A cottage is a peculiar asset that can present a pesky legal issue, says experienced family lawyer
For Canadians who own a cottage or other second home where they spend holidays, these properties are prized possessions; a place that is often synonymous with good times and happy memories. But it’s also a peculiar asset that can present a pesky legal issue and raise some difficult questions regarding who gets it following a divorce.
This is because, under Ontario’s Family Law Act, the cottage may be considered a second matrimonial home, defined as any property that is habitually occupied by the family. A married couple is allowed to have several “matrimonial homes” and, in this case, if the family routinely spent time at a cottage located in Ontario (even if it is a seasonal cottage), it may be considered a matrimonial home.
Therefore, even if the cottage was a gift given to one of the spouses prior to marriage, there is no exclusion from the net family property that is typically permitted under section 4(1) of the Family Law Act (Ontario). While gifts or inheritances received during the marriage are generally excluded property, this is not the case if the gift is made toward the couple’s matrimonial home which, again, a cottage can be considered as such. Section 4(2) of the Family Law Act indicates that the value of the matrimonial home (and any gift toward the matrimonial home made during the marriage) is equally divided between the two married spouses in the event of a separation.
In addition to having the right to share in the value of a matrimonial home upon a divorce, both married spouses have an equal right of possession. Neither can be kicked out, even if their name is not on title, nor can the property be sold without the other’s consent.
Strategies to protect the cottage
Ideally, a prenuptial agreement would have been recommended by a lawyer to help their clients protect the family cottage in the event of divorce. This, and other property to be protected, should be listed in the agreement to allow the titled-owner to exclude the value of the cottage from being shared if there’s a divorce. However, all rights regarding possession and protection from the property being sold will continue to be available to the other spouse because of special protections in the Family Law Act.
For couples who are already married, advisors can recommend protecting the family cottage through a matrimonial home designation. Each spouse will need to consent to the designation of the city home where they ordinarily reside as their only matrimonial home. This will mean that any other property that is not registered by both spouses as a matrimonial home will cease to fall under that category.
If the family can get along after the divorce, a family law lawyer can help draft an agreement for ‘co-owning’ the cottage, which outlines the use of the property for children’s vacations or gives rights to use the cottage to the non-owner spouse.
Some families own property in other provinces and even other countries. In this case, property located outside of Ontario cannot be considered a matrimonial home and does not have the protections described above. This means the cottage will be treated the same way as all other non-matrimonial home assets. If it’s acquired before the marriage, the increase in value will be shared with a divorcing spouse. If it’s acquired during the marriage, all of it will be shared with the divorcing spouse. Gifts and/or inheritances during the marriage that are used towards these homes in other provinces can be considered excluded assets and property and will be excluded from an equalization payment.
If a client is about to receive the cottage as a gift or inheritance, other strategies for proactively protecting the value and ownership include:
Keep the title with the gifter: If the cottage is a gift from a parent, one option is to have the parents retain the title of the property in which their child and new spouse will reside. That way, if there is a separation, the house does not go in either spouse’s net family property since it belongs to someone else.
However, if the spouses who do not own the cottage invest significant time and money to significantly improve the value of the cottage (e.g. they perform repairs, improvements, etc.), there are instances when the separating son-in-law or daughter-in-law might be able to prove a claim in equity against the house and recoup some of the value of his or her labour. This is hard to prove as in this case, the person would likely have to offset their financial contributions against free usage of the cottage.
Hold the house in a trust: Another way to protect the value of the gift would be for the property to be owned by a trust. An asset held in a trust does not belong to a spouse and does not form part of their net family property.
If a separating spouse is a beneficiary of that trust, however, it is likely a portion of the value of the assets in the trust could form part of his or her net family property because courts have determined that a beneficial interest in a trust, even a discretionary trust, has value.
These are complex issues that require the expertise of a family law lawyer.
Nathalie Boutet, based in Toronto, is an experienced family law lawyer, accredited mediator and certified Family Enterprise Advisor, skilled at providing unique strategies and out-of-court results to the complex legal, financial and human matters related to separation or divorce for high-net-worth families and business owners. Contact Nathalie by email.