Financial Planning Issues for Common-Law Partners
It may be an obvious thing to say, but common-law partnerships are increasingly “common” in Canadian society. While common-law couples may not have solemnized their relationship through marriage, that does not mean that they do not need to consider each other when developing a financial plan.
The term “common law” refers to law that has developed from decisions of the courts. This can be distinguished from laws that come into existence through legislation. The government of Canada has jurisdiction over laws regarding marriage and divorce. However, couples may establish conjugal relationships without getting married.
This definition from the Government of Canada may be helpful: “A common-law relationship is legally a de facto relationship, meaning that it must be established in each individual case, based on the facts. This is in contrast to a marriage, which is legally a de jure relationship, meaning that it has been established in law.” In other words, a common-law partnership may look like a marriage, but do not expect that it will be treated the same under the law or by the courts.
Provinces have jurisdiction to define common-law relationships. In British Columbia, Newfoundland and Labrador, Nova Scotia, and Saskatchewan a common-law relationship can be established after cohabiting for two years. In Alberta, Manitoba, New Brunswick, Ontario, and Prince Edward Island, the requirement is three years. When the couple has a child together, a lower threshold applies. Quebec’s civil law regime does not recognize common-law relationships.
The legal rights of common-law partners also vary by province. In this blog post, I will consider relationship breakdowns (separation) and estate planning (death of a common-law partner).
Child support can be a factor in the breakdown of a common-law relationship as much as it can in a marriage. What may be more surprising is that the non-custodial ex-partner may be required to make child support payments regardless of status as the biological parent of the child.
Spousal support payments are less common in general, but an ex-partner in a common-law relationship can seek spousal support on the same basis as a formerly married spouse.
Division of Property
Upon the breakdown of a marriage, one of the points in negotiating a divorce is the division of property. Some provinces also provide for the division of matrimonial property in the case of common-law relationships. For example, Manitoba allows for the registration of a common-law relationship. “This means that if a common-law couple separates, each partner is entitled to half the value of the property acquired by the couple during the time they lived together, just like married couples. It also means that if one of the partners dies, the surviving common-law partner has a claim to his or her estate.” As one might expect, though, once registered, the only way to terminate the relationship is by “registering a dissolution,” and only after the ex-partners have been living apart for at least a year.
Let’s start with the possibility that a common-law relationship started where one or both of the partners were previously married. If the previous marriage has not been ended through a divorce in which all the terms have been settled, then the estranged spouse may retain rights that are not available to the cohabiting common-law partner. A pension could be one such example. For example, if the still-married common-law partner died, the estranged spouse may have a right to the survivor’s pension even if there was an expectation by both common-law partners that the surviving partner would be treated as the eligible survivor.
One of the biggest areas of personal finance where a common-law couple should want to get their legal paperwork dealt with is estate planning. Depending on the circumstances and the province in which they live, a surviving common-law partner may be left without a right to inherit their deceased partner’s estate.
Someone who dies without a valid will is said to have died “intestate.” Intestacy laws are established at the provincial level. British Columbia’s common-law couples have the same rights and responsibilities as married couples. When someone dies without a will, whether he was legally married or common law, his partner is entitled to a share of the estate. The same applies in Alberta, Saskatchewan and Manitoba. In the remaining provinces, only legally married spouses have the right to a share of the estate on intestacy. For example, in Ontario, the “Succession Law Reform Act sets out how the estate is distributed. In general, when a person dies without a will, the people who can inherit their estate include their spouse and closest next-of-kin. A common law spouse does not inherit under the… Act.”
Intestate rights aren’t the only ones where rules differ for legally married and common-law couples. In most provinces, the surviving spouse has the right to make a matrimonial claim against the estate of the deceased spouse. For example, under Ontario’s Family Law Act, a surviving spouse has the right to take his or her entitlement, if any, under the will (or on intestacy), or to make an equalization claim. But only legally married spouses may apply. In most other provinces that provide for matrimonial claims against an estate, such a right does extend to common-law spouses. B.C. does not provide for matrimonial claims.
Even in Ontario, where the rights of common-law partners are limited, other resolutions may be available. For example, dependants’ claims and constructive trust claims are open to both legally married and common-law partners. In the case of a dependant claim, the surviving partner must show that they were in a common-law relationship at the time of the death of the deceased. Once that is established, the court will then take several factors into account to determine the amount of the claim. Constructive trust claims can be made in situations where the surviving partner contributed to the value of the deceased’s estate but does not otherwise have a legal claim to a portion of the estate due to their common-law status.
While “just living together” seems like a pretty straightforward event, doing so can still open either or both partners to unanticipated obligations and/or vulnerabilities. To close out this post, I offer the following: if you are considering entering into, or are already in, a common-law relationship, you will do well to consider these actions.
Create a Cohabitation Agreement
This agreement can be used to define how finances are dealt with during the relationship. More often they are used to establish a degree of certainty on how property or other assets and liabilities (debts) are dealt with if the relationship ends. It is ideal if each party to the agreement obtains independent legal advice.
Create Wills and Powers of Attorney
As has been discussed, when a common-law partner dies without a will (intestate), the situation for the surviving partner can be unjust. Although a court may be able to rectify the situation, litigation costs may reduce the value of the estate.
Powers of Attorney are useful to have in place as well. These documents will serve to give recognized authority to the other partner – assuming common-law partners would make each other the primary attorneys – if important decisions need to be made on behalf of the other in a time of vulnerability.
Review and Update Documents in Which Beneficiaries Can Be Assigned
These documents can include pension plans, RRSPs, TFSAs, and life insurance policies. This step is especially important if former spouses or children are involved.
This is the 180th blog post for Russ Writes, first published on 2023-01-16.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.