- The exclusion protects the original gift or inheritance itself, and whatever it can be directly traced into.
- Ontario’s equalization rules allow for income from excluded property to also be excluded — but only where the person who made the gift or left the inheritance expressly stated, in…
- Spouses themselves can also agree, in a marriage contract or cohabitation agreement, to treat income from certain property as excluded going forward.
Here’s a misconception that catches a lot of people off guard: once a gift or inheritance is excluded from equalization, everything it earns must be excluded too. It feels intuitive — if the source is protected, shouldn’t everything that flows from it be protected as well? Under Ontario’s Family Law Act, the answer is generally no.
Income from excluded property — interest, dividends, rental income, and similar returns earned during the marriage — is, by default, treated as ordinary property subject to equalization, even when the property that generated it is fully excluded. There are ways around the default rule, but they don’t happen automatically.
The Default Rule: Growth Isn’t Automatically Excluded
The exclusion protects the original gift or inheritance itself, and whatever it can be directly traced into. It does not automatically extend to income the property generates while you hold it. If an inherited investment account pays out dividends, or an inherited rental property collects rent, that income is generally treated as part of your net family property — separate from the excluded asset that produced it — unless something specific protects it.
This is different from the asset simply growing in value while you hold it. If inherited shares rise in price and you still own the same shares, that increase in value is generally still attached to the same excluded property. Income paid out and available to spend — dividends, interest, rent — is treated as a distinct stream, not an extension of the original exclusion.
The One Exception: What the Gift or Will Says
Ontario’s equalization rules allow for income from excluded property to also be excluded — but only where the person who made the gift or left the inheritance expressly stated, in writing, that income from it should be excluded too. Without that express statement in the will or gift documents, the default rule applies and the income is treated as shared.
This makes the wording of a will or gift instrument genuinely important. A gift or bequest that’s silent on the point leaves any income it earns exposed to equalization, even though the gift itself is protected.
A Second Route: A Domestic Contract Between Spouses
Spouses themselves can also agree, in a marriage contract or cohabitation agreement, to treat income from certain property as excluded going forward. To be enforceable under the Family Law Act, that agreement needs to be in writing, signed by both spouses, and witnessed. Without either an express statement in the originating gift or a properly signed domestic contract, income earned during the marriage is included by default.
How the Rule Plays Out
| Scenario | Typically excluded? |
|---|---|
| The inheritance itself, untouched | Yes |
| Interest or dividends earned on it, with no special wording | Generally no — treated as ordinary property |
| Interest or dividends, where the will expressly excludes the income | Yes |
| Growth in value of the same excluded asset (e.g., shares that appreciate) | Generally yes, as part of the traced asset |
| Income deposited into a joint account | Often loses protection entirely, regardless of the source, due to commingling |
Why This Trips People Up
People holding an inheritance in an investment account often assume "it’s inheritance money, so everything it produces is mine." In practice, the exclusion is narrower than that assumption suggests, and the gap between what’s protected and what isn’t can be significant over a long marriage where an inheritance sat invested and paid out income for years. Anyone in that position should understand the distinction well before separation forces the question.
Frequently asked questions
Does this apply to gifts too, not just inheritances?
Yes. The same framework applies to gifts and inheritances alike — the underlying gift or inheritance can be excluded, while income it generates during the marriage follows the same default rule unless the giver’s documents or a domestic contract say otherwise.
What if my inheritance grew in value instead of earning income, like stocks going up?
An increase in the value of the same asset you still hold is generally treated differently from income paid out to you. If you still own the original inherited shares and they’ve simply appreciated, that growth is generally still part of the traced, excluded property — as long as you haven’t sold, spent, or mixed it with other funds.
If I reinvest the income back into the same account, does it matter?
It can. Reinvesting income alongside the original excluded principal makes the two harder to tell apart later, which complicates tracing. Keeping records of what’s principal and what’s reinvested income helps preserve whatever protection is available.
Can I ask the person making a gift to word it a certain way to protect future income?
That’s a conversation to have with the person making the gift and, ideally, a lawyer helping them draft the will or gift documents — an express statement excluding future income needs to be in writing at the time the gift or bequest is made.
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