Pre-nuptial Agreements

Douglas J. Green & Natasha Bone

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What is a Pre-nuptial Agreement?

In Ontario, a marriage contract can be made either before or during a marriage. If it is made prior to the marriage it is termed a pre-nuptial agreement or “pre-nup”. In addition, prospective spouses can enter into a “cohabitation agreement” if living together without an immediate intention to marry.

Whether we are speaking of cohabitation agreements, pre-nuptial agreements or marriage contracts, the Family Law Act of Ontario provides that such agreements may be entered into by persons who are married, intend to marry or are simply cohabitating. The parties may agree on their respective rights and obligations during marriage, cohabitation or on separation, including:

1. Ownership in or division of property;
2. Support obligations;
3. The right to direct the education and moral training of their children, but not the right to custody of or access to their children;
4. Any other matter in the settlement of their affairs.

Should I have a Pre-nuptial (Cohabitation, Marriage) Agreement?

Legally speaking you should have a pre-nup or one of the other forms of agreements.

When you and your beloved enter into a pre-nup you are, essentially, agreeing on the terms of your separation or divorce. This is a difficult thing to contemplate either prior to or shortly after a wedding ceremony, particularly as most people would view such agreements as not being very romantic.

On the other hand, it is when the parties are still enamoured of each other that generosity and fairness will most likely be felt. It is, in fact, the best time to negotiate a fair agreement on how the relationship might end. Each party will know where they will stand in the event that the relationship terminates.

While the comfort of predictability and the security of knowing where one stands is very important, pre-nups, cohabitation agreements and marriage contracts must be drafted with care inasmuch as the parties are trying to negotiate an agreement based upon their assumptions about the future.

Does it matter whether the parties are married, or not?

The Family Law Act contains two definitions for the word “spouse”.

The first is a general definition that applies to Part I and Part II of the Act (dealing with the division of matrimonial property and rights in the matrimonial home) which states that spouse means either of two persons who:

1. are married to each other, or
2. have together entered into a marriage that is voidable or void, in good faith.

In order to make a claim for a division of property or the right to remain in the matrimonial home, the spouse making the claim has to be actually “married” to the person to against whom the claim is made.

Section 29 of the Family Law Act contains a second definition of “spouse”. This definition applies to Part III of the Family Law Act which deals with support obligations. For the purposes of this Part, “spouse” means a spouse as previously defined and, in addition, includes either of two persons who are not formally married to each other and have cohabited:

1. continuously for a period of not less than three years, or
2. in a relationship of some permanence, if they are the natural or adoptive parents of a child.

The definition under Section 29 of the Family Law Act is generally known as a “common law spouse”.

Many people mistakingly believe that a common law spouse has the same rights and obligations as a married spouse. This is not the case.

Under the Family Law Act a common law spouse has only the right to seek support from his or her partner. There is no right on the part of the common law spouse to seek an equalization payment of matrimonial property from the other spouse nor does the common law spouse have any possessory rights in the matrimonial home. Moreover, common law spouses have no automatic inheritance rights under the Succession Law Reform Act of Ontario.

As can be seen, there is still a distinction in this province between traditionally “married” spouses and “common law” spouses which can have a fundamental effect upon the rights and obligations of the parties.

The use of a prenuptial, cohabitation or marriage contract can help the parties to define those rights – including inheritance rights – even if the parties never marry.

Who needs a Pre-Nuptial Agreement?

• Parties with estate plan or Wills . Marriage revokes a Will. A pre-nup will help to ensure an estate plan is in place the moment the marriage is celebrated.

• Parties entering a second marriage . Parties entering a second marriage may carry legal and financial obligations such as child and spousal support payments from a previous marriage. Prenuptial agreements can ensure that your assets are distributed according to your legal obligations, and that your first and second family benefit fairly from the estate.

• Parties entering a cohabitation relationship . The laws of property division relating to married couples do not apply to an unmarried couple. Prenuptial agreements can provide certainty about the division of property in the event of separation.

• Parties who own significant assets or a business (whole or part) before marriage . Upon marriage, a spouse may become entitled to claim ownership of shares in their partner’s business. Prenuptial agreements can protect the business parties’ interests and avoid a spouse from becoming an unwanted business partner.

• Parties who own a home which will become the matrimonial home . In the event of separation, the Family Law Act does not give a credit to the party who brought the home into the relationship. Prenuptial agreements can create a deduction for the value of the home and allow for the sharing, for example, of any increase in value or otherwise divide the equity in the house according to your preference.

• Parties who invest personal assets, RRSPs, or family gifts towards the purchase of the matrimonial home. In the event of separation, the Family Law Act does not give a credit to the party who uses personal assets or gifts towards the purchase of the matrimonial home. Prenuptial agreements can create a deduction for the value of the home and allow for the sharing, for example, of any increase in value or otherwise divide the equity in the house according to your preference.

• Parties who earn a significantly higher or lower income than their partners or who forego a career due to the relationship. Prenuptial agreements can provide financial security to both parties: they can protect a wealthy party’s assets, as well as provide economic protection to an independent spouse upon separation or death of a partner.

• Parties who are sole providers for elderly parents or other relatives in need . Prenuptial agreements can reflect your obligations to your loved ones and help protect their financial interests.

The Matrimonial Home

While the Family Law Act allows parties to deduct the value of the assets which they bring into the marriage from the couple’s divisible property, it does not allow a similar deduction to a party who brought the matrimonial home into the marriage.

Pre-nuptial agreements have become an important vehicle which allows parties to create a deduction for the value of the home and only allow for the sharing of any increase in value, or divide the equity in the house according to the parties’ preference.

Terms of a Prenuptial Agreement

The content of a prenuptial agreement can be as varied and individual as the parties. There is no complete list of matters which should be, or must be included. The parties are free to decide the terms they wish to include save and except that agreements cannot pre-determine the custody of children.

A prenuptial or cohabitation agreement usually deals with the following:

1. Division of property;
2. Ownership of property;
3. Inheritance of property;
4. Spousal support obligations;
5. The right to direct the education and moral training of their children.

Validity of Prenuptial Agreements

For a prenuptial agreement to be valid and enforceable, the following requirements must be met:

1. Formal validity – the agreement must be in writing, signed, and witnessed;
2. Full and complete disclosure of assets, debts or other liabilities;
3. True independent legal representation and advice – even if there are no disputed issues, each party to a prenuptial agreement must retain their own lawyer;
4. Equal bargaining power – fraud, undue influence, duress, or unconscionable circumstances must be absent;
5. Clarity of intent and accuracy of expression;
6. Permissible matters and terms.

Prenuptial Agreements from Other Jurisdictions

In theory, Ontario recognizes prenuptial agreements from other jurisdictions. As per section 58 of the Family Law Act, however, the reality is that non-Ontario agreements are only valid and enforceable if they are drafted in accordance with Ontario law. For example, the non-Ontario agreement must deal with Ontario’s unique system of dividing property upon parties’ separation. Similarly, it must reflect the principles of Canadian family law with respect to spousal support. For parties moving to Ontario, it is advisable to prepare an Ontario prenuptial agreement.

Updating the Prenuptial Agreement

Prenuptial agreements, much like a personal will, can be updated periodically to allow parties to periodically review the agreement as life’s responsibilities and challenges necessitate strategic changes. Some prenuptial agreements contain ‘sunset clauses’ which specify a time at which the agreement will require revision or cease to be valid.

Case Law on Prenuptial Agreements

Ontario courts have strongly recognized prenuptial agreements as vehicles by which parties opt out of selected parts of the Family Law Act, specifically, its property provisions, its support provisions, or both. As such, the courts have also emphasized the importance of formal requirements for the existence of valid, enforceable marriage contracts, including: independent legal advice, securing adequate disclosure, and ensuring clarity of intent. In Dubin v. Dubin, the court stated: “A party must know what assets and liabilities exist at the date of the contract, and must understand the general legislative scheme in order to know what he or she is giving up in the proposed agreement.”

In the 2004 decision Hartshorne v. Hartshorne, the Supreme Court of Canada provided a clear message about the validity of prenuptial agreements: provided that certain requirements are met, the terms of prenuptial agreements will be enforced in all but the most unusual of cases. Although the courts do reserve the right to set aside or overrule any terms in a prenuptial agreement which they believe to be unfair, in the post Hartshorne environment, courts are likely to hesitate in interfering with prenuptial agreements.

The Court reasoned that it should avoid substituting its idea of what is fair for what the parties believed would be fair at the time they entered into the agreement. In this respect, the Supreme Court’s decision in Hartshorne mirrors two earlier Ontario decisions, Bosch v. Bosch and Lay v. Lay, where the courts stated that every effort must be made to give effect to the intention of parties.

The Supreme Court in Hartshorne also made an important ruling on divisibility of corporate and professional assets. It held that a business asset should be excluded from division of assets if that asset generates income used to pay child support. In essence, the decision favours the owners of businesses and corporations in excluding these assets from any division whatsoever. The court reasoned that this new approach was important to prevent double dipping.

With respect to cohabitation agreements, Gauthier v. Gauthier is an interesting Ontario decision which maintained that where parties to a cohabitation agreement marry each other, the agreement shall be deemed to become a marriage contract.

In conclusion, the courts seem to be well aware that, in negotiating marriage contracts parties seek to gain greater autonomy over what laws will govern their financial security now and in the future. What is more, the courts have shown a great degree of respect for the parties’ own intentions in entering into marriage contracts and seem content to enforce their validity and enforceability within their jurisdictions.

Dubin v. Dubin (2002), 34 R.F.L. (5 th) 227 (Ont. S.C.J.).

Hartshorne v. Hartshorne (2004) 1 S.C.R. 550.

Hartshorne v. Hartshorne. Ibid.

Bosch v. Bosch (1991), 36 R.F.L (3d) 302, 6 O.R. (3d) 168, 84 D.L.R. (4 th) 626 ( C.A.).

Lay v. Lay (2002), 47 O.R. 3 rd 779.

Gauthier v Gauthier (2005), 13 R.F.L. 6 th 128.