How do cohabitation agreements work?

Hey there, time traveller!
This article was published 21/10/2022 (1309 days ago), so information in it may no longer be current.

Dear Money Lady Readers,

My eldest son recently declared he was moving in with his girlfriend after 14 months of dating to save money together for their future – without a ring or proposal.

I was quite surprised by this announcement since I am definitely an old-school mum who believes you should be married or at least engaged to be living together. But, trying to be more worldly, I have adjusted my archaic dinosaur ways to now realize that this is happening all the time with millennials all over the world. To some younger Canadians, a marriage certificate is just a piece of paper. But, as a lifelong banker, I am inclined to get my two cents in there with my son since a new, “living-together relationship” still needs a transparent agreement between both parties; and a detailed discussion to deal with the new set of unique financial responsibilities which will eventually come. So, today we are going to talk about cohabitation agreements – a contract that is very different to a marriage prenuptial agreement.

I have written about marriage pre-nups in the past for those readers who want to marry again with more than just “love and school debt.” Marriage contracts are extremely beneficial for comprehensive estate planning to protect finances, property, children and/or dependents. They are also necessary to outline death succession or a possible future divorce. To protect Canadians, I am much more interested in what is to happen in the event of a partner’s death, and to ensure that if you do have a marriage contract, you make sure it is “in sync” with your will. Please, be mindful that marriage contracts can, and often do, override wills.

So, what is a cohabitation agreement and why do you need one?

A cohabitation agreement is a domestic contract. It is not the same as a marriage contract. Like all family contracts, it should not be viewed as reflecting a lack of love or future commitment to your new partner, but rather your conscious need to set out the manner in which your finances and property will be shared or divided in the event of a split or death; based on your wishes and intentions, not on provincial statutory law.

At present, cohabiting partners have very few rights to property, when compared to married couples. Typically, the property you bring into the relationship, plus any increase in its value, usually continues to belong to you alone. This would include investment assets, registered accounts, real estate, or chattels. The main reason for drawing up a cohabitation agreement is to provide for a division of property if the relationship breaks down. The most straightforward way is to state that all property remains the separate property of each individual and to provide in the contract for a “separation of property regime.” This means that all property, including assets owned before cohabitation, plus any increases in value, and all property acquired during the relationship is owned strictly according to title. This type of domestic agreement is very different to a marriage contract and not usually ideal for each partner in the long term. That said, cohabitation agreements are not as rigid as marriage prenups, and contracts can be crafted with more freedom and/or creativity based on the particular conditions and circumstances each party is in when they begin their union.

Since provincial statues vary across the country, it is critical that the relevant provincial legislation be reviewed when you plan for a major lifestyle change. Being proactive and open with your partner helps form the basics to future financial planning – something that should be thought of to protect all parties financially, and to ultimately eliminate any uncomfortable future consequences.