Inheritance Received After Separation but Before Divorce in Ontario

Inheriting money or a home after you and your spouse separate, but before the divorce is final, raises a natural question: does it stay yours, or does your spouse have a claim? People ask this when a parent dies during separation, or when an estate finally pays out after the relationship has ended.

There is no single answer that fits everyone. This article explains the points that usually matter, what we can say about spousal support and the tax side of an inherited home, and the records and steps that help you get accurate advice.

Why the timing of the inheritance matters

The timing of an inheritance is worth writing down: when you married, when you separated, when the person died and when you actually received the money or property. How those dates apply to you depends on your situation, so it is worth confirming with a lawyer.

The rules for how property is divided between spouses, including how inherited property is treated, depend on the facts and on the family law legislation. Because those rules need to be read carefully against your situation, confirm with a family lawyer before you assume the inheritance is protected or shared.

It also helps to understand when you actually receive an inheritance. An estate trustee is responsible for winding up the deceased's affairs and paying taxes, bills and debts, then collecting the assets and distributing what remains. A person may therefore be entitled to an inheritance long before they receive it. Assets with a designated beneficiary, such as an insurance policy or joint bank account, can pass directly.

Spousal support is a separate question

Even where an inheritance is not shared as property, it can still come up in a support discussion. Under section 17(4.1) of the Divorce Act, before varying a spousal support order the court must be satisfied that a change in the condition, means, needs or other circumstances of either former spouse has occurred since the last order. It must take that change into account.

A variation order under section 17(7) should recognize the economic advantages or disadvantages from the marriage or its breakdown. It should also divide the financial costs of child care, relieve economic hardship from the breakdown, and promote self-sufficiency within a reasonable time where practicable. Whether an inheritance is a change that matters, and how much weight it carries, depends on the facts and the existing order.

If the inheritance is a home

A home is a common inheritance, and tax can matter if it is later sold. A property qualifies as a principal residence for a year if it is owned (alone or jointly), is lived in during the year by the owner, spouse or common-law partner, or a child, and is designated. A family can designate only one home per year (from 1982 on).

The CRA allows the principal residence exemption only if the sale and designation are reported on Schedule 3 with Form T2091(IND). The legal representative of a deceased person uses Form T1255 to designate the deceased's property as a principal residence. Years not designated have their gain reported.

A home sold within 365 consecutive days of acquisition can be taxed as business income under the flipped-property rule. An exception applies where the sale was due to a qualifying life event such as the death of the taxpayer or a related person. How these rules apply to a person who inherits a home, and whether a separated spouse's own home affects designation, depends on the facts and is worth confirming with an accountant.

Protecting your position

• Keep inherited money in its own account rather than mixing it with other funds.
• Avoid putting the inheritance into a jointly owned asset, such as the matrimonial home, without advice.
• Save the will, any beneficiary designation, the estate trustee's letters and statements showing what you received and when.
• Record what the money was used for, especially if it was spent on a home or a debt.
• Be honest and complete when you share financial information.

What to do next

• Write down the dates of marriage, separation, death and receipt of the inheritance.
• Collect statements for the account where the money was deposited or the property was held.
• Ask the estate trustee to confirm in writing what you are entitled to and what has been paid.
• Speak with a family lawyer about how the inheritance is treated in your property division.
• If support is in play, ask the lawyer whether the inheritance changes your position on a variation.
• If a home is involved, ask an accountant about designation, reporting and timing of any sale.

Frequently asked questions