Let’s face it… home ownership is an expensive and serious undertaking. For couples ready to purchase a house together, the intermingling of financial resources is almost certainly a must. In addition to pooling your life savings with your life partner to come up with an acceptable down-payment, many couples (eagerly) accept parental involvement (i.e. a down-payment gift) to make their home ownership dreams come true.
The gifting of down-payments by parents to their millennial children is on the rise as home ownership becomes increasingly unattainable by historical standards in many Canadian cities. Unsurprisingly, down-payment gifts have doubled from 7% in 2000 to 15% for homes purchased between 2014 and 2016 (Mortgage Professionals Canada). There are legal implications to consider when monetary gifts are poured into a down-payment for a soon-to-be married couple’s home, especially since a substantial amount of Canadian marriages end in divorce.
Dividing the matrimonial home upon divorce in Alberta
In the event of separation and divorce, both spouses will be entitled to half of the home’s value after the mortgage and other encumbrances are accounted for, even if part of the down-payment was a gift from one of the spouse’s parent(s).
[Unequal financial contributions between spouses to attain their home can also have significant legal implications if the parties separate in the future — Stay tuned for a future blog post on this issue!]
If it is your intention to protect the down-payment and ensure that it is either paid back to your parents or remains a gift that your spouse cannot claim entitlement to, steps MUST be taken to legally protect the intention of the gift. Although gifts received from third parties to one spouse alone are often exempt from the presumptive equal distribution under the Alberta Matrimonial Property Act, the matrimonial home is treated differently. The matrimonial home is an exception in family law, and division of the value of the home depends on the circumstances surrounding the down-payment.
For example, in Henderson-Jorgensen v Henderson-Jorgensen, 2013 ABQB 213, the Alberta Court of Queen’s Bench dealt with a claim by the Husband that his father had gifted him $83,500 for the down-payment on a condo which was later sold to buy the matrimonial home and he claimed that this money should not be divided with the Wife. The key finding of the Court was that the Husband’s father was gifting the down-payment to both parties equally. Therefore, the Husband’s claim for the $83,500 exemption from the matrimonial home value was denied by the Court (para 140-41).
If there is disagreement about how the value of the matrimonial home is to be split between the parties and the matter is litigated in Court, the intention of the person making the gift will be taken into account by the judge. Free of any agreement, each party will have to convince the Court that the down-payment was intended to either be a gift for both parties or specifically for one. A spouse claiming the gift is excluded from division of matrimonial property is responsible for demonstrating that the property is really a gift to them alone. The onus to prove this fact is on the spouse wishing to protect the value of the property for their sole benefit.
Protecting the down-payment gift from equal division
Parents wishing to make home ownership a reality for their children while also protecting their rights need to have documentation that clearly states that the gift is for one person (their child) only. If there is no contract or document ensuring that the down-payment is protected, the way in which the home is used by the parties will determine the status of the gift. This means that if the home is the primary residence of both parties, and especially if the couple is raising children in the home, it will be considered the “matrimonial home”. To help ensure that the down-payment gift remains with the intended person upon dissolution of a marriage, a prenuptial agreement is your best bet for preserving the significant contribution from being divided equally.
Prenuptial agreements can be executed before the parties marry, or parties who are already married may enter into a post-nuptial agreement to have the same contractual effect. A marital agreement will reduce the potential risk for financial disappointment when your emotions are already in a state of turmoil. If the parties are in a common law relationship and not married, a cohabitation agreement may also be used to outline the total down-payment contributions received from third parties to safeguard against an unintended “payout”.
Discussing the importance of a prenuptial or cohabitation agreement with your spouse usually alleviates financial tension down the road. Read about prenuptial agreements and the value they provided in Banaszek Family Law’s blog post: Prenups are for Lovers.
An added benefit of entering into a cohabitation, prenuptial or post-nuptial agreement is the requirement for the couple to disclose their financial circumstances to each other. Relationships often fail due to difficult financial circumstances and a lack of communication, so obtaining an understanding of each other’s finances before tying the knot may be a key to avoiding divorce (or at least gaining some certainty that marriage is the right choice in advance of making it official).
The concurrent rise in down-payment gifts and rate of divorce makes entering into a prenuptial agreement to prevent a generous gift from being disturbed in an unintended manner a no-brainer. Banaszek Family Law offers flat rates for uncontested family law agreements for clients in Alberta and British Columbia. Family law agreements provide peace of mind for both the parents gifting down-payments to their children and the spouses purchasing their new home.