What they are
There are several different types of domestic contracts that can be made in Ontario, and they differ according to the point in the parties’ relationship at which they are made. A contract made by two parties who plan to live together without being married is called a “cohabitation agreement”; a contract by future spouses who intend to marry is called a “pre-nuptial agreement”. An agreement made at the point where married spouses decide to separate, usually in anticipation of divorce, is called a “separation agreement.”
Under the provisions of the Ontario Family Law Act (which govern the creation of all such domestic contracts), a pre-nuptial agreement can be entered into by “two persons who are married to each other or intend to marry”. This article will focus only on this type of agreement.
Elements of a valid pre-nuptial agreement
The provisions of the Family Law Act set out the elements that are necessary for a legally-valid pre-nuptial agreement, and there are certain other general legal principles that apply to such contracts as well. Specifically, the law stipulates that the following requirements must be met:
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- The pre-nuptial agreement must be in writing, signed and witnessed;
- It must be predicated by complete disclosure on the part of both spouses in terms of their respective assets, debts, and other liabilities;
- Each spouse must have had independent legal representation and advice in achieving the agreement;
- There must be equal bargaining power between the spouses, i.e. there can be no fraud, undue influence, duress or unconscionable circumstances between them;
- The agreement must be clear and accurate; and
- It must cover only those topics and matters that are specifically permitted under the Act.
Provided these requirements are met, a pre-nuptial agreement will generally be valid and enforceable; courts have repeatedly upheld agreements that were freely negotiated and agreed to by spouses, no matter how unfair they may seem when the spouses’ circumstances later change. Indeed, the Supreme Court of Canada in a 2004 decision called Hartshorne v. Hartshorne confirmed that – while courts always retain the right to set aside or overrule an agreement which is unconscionable – they should otherwise be reluctant to interfere with an agreement that the spouses have freely and willingly entered into. A court should not substitute its own idea of what is “fair” in lieu of what the spouses themselves believed was fair at the time the agreement was reached.
The Family Law Act also governs the content of pre-nuptial agreements, by stipulating that spouses are entitled to “agree on their respective rights and obligations under the marriage or on separation.” More particularly, the specific list of topics that can be covered is set out in the Act as follows:
- ownership in or division of property that one or both spouses own;
- support obligations between spouses;
- the right to direct the education and moral training of any children; and
- any other matter in the settlement of the spouses’ affairs.
Note that the Family Law Act does not allow spouses to enter into an agreement relating to the custody or access to the children; these determinations are governed by separate and specific laws focusing on the best interests of the children.
The need for a pre-nuptial agreement
Pre-nuptial agreements are always a good idea. As with all contracts, they reduce to writing the agreement between future spouses, and can deal with the terms of any future separation or divorce that may occur. Because such agreements are negotiated at a time when future spouses are “in a good mood” towards each other and have a positive outlook, they are more likely to represent a fair, but generously structured, unwinding of each party’s affairs in the event that the marriage later deteriorates.
Pre-nuptial agreements are particularly important where:
- one or both spouses are marrying for a second time; the agreement can address any pre-existing support obligations to first spouses or children from the previous marriages.
- one or both spouses own a home prior to marriage. Upon marriage the home is statutorily designated to become the “matrimonial home”, and is subject to specific provisions under the Family Law Act which aim to divide the home more or less equally upon separation, regardless of which party held titled prior to marriage. Therefore, pre-nuptial agreements can make an allowance on separation for the title-holding spouse to be credited for the value of the matrimonial home, with adjustments made for any increase in its value since marriage.
- one or both spouses own a business or significant assets prior to marriage. Again, once the parties decide to formally marry, family law legislation operates to potentially give the non-owning spouse a claim to certain assets held by the other spouse. Pre-nuptial agreements can therefore protect these business interests and assets.
- one or both spouses have significant investments, assets, RRSPs, inheritances or gifts which they brought into the marriage and used towards the purchase of a matrimonial home. Again, at the point of separation the Family Law Act does not allow the spouse to receive credit for such funds, so the pre-nuptial agreement can create a fairer arrangement by which the spouse owning those funds essentially receives a credit for them at separation.
- one spouse earns significantly more than the other, or where one spouse gave up a career (or put a career on hiatus) in order to pursue the relationship. In the event of a separation, a pre-nuptial agreement can protect the assets, and can be drafted to provide financial security for the less independent party in the marriage.
- there are pre-existing wills in place, drafted prior to marriage. Certain aspects of any previous will are superseded by law, once parties formally marry. Therefore, a carefully-crafted pre-nuptial agreement can off-set some of the changes that would otherwise take place by legislation.
Naturally, for any future spouse the individual circumstances, financial status / goals, and estate-planning and other objectives are all interwoven, and require the creation of a pre-nuptial agreement that is tailored to the unique situation of both parties. Feel free to contact our firm in order to discuss your situation and your objectives and to provide customized advice that will best accomplish your goals through the use of a pre-nuptial agreement.