Are Injury Settlements and Insurance Proceeds Excluded in Ontario?

If you received a personal injury settlement or a life insurance payout, you may fear it will be pulled into the property division when you separate. Ontario's Family Law Act does set aside certain kinds of money, but with limits.

This article explains the exclusions in plain terms, the situations that cause trouble, and the proof you may need. Whether a specific payment falls inside an exclusion depends on what it was for, so a lawyer can confirm.

Where exclusions fit in the calculation

Net family property is the value of property a spouse owns on the valuation date, minus excluded property, debts and the net value of property, other than a matrimonial home, that the spouse owned on the date of marriage. That date-of-marriage deduction is not allowed for property that is a matrimonial home on the valuation date, so the home's full value is included even if one spouse owned it before the marriage. The spouse with the lower figure is entitled to one-half the difference. Excluded property under section 4(2) comes off the total, so it does not increase what you may owe.

The valuation date is the earliest of several dates: separation with no reasonable prospect of resuming cohabitation, the date a divorce is granted, the date the marriage is declared a nullity, the date a spouse starts an improvident-depletion application that is later granted, or the day before a spouse dies. Values are calculated as of close of business on that date.

Equalization is a payment of money, not a split of each asset. If a spouse's net family property is less than zero, it is deemed to be zero.

What is excluded

• Damages for personal injuries, nervous shock, mental distress or loss of guidance, care and companionship.
• Life insurance proceeds payable on death.
• Property, other than a matrimonial home, that these assets can be traced into.
• Property excluded by a domestic contract, and unadjusted pensionable earnings under the Canada Pension Plan.

The wording is tied to what the payment is for. A settlement for the injury itself is described in the exclusion. Whether every part of a settlement, such as money replacing lost income, falls inside it is not something the list answers, and it can depend on how the payment is broken down. A lawyer can help review the settlement documents.

The wording for insurance covers proceeds payable on death. Other insurance money, such as the value of a policy on a living person, is not described there, so ask about it.

Limits and traps

The matrimonial home is the biggest limit. Traced property is excluded only if it is property other than a matrimonial home, so settlement money that went into a family home is not protected by the tracing rule. A matrimonial home is property ordinarily occupied by the spouses as their family residence.

Proof is the other limit. The person claiming an exclusion has to prove it. Keeping settlement money in its own account makes tracing easier. Mixing it with other money can make it harder to show what is excluded, and how a court treats mixed funds depends on the facts.

Note that income from gifted or inherited property is a separate rule, excluded only if the donor expressly said so. Do not assume that rule applies to settlement or insurance money.

If you make a property claim in court, you must serve and file a financial statement in Form 13.1. Before a settlement conference or trial, each party to a Part I property claim must also serve and file a net family property statement, Form 13B. How you present an exclusion in these documents depends on your situation, so it is worth confirming with a lawyer.

These rules apply to married spouses. Unmarried partners have no equalization, and property generally belongs to whoever bought it.

When the insurance payout follows a death

When a married spouse dies, the surviving spouse can be entitled to one-half the difference if the deceased spouse's net family property was larger. If there is a will, the survivor must elect between taking under the will and equalization; if there is no will, the survivor elects between the intestate share under Part II of the Succession Law Reform Act and equalization. If the survivor elects equalization, life insurance proceeds, lump-sum pension payments and survivorship property received because of the death are credited against the equalization entitlement.

The election must be on the prescribed form and filed with the Estate Registrar for Ontario within six months after the death. The form is Form 1, Election of Surviving Spouse. A late filer is deemed to have elected to take under the will or the Succession Law Reform Act, unless the court orders otherwise.

What to do next

• Keep the settlement agreement, release and any breakdown of what the money was for.
• Keep bank records showing where the money was deposited and what it was used for.
• Do not put the money into a joint or matrimonial home without advice.
• Check any marriage contract, since a domestic contract can exclude property and prevails over the Act on matters it covers, unless the Act provides otherwise.
• Raise the exclusion early, since you carry the burden of proving it.
• Speak to a lawyer before signing any agreement that divides property.

Frequently asked questions