How you pass on farm property to a son or daughter may be critical in the event of a divorce
No parent wants to think about the possibility of their son’s or daughter’s marriage failing. However, it may be necessary to think about it to avoid having half of the family’s farm legacy lost in a messy divorce.
A pre-nuptial agreement may be the first thing that comes to mind when considering ways to protect farm property. However, while a pre-nuptial agreement may be an effective legal mechanism, there are other more subtle ways to protect property. These ways may even be preferable to avoid any animosity that might arise from proposing a pre-nuptial agreement.
Ontario’s Family Law Act sets out many of the rules governing separation and divorce in this province. Among them are the rules for the division of matrimonial property. This includes two rules that should stand out with respect to the transfer of farm property to a son or daughter:
- The division of family property excludes the value of property, other than the matrimonial home, owned by a spouse as of the date of marriage (after deducting debts and liabilities); and
- The division of family property excludes property, other than a matrimonial home, that was acquired by gift or inheritance from a third person (i.e. parent) after the date of the marriage.
In other words, some property (or the value of same) may not be claimed by a spouse upon a divorce – if it was transferred to a son or daughter in certain ways. For example, if a farm was transferred to a son or daughter before marriage, half of the value of the property (as of the date of marriage) would not be lost upon divorce (excluding the value of the house, if the spouses live on the farm).
In another example, a farm or farm property (i.e. quota) could be preserved and otherwise not divided in half if it was gifted to a son or daughter. In this case, it has to be a true gift with no strings attached. To qualify, it cannot be part of a larger transfer of property where consideration is paid, and it cannot include other consideration such as a lifetime interest or free rent in favour of the parents. In such cases, there should be some sort of paperwork issued to confirm the intentions of the parent(s).
As you can see, unlike a pre-nuptial agreement, taking these steps does not require any prior agreement from the soon to be son or daughter in law. The parents have control, at least initially. Keep in mind that the parents’ intentions can be undermined where a gift is concerned if the son or daughter voluntarily transfers partial interest (i.e. joint title or ownership) into their spouse’s name at any point after the gift is made.
A word of caution: there are also exceptions to the exclusions. It is too complicated to fully cover in a short article. For example, an exclusion of a gift can also be lost if the property is sold and the proceeds are not sufficiently kept separate from other jointly held assets (i.e. a jointly held bank account).
As is always the case in any farm transfer, proper planning is important. But do not assume that the planning should stop with tax advice – legal advice may be just as important.