inherited money for their home, knowing the consequences, and that is a perfectly reasonable choice. The problem is making it without knowing.
If you have already separated, gather what you can before you make any claim: the will or estate statements, bank records around the date of receipt, and anything that shows where the money went. Our family law team can go through the tracing with you, and our page on legal services in Brampton has more about the firm’s local work. If you are also dealing with the divorce itself, our divorce page has further background.