When it comes to divorce, there are many complex legal issues that need to be sorted out. One of the most important is how the marital property will be divided. This includes all the assets and debts that were acquired during the marriage. But what happens if one spouse inherits money or property during the marriage? Is inheritance money split in a divorce in Canada? What if the inheritance was received before the divorce? These are questions many Canadians are asking — and rightfully so. Divorce is often a financial burden so being motivated to protect your inheritance is only natural. Let’s take a closer look at what the law says about inheritance money and divorce.

Divorce and your finances: an overview

In Canada, divorce law is dictated by the nation’s federal Divorce Act. This law states there are no specific grounds required to obtain a divorce. Instead, it is based on the concept of marriage breakdown. To initiate a divorce, individuals must file an application with the court. They may be required to pay an application fee.

The divorce process can vary depending on which province or territory you live in. It often involves dividing assets between both partners. Notwithstanding this variability, one thing remains constant: the importance of understanding one’s own financial situation before entering into a divorce agreement.

Whether you are considering filing for divorce or already undergoing this process, it is critical to have a strong understanding of your finances. In addition, you should understand what steps need to be taken to protect your assets. Plus, achieve the best possible outcome for you and your family.

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What is considered inheritance money?

Inheritance money refers to any funds that are received, or expected to be received, through gifts or bequest during a person’s marriage. For example, if you receive a monetary gift from your parents prior to getting married, this would be considered inheritance money. Alternatively, if you inherited a summer home after your grandmother died, this would also be considered inherited property.

Additionally, money you expect to receive in the future due to inheritances or other forms of bequests may also be protected in the event of a divorce. By delaying receipt of such funds until after the dissolution of your marriage, you can ensure your spouse cannot claim these assets during a division of assets, for alimony and/or child support.

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Is inheritance money split in a divorce in Canada?

In Canada, inheritances and other gifts are typically excluded from the division of assets in divorce proceedings. To take advantage of this exclusion, recipients must treat the money or assets received as separate from the marital property in a specific way. This may include setting up a separate account for the inheritance or gifted funds. Or, keeping them entirely separate from other assets acquired during the marriage or the relationship. Furthermore, how an inheritance is treated during a divorce can vary depending on factors. For instance, individual circumstances and local laws.  

How do I protect my inheritance from divorce?

No one wants to think about the possibility of a divorce. But it’s important to be financially prepared, just in case. If you’re concerned about how your inheritance might be affected in the event of a split, here are some tips to help you protect your assets. Keep in mind that most of these tips cannot be actioned overnight. Normally, these actions must be executed throughout the marriage. Otherwise you risk your inheritance being included in the sum of marital property.

Use a separate account for gift and inheritance money

Open a separate account specifically designated for storing and use of your gifted or inherited funds. This will help you to clearly demonstrate these funds were not part of your marital assets. Thereby allowing you to protect your prized inheritance during any potential divorce proceedings.

Additionally, if you choose to invest or purchase property with money from your gift or inheritance, it is important to keep those assets separate and distinct from your other investments or real estate holdings. This will allow you to easily trace and prove ownership in the case of any future disputes regarding the division of property.

Don’t use gifted or inherited money in the matrimonial home

Under the Family Law Act, the value of a matrimonial home will always be split between spouses. Regardless of any existing domestic contract. Therefore, if you use gifted or inherited money to pay down your mortgage, put in a down payment on the home, open a home equity line of credit, or make renovations to the home, you run the risk of losing out on that inheritance in the event of a divorce.

To safeguard your funds from potential divorce settlements and maintain control over those assets in case of separation, it is best to keep inherited or gifted money separate from any assets used for the matrimonial home.

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Using gifted or inherited money to buy other property

To protect an inheritance or gift from potential divorce proceedings, it is important to carefully consider how you choose to use those funds.

One strategy that can help is to purchase other property with gifted or inherited money. By doing so, you effectively remove the gifted or inherited funds from consideration. Those funds are no longer held in the same form as when they were received. However, this approach does require some careful planning. Tracing requirements can be quite complicated. Especially if the purchase of the new property involved a combination of gifted or inherited funds and family money. Therefore, it is essential to work closely with legal and financial experts to ensure your rights are fully protected. Ultimately, the key is to make sure any assets obtained using gifted or inherited funds remain separate from the marital property at all times.

Pre-marital gifts and inheritances

Pre-marital gifts and inheritances still play a role in divorce proceedings. These assets may include valuable jewelry, artwork, or real estate. All of which can significantly increase in value over the course of a marriage. While these assets are typically treated like any other pre-marriage assets, they must be taken into account when calculating net family property and dividing marital assets fairly in divorce proceedings. Careful consideration must be given to both pre-and post-marital gifts and inheritances in order to ensure a just resolution for all parties involved.

Does an inheritance need to be split in a divorce?

Whether or not an inheritance should be split in a divorce depends on several key factors. If you take necessary precautions with your gifts or inheritances, it does not need to be split in a divorce. Although, if you didn’t take due care with your gifts and inheritances, you may have to split the funds during a divorce.

To summarize, it is important to keep any gifted or inherited funds in a separate account that is protected from the rest of your assets. Additionally, these funds should not be used to pay for the matrimonial home or other marital property. If you do use inherited or gifted money to purchase property, it is important to do so before entering into a divorce. Otherwise, this may affect the net family property calculations in your divorce proceedings.

Whether or not inheritance will be split in a divorce simply depends on the timing and circumstances of its receipt. If you receive this money before your marriage ends, then it may be considered your separate property. Therefore, it is retained by you during a divorce settlement. However, if you receive an inheritance or gift during or before your marriage, it may need to be considered when determining the net family property of the couple.

Thus, when faced with questions about inheritance in a divorce proceeding, it is essential to consider all relevant factors and seek independent advice as needed.

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