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Couples who move in together can be considered common law.

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Laurie Pawlitza gets a lot of starry-eyed clients in her office – they’re often young couples who are moving in to their first home and come in asking for cohabitation agreements to protect their assets. But many aren’t there of their own accord.

“It’s parents who may have helped buy properties for their kids – that’s why we see the cohabitation agreements,” says Ms. Pawlitza, a partner in the family law group at Torkin Manes in Toronto. “They want an agreement that will protect the initial investment.”

Ms. Pawlitza also sees clients such as these when their relationships end – the couples in their 20s and 30s who have moved in together, often to save on housing costs – and over the years have become common law. Suddenly, they are splitting properties, assets and savings – facing financial challenges they didn’t foresee.

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At a time when housing is more expensive than ever, moving in early in a relationship with a significant other is an attractive option, for both the heart and the wallet. Conversations about managing everyday finances, things such as splitting costs and paying bills, are crucial. And once a couple pass the common-law threshold – which varies according to province – the rules of the game change.

Ms. Pawlitza recalls a client who had a verbal agreement with a partner that they would take on the payments toward a joint line of credit. But after breaking up with the partner, when the client went to apply for a mortgage, he was denied based on bad credit. The former partner had defaulted on payments and the client’s name was still on the loan. He had to have his name removed from the loan at a bank.

“You have to be leery about those things,” she says.

And there are many couples who haven’t signed anything – and who stand to lose a lot in the event of a separation. According to Statistics Canada, between 2006 and 2011, the number of common-law couples rose 13.9 per cent, compared with a 3.1-per-cent increase in married couples. Many of these couples don’t have formal agreements that would protect their assets.

Common law varies provincially

Common law is interpreted differently depending on where you live. In British Columbia, for example, the law applies exactly as if a couple were married after two years, which means that in the event of a separation, each partner keeps the property they owned before the relationship. Each is entitled to half of the property they acquired while together – it doesn’t matter who actually owns it.

In Ontario, a couple are common law when they’ve lived together for three years – though when it comes to property, the law is far less cut and dried than in B.C., according to Ms. Pawlitza. “In Ontario we have no legislation that deals specifically with the property rights of common-law couples,” she says. “There is no specific waiting time before there can be a property claim made,” she says.

As a result, if a common-law couple in Ontario owns a home and their names are both on the title, the courts will often divide their joint property 50/50, says Rick Peticca, a senior lawyer at Shulman Law Firm. The same goes for debt.

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“Everyone is responsible for their own debt,” he says. If it’s a joint line of credit, each party is responsible for half.

However, if only one person has their name on the title of the property, the assets will go to that person, he warns. “This creates a problem because the person who is not on title has to show their financial contributions to that asset.” It’s why he suggests couples buying property together put both of their names on the title to ensure equal distribution.

Ms. Pawlitza also suggests that in cases in which one partner owns a property and has their name on the title, but the other partner has done extensive renovations to the property, they can claim a portion of the property’s value. “It’s complicated and time-consuming,” she says. “Track your contributions – either your purchases or labour.”

Another area that needs to be hammered out is spousal support. “With respect to spousal support, [in Ontario] you can make a claim against your common law partner at any time after you’ve been living together for three years – or if there is a child in the relationship, Ms. Pawlitza says. However, in her experience, a bid for spousal support often usually arises in longer-term unions – or if one partner has a lot more income than the other.

Tax issues can also arise. If spousal support is payable, the spouse who receives support has to pay tax on it and the payor spouse gets to deduct it, Ms. Pawlitza says. “There are all sorts of tax issues related to property transfers, depending on whether property is being transferred from one spouse to another and what kind of property it is,” she says. Because only one partner is on the hook for tax on this property transfer, she says it’s a good idea to talk to a tax lawyer.

And if one person owns property, sells it and is giving the other person cash for their share or contributions, the owner/seller might be liable for tax but not know it, Ms. Pawlitza says. “It’s important for the seller to know what the tax consequences are before agreeing to pay a certain amount, so they are not hit with an unexpected tax bill afterwards.”

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“It’s about being aware,” she says. “If anyone comes into a relationship with some property – or the incomes of the couple are quite different – then things can become quite muddy.”

Experts agree that cohabitation agreements are paramount. “That sets everything out in black and white – and sets up expectations should the relationship fail,” Mr. Peticca says. “Everyone thinks their relationship will last forever,” he says. “No one’s keeping a general ledger account. But you need evidence to support a claim.”

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