Domestic contracts are an important consideration for anyone planning to marry, enter into a common law relationship or separate from their partner. This is particularly true in situations where one of the parties has significantly more assets and/or owns a business. A domestic contract is a legal document that allows the parties to define rights to property and/or support should their relationship break down. This topic is a very complex and emotional one and needs to be handled with expert advice and counsel.
The Ontario Family Law Act (the Act) recognizes three types of domestic contracts:
- Cohabitation agreements – these are entered into between parties who are not legally married. This is particularly important for common law relationships, as unlike married couples, the Act does not provide for the equalization of property between common-law partners.
- Marriage contract (also known as a prenuptial agreement) is intended for people that are legally married or intend to become married. These agreements are often used to “opt out” of the equalization formula established in the Act. For example, a business owner (or his or her family or partners) may require that the spouse (or spouse to be) has to enter into a marriage contract to exclude part or all of the value of the business, in determining the equalization of family property on separation or divorce.
- Separation agreement – where a relationship comes to an end, the Act establishes an approach for the division of property, spousal and child support, and custody of children. Ontario law permits both common-law and legally married couples to enter into a separation agreement that may alter the approach taken under the Act.
In many cases, children of high net worth families are beneficiaries of family trusts, and shares of the family business may be transferred to them in the future. In the event of a marriage or cohabitation breakdown, the lack of a domestic contract will in most cases result in considerable adverse financial consequences to both the child and the family as a whole.
It is a good idea to have a conversation with your children about the need for a domestic contract when they are considering marriage or cohabitation. This will allow them to better understand this topic and ensure the issue be brought up with their prospective spouse in the proper manner.
Requirements for a Valid Domestic Contract
For a domestic contract to be binding and enforceable by a court, it must meet the following standards:
- Both parties must provide complete financial disclosure
- Each person must understand the legal consequences of entering into the domestic contract; and
- One party must not exert coercion or cause duress on the other party to enter into the contract
It is also important to note that any provisions relating to the care, custody and support of children can be set aside by a court if it’s not in the best interests of that child.