Section 4(2) of Ontario's Family Law Act leaves seven kinds of property out of net family property, including gifts and inheritances from third parties received after the marriage, personal injury damages, life insurance proceeds and property traced from them. The exclusion is lost if the property went into the matrimonial home, and the spouse claiming it must prove it.
How do exclusions work in an Ontario property claim?
Equalization shares the growth in each spouse's net worth during the marriage. Some property, though, is treated as belonging to one spouse alone, because it came from outside the marriage partnership. The Family Law Act lists that property in section 4(2), and its value on the valuation date simply does not count. For the broader picture, see our property division page.
Claiming an exclusion usually follows these steps:
- Identify the source. Was the property a gift or inheritance from someone other than your spouse, a personal injury award, or life insurance paid on someone's death?
- Check the timing. A gift or inheritance must have been received after the date of the marriage. Property you already had on your wedding day is handled by a different rule: its value is deducted instead.
- Confirm you still owned it, or something bought with it, on the valuation date. Money that was spent on living costs or holidays is gone and cannot be excluded.
- Trace it. Follow the money from the moment you received it to the asset it sits in today.
- Check for the matrimonial home. If the property is, or was put into, a matrimonial home, the exclusion does not apply to that part.
- Prove it. In a court case, rule 13(3.3) of the Family Law Rules requires you to serve the documents that support any exclusion, and you list it on your financial statement and your net family property statement.
The result then goes into your net family property calculation as a line that reduces your total. Exclusions are one piece of the wider equalization process explained in our guide to how property is divided in Ontario.
The Act builds disclosure of exclusions into the court process. Section 8(c) requires each spouse in an equalization case to set out, in a sworn statement, the exclusions they claim under section 4(2). Rule 13(3.3) then requires documents supporting each exclusion, and documents showing what you owned and owed on the wedding day, to be served within 30 days after the financial statement is due. A claim that appears for the first time late in a case, with no records behind it, is hard to sustain.
The seven kinds of excluded property
| Excluded property | What it covers | Main catch | Section 4(2) |
|---|---|---|---|
| Gifts and inheritances | Property received from a third person by gift or inheritance after the marriage | Not if it is a matrimonial home; gifts from your spouse do not count | Para. 1 |
| Income from those gifts or inheritances | Interest, dividends or rent earned on them | Only if the donor or will expressly said it is to be excluded | Para. 2 |
| Personal injury damages | Damages for personal injury, nervous shock, mental distress, or loss of guidance, care and companionship, or that part of a settlement | Other parts of a settlement, such as lost income, are not covered | Para. 3 |
| Life insurance proceeds | Proceeds of a life insurance policy payable on the death of the life insured | The cash surrender value of your own policy is not a death benefit | Para. 4 |
| Traced property | Property bought with any of the above | Tracing must be shown; not available for a matrimonial home | Para. 5 |
| Property excluded by contract | Property the spouses agreed in a domestic contract to leave out | The contract must be valid and can be challenged | Para. 6 |
| Canada Pension Plan | Unadjusted pensionable earnings under the Canada Pension Plan | Workplace pensions and RRSPs are not covered | Para. 7 |
The matrimonial home trap
The most expensive rule in this area is short. Paragraphs 1 and 5 of section 4(2) both say "other than a matrimonial home". So an inheritance used to buy, pay down or renovate the family home stops being excluded for that portion, because the money now sits in the home and the home is counted in full.
The same applies if the inheritance was the home itself. If you inherit a house and the family moves into it as their residence, it can become a matrimonial home under section 18(1). A family cottage used regularly as a family residence can raise the same issue, since a couple can have more than one matrimonial home. Our page on the matrimonial home explains how the Act decides which properties qualify.
Tracing: following the money
Exclusions rarely survive in their original form. An inheritance may be paid by cheque, sit in an account, then be moved into investments or used to buy a car. Paragraph 5 allows the exclusion to follow the money into whatever it was converted into, as long as you can trace it.
Tracing is easiest when the money was kept apart. It gets harder when excluded money is mixed with family savings, used for day-to-day spending or moved several times. A separate problem arises with joint accounts: under section 14, money on deposit in both spouses' names is treated as held jointly, unless evidence shows a different intention. Putting an inheritance into a joint account can therefore invite an argument that you meant to share it.
What changes the answer
- Burden of proof. The spouse who claims an exclusion must prove it (s. 4(3)). If the evidence falls short, the exclusion is not allowed and the property stays in that spouse's figure.
- Received before or after the wedding. Only gifts and inheritances received after the date of the marriage are excluded. A gift from your parents before you married is part of your wedding-day property and is deducted instead, a route that offers no protection if that property is a matrimonial home on the valuation date.
- Who gave it. The gift must come from a third person (s. 4(2), para. 1). A gift from your spouse is counted, although a court can consider it under section 5(6)(c) when deciding whether equal sharing would be unconscionable.
- What the will or gift said about income. Interest or dividends earned on an inheritance count unless the donor or testator expressly excluded them (para. 2).
- A domestic contract. A marriage contract can exclude property, including a future inheritance, but it must be in writing, signed and witnessed (s. 55(1)) and can be set aside for problems such as non-disclosure (s. 56(4)). See our page on setting aside a marriage contract or separation agreement.
- A family business. Shares in a family company received by gift or inheritance can be excluded, but new shares, retained profits and later investment raise tracing questions. Our page on a business owned by one spouse goes into this.
- You were not married. Exclusions belong to the equalization scheme, which covers married spouses only. Common-law partners use different claims, set out in our page on unjust enrichment for common-law partners.
A worked example
For example, imagine a hypothetical spouse, Jamie, who inherits $150,000 from an aunt in the fifth year of marriage. The will says nothing about income. Jamie uses $100,000 to pay down the mortgage on the family home and puts the other $50,000 into a GIC in Jamie's name alone. By the valuation date the GIC has earned $4,000 of interest and holds $54,000.
- The $50,000 traced into the GIC is excluded, because Jamie can show where it came from and it never touched the home.
- The $4,000 of interest is counted, because the will did not expressly exclude income.
- The $100,000 paid into the mortgage is not excluded. The home is counted at its full value in Jamie's figure, so that money is now part of what gets shared.
Compared with keeping the whole inheritance separate, putting $100,000 into the home raises Jamie's net family property by $100,000. Since the equalization payment is half the difference between the spouses' figures, that one decision costs Jamie $50,000. The $4,000 of interest adds another $2,000 to the payment.
Common mistakes with excluded property
- Paying down the family home with an inheritance. It feels responsible, but it is the most common way an exclusion is lost.
- Depositing it into a joint account. This makes tracing harder and invites an argument that you meant to share it.
- Throwing away the paperwork. The will, estate statements, the deposit record and every later transfer are the proof. Without them, the exclusion may fail.
- Treating a whole injury settlement as excluded. Only the part representing the damages listed in paragraph 3 qualifies. Amounts for things like lost income are counted.
- Confusing life insurance proceeds with policy value. Money received when someone died is excluded. The cash value of a policy you own on your own life is counted, and rule 13(3.3) asks for the statement showing it.
- Assuming growth and income are treated the same. Income needs an express statement by the donor or testator to be excluded.
What to do this week
- List every gift, inheritance, injury award or insurance payout you received during the marriage, with the date and amount.
- Get a copy of the will or gift letter, and check whether it says anything about income from the property.
- Request the estate statement or settlement document showing what you received and when.
- Pull the bank records showing where the money was deposited, and every later transfer.
- Note whether any of it went into a home the family lived in, including a cottage.
- Keep any remaining excluded funds in an account in your own name and do not add to them, so tracing stays simple. Our page on financial disclosure lists the documents the court expects.
Frequently asked questions
Is a gift from my parents during the marriage always excluded?
Only if it was a gift to you from a third person, received after the wedding, and you can trace it to property you still owned on the valuation date that is not a matrimonial home. A gift made to both spouses together raises separate questions about whose property it is, so keep any letter or message that shows who the gift was meant for.
Does the increase in value of an inherited asset count?
The Act excludes the value, on the valuation date, of property acquired by inheritance and property traced from it. Income earned on it is a separate question and is counted unless the will or donor expressly excluded it (s. 4(2), para. 2).
Can a marriage contract protect an inheritance I have not received yet?
Yes. Spouses can agree in a domestic contract that specific property will not be included in net family property (s. 4(2), para. 6). It cannot, though, limit a spouse's rights under Part II of the Act, such as the right to possession of a matrimonial home (s. 52(2)).
Are Canada Pension Plan credits divided?
Unadjusted pensionable earnings under the Canada Pension Plan are excluded from net family property (s. 4(2), para. 7). Workplace pensions, RRSPs and other retirement savings are not covered by this exclusion and are counted in the usual way.
What if my spouse says an inheritance was used for the family?
Money that was spent no longer exists on the valuation date, so it is not excluded or counted. What matters is what you still owned on that date and whether you can trace it back to the inheritance.
Does it matter whose name the inherited property is in?
Yes. Exclusions apply to property the claiming spouse owns. Moving an inheritance into joint names can create a presumption, under section 14, that the spouses intended to own it together.