Why a Prenuptial Agreement or Cohabitation Agreement is Essential under the Family Law Act

The new Family Law Act “FLA” which came into force in March 2013 modernized the law on family relationships. The FLA is a substantial shift from the previous law – the Family Relations Act. This article will deal with the new property division regimes under the FLA and why a prenuptial agreement or cohabitation agreement is essential for any party with assets and/or children from a previous relationship.

Firstly, a prenuptial agreement is defined as a contract entered into in anticipation of marriage. A cohabitation agreement is a contract by couples wishing to live together in a marriage like relationship.

Let’s first look at some of the property regime changes from the old law to the FLA. One of the major differences is that common law relationships are now governed under the FLA with a similar property regime as married couples. A common law relationship is defined as parties living together in a marriage like relationship for two or more years, or less if they have a child together. Including common law couples in the FLA will result in a definite impact on common law relationships. It will certainly make couples think about the possible financial consequences of living together, and may lead to re-evaluating a couple’s relationship before the two years are up.

Since common law couples and married couples fall under the same property regime it is important to understand what that new regime is.

Generally speaking, under the FLA all family property is divided equally among the separating parties with a few exceptions. The FLA defines family property as follows:

  1. at the date of separation, property that one or both spouses has a legal or beneficial interest, or
  2. after separation, property acquired by one or both spouses has a legal or beneficial interest, which is derived from the property described above.

The types of property defined as family property in the FLA are as follows:

    1. a share or an interest in a corporation;
    2. an interest in a partnership, an association, an organization, a business or a venture;
    3. property owing to a spouse
      1. as a refund, including an income tax refund, or
      2. in return for the provision of a good or service;
    4. money of a spouse in an account with a financial institution;
    5. a spouse’s entitlement under an annuity, a pension, a retirement savings plan or an income plan;
    6. property that a spouse disposes of after the relationship between the spouses began, but over which the spouse retains authority, to be exercised alone or with another person, to require its return or to direct its use or further disposition in any way;
    7. the amount by which the value of excluded property has increased since the later of the date
      1. the relationship between the spouses began, or
      2. the excluded property was acquired.

Point G above leads to one of the reasons why a prenuptial agreement or cohabitation agreement is necessary. As it can be the only way to prevent the appreciation of excluded property from division.

The FLA lists property that is excluded from division as follows:

    1. property acquired by a spouse before the relationship between the spouses began;
    2. gifts or inheritances to a spouse;
    3. a settlement or an award of damages to a spouse as compensation for injury or loss, unless the settlement award represents compensation for
      1. loss to both spouses, or
      2. lost income of a spouse;
    4. money paid or payable under an insurance policy, other than a policy respecting property, except any portion that represents compensation for
      1. loss to both spouses, or
      2. income of a spouse;
    5. property referred to in any of paragraphs (a) to (d) that is held in trust for the benefit of a spouse;
    6. property held in a discretionary trust
      1. to which the spouse did not contribute,
      2. of which the spouse is a beneficiary, and
      3. that is settled by a person other than the spouse;
    7. property derived from property or the disposition of property referred to in any of paragraphs listed above.

So why is a prenuptial agreement or cohabitation agreement essential? It is important to have a prenuptial agreement or cohabitation agreement to:

  1. Determine the value of property acquired by a spouse before the relationship between the spouses began. One of the main disputes and difficulties that can arise without a prenuptial agreement or cohabitation agreement is determining the value of property brought into the relationship by a spouse. It is difficult to trace an asset and go back in time to determine a value for exclusion. As this is often subjective there is plenty of room for disagreements. A prenuptial agreement or cohabitation agreement eliminates these difficulties by establishing values of property at the time the agreement is signed.
  2. Prevent the division of the appreciated value of excluded property. A prenuptial agreement or cohabitation agreement can specifically specify that the appreciation of excluded property is not subject to division.
  3. Determine how property, debts and spousal support are to be dealt with should the couple’s relationship break down.
  4. Determine how property and debts should be dealt with on the death of a spouse. This is especially important if either party has children from a previous relationship and wishes to ensure that certain property is to be given to those children. Without a prenuptial agreement or cohabitation agreement the new spouse may inherit the property.
  5. Determine how money is to be managed during the relationship. The management of money can be one of the leading causes of disagreements between couples and one of the leading causes of relationship breakdown. A prenuptial agreement or cohabitation agreement can assist the couple by starting a dialogue on financial matters and creating an understanding of how money is to be managed during the relationship, thereby reducing potential disagreements and conflict.
  6. Ensure how disputes resulting from the breakdown of the relationship are to be dealt with. For example, a prenuptial agreement or cohabitation agreement may set out provisions for dispute resolution such as mediation or collaborative divorce.

These are only a few of the reasons why a prenuptial agreement or cohabitation agreement is essential under the Family Law Act. Should you have any further questions on prenuptial agreements or cohabitation agreements please give us a call at 604-449-7779.

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