One of the most common misconceptions in family law is that a couple who has lived together for a lengthy period without getting married, often referred to as common law spouses, is ‘the same as married’. The law in Ontario draws significant distinction between married and unmarried couples, most significantly in terms of property division. Family lawyers are seeing increasing numbers of common law spouses who did not understand this distinction or take steps to protect themselves from this potentially costly misconception. Basic information in this regard can help you ensure that you are protected.
Equalization in Ontario
In Ontario, when married people separate, they are entitled to equalization. Very simply, this is the process by which the amount that each spouse’s individual net worth has increased during the marriage is split between the spouses, so that they each come out of the marriage having grown by roughly the same amount. Like most legal concepts, there are a series of caveats and exceptions, however, distilled to its most basic form, the equalization process ensures that growth in assets in the name of one spouse can be shared by the other after separation. The underlying principle is that marriage is a partnership and each partner should walk away from it having gained the same amount.
Common law couples are not entitled to equalization, regardless of how long they have lived together. This means that a spouse is not automatically entitled to share in the growth in net worth of the other spouse. In cases where one spouse has contributed significantly to an asset in the other spouse’s name, there are claims potentially available to that party. However, these claims (referred to as trust claims) are generally difficult and costly to litigate.
An example is useful here to illustrate the difference:
Couple A is married. When they separate, they have been married for 10 years and have children together. Spouse 1 owned a business that was worth $200,000 when they married. The value of the business at separation is now $1.2 million and is the only significant asset. Spouse 2 never worked at or invested in the Spouse 1’s business. Through equalization, Spouse 1 will have to equalize the increase in value of the business with Spouse 2, which could mean that she receives $500,000 in equalization from him.
Couple B is identical to Couple A save for the fact they were not married. They also have children together and consider themselves just as committed as Couple A. Spouse 1’s business has also grown by $1 million during the marriage, however, because they were not married, Spouse 2 is not automatically entitled to share in the value. Spouse 1 may leave the relationship with a $1.2 million business and Spouse 2 may leave with nothing. While Spouse 2 may have some potential claims, pursuing them would be costly and may be unsuccessful.
How to Protect Yourself as a Common Law Spouse
Short of getting married, there are steps that common law couples can take to protect themselves. We are seeing increasing numbers of couples entering into Cohabitation Agreements, which are contracts which set out how the couples’ affairs will be dealt with upon separation. Cohabitation Agreements are particularly useful where large assets, such as a house or a valuable business, are in one spouse’s name only but where the other spouse makes contribution to that asset, either directly or even to the household in general, allowing the title-holding spouse to devote attention or money to the asset in question. In the example above, Couple B could have entered into a Cohabitation Agreement which provided that Spouse 2 would be entitled to share in the growth in Spouse 1’s business.
Cohabitation Agreements are also useful where a common law couple specifically wishes to avoid equalization or costly trust claims should they separate. In the example above, Couple B could have agreed that Spouse 2 would not share in the increase in value of Spouse 1’s business should they separate. This would provide certainty to both parties, allow them to arrange their affairs accordingly, and help them avoid the expense and stress of litigation on separation.
It is crucial that common law couples understand how their marital status affects property division, right to occupy the family home or spousal support on separation. Where the law may not meet the couples needs or intentions, a Cohabitation Agreement can address this issue.
Please do not hesitate to contact us at Mills & Mills LLP should you have questions as to how the applies to you or how you might protect your interests on separation. Reach out online or at (416) 863-0125.