Between 2023 and 2026, $1 trillion of wealth is expected to move between Canadian baby boomers and their millennial and Generation X children. They’re calling it the “trillion-dollar tsunami” because it is going to permanently alter the Canadian economy and housing market.
This massive wealth transfer makes prenuptial agreements (and other marital contracts) more relevant than ever for Canadians inheriting significant assets, especially given the complexities of family law and the potential for these assets to be impacted by divorce. Let’s dive into everything you need to know to “surf” this incoming tsunami.
The changing economic landscape in Canada
Let’s dig a little deeper into what to expect from this incoming wealth transfer. For starters, the housing market is expected to change. As younger Canadians start receiving these large sums of money, they’re more likely to enter the housing market, further driving up demand and prices. This may exacerbate affordability challenges and widen the gap between those with family support and those without.
Speaking of a wealth gap, the wealth transfer is also likely to amplify existing wealth disparities. Those whose parents benefited from decades of economic growth and rising asset values will have a significant advantage, while those whose families did not accumulate substantial wealth will be left behind.
Not to mention, 31% of new homebuyers received help from their parents, highlighting the growing dependence on parental gifts and/or inherited wealth to achieve major financial milestones like buying a home.
How family law in Ontario works
Let’s take a look at one of Canada’s province’s family laws and how “dividing up” an inheritance works in the real world. Without a prenup, an inheritance or wealth transfer isn’t necessarily safe. Let’s look at how divorce and separation works in Ontario so you can understand where you may risk losing out on a portion of your family’s wealth.
In an Ontario divorce (without a prenup), a court will first calculate each spouse’s “Net Family Property,” which consists of total assets minus debt, minus inheritances, and minus the assets owned at the time of marriage. That total amount is then compared to the other spouses’ Net Family Property. Whatever the difference is, divide it by 2. Now, that’s what the wealthier spouse has to pay the other. But you may be thinking, “Wait, inheritances are excluded from that, we’re fine!” But that’s not necessarily true—this exclusion only applies if the inheritance wasn’t commingled into marital assets or the matrimonial home.
In other words, if you use your inheritance to purchase a home with your spouse you are risking losing half your inheritance. And this can apply to cottages and vacation homes and other properties, not just your principal residence.
Example of how Ontario divorce law works with and without a prenup: Meet Emily and Ben
Emily and Ben married in 2018. Prior to marriage, Emily has a $300k condo. Ben has a retirement account worth $50k. Emily inherits $1M from Mom. They buy a home for $800,000 using Emily’s inheritance. They call it quits in 2023.
Here’s how Emily’s inheritance would come into play in a divorce with and without a prenup:
- With a Prenup: Calculation with Inheritance Excluded:
- Emily’s Net Family Property:
- $800,000 (house purchased with inheritance)
- Plus $300,000 (investment condo)
- Less $300,000 (pre-marital deduction)
- Less $800,000 (inheritance excluded because of prenup)
- Emily’s NFP: $0
- Ben’s Net Family Property:
- $30,000 RRSPS
- Equalization Payment: ($30,000 – $0) / 2 = $15,000 (Ben pays Emily and she keeps her house/inheritance in full)
- Without a Prenup: Calculation if Inheritance Not Excluded:
- Emily’s Net Family Property:
- $800,000 (house purchased with inheritance)
- Plus $300,000 (investment condo)
- Less $300,000 (pre-marital deduction)
- $0 (inheritance exclusion because it was used in a matrimonial home)
- Emily’s NFP: $800,000
- Ben’s Net Family Property:
- $30,000 RRSPs
- Equalization Payment: ($800,000 – $30,000) / 2 = $385,000 (Emily pays Ben)
- Outcome: Excluding the inheritance drastically reduces the equalization payment Emily would owe. Emily either receives an equalization payment from Ben with a prenup or she pays him $385,000 of her inheritance without a prenup. Almost 40% of her inheritance is paid to her ex which could have been 100% preserved had they just signed a prenup.
How a prenup and other marriage contracts can protect your inheritance
As you can see from the example above, a prenup saved Emily around $350,,000! That’s a lot of money, folks! By making sure your inheritance is excluded from the Net Family Property calculation, including any appreciation on inheritance, and regardless of its use and commingling status, you can protect your family’s wealth. And if you’re already married, don’t despair! You can use a postnuptial agreement to accomplish the same goal and ensure your inheritance is safe and sound in your hands.
The bottom line is that you can lose your inheritance without a prenup
The impending trillion-dollar wealth transfer in Canada presents both incredible opportunity and potential risk. Protecting your inheritance isn’t about preparing for war with your future spouse; it’s about proactive planning for your future. With so much at stake, Gen Z, millennials, and Gen X should all seriously consider the role a prenuptial agreement (or other marriage contracts) can play in safeguarding their inheritances and ensuring their financial security, regardless of what the future holds.
Anna-Marie Musson is a Family Lawyer with over 20 years’ experience. A graduate of Windsor Law, Anna-Marie began practising in 2003. She was a partner at a prominent national Bay Street law firm before starting her own firm. Anna-Marie helps professionals and high net worth clients navigate the financial, emotional, and legal issues in divorce and separation. She also helps clients preserve their net worth and avoid financial ruin with Marriage Contracts (Pre-nups) and Cohabitation Agreements. Anna-Marie is the host of the Modern Divorce Show on 105.9 The Region and also hosts the upcoming Podcast – Love & Wealth.
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