Although most of us know them as prenuptial, “prenup” or interspousal agreements, the legal term most often used in Canada is a cohabitation agreement. Within the Canadian legal system, a cohabitation agreement is used to describe a written contract between two people entering a common-law relationship or marriage.
Other jurisdictions may use other terms, but no matter what you call them, these agreements enable the parties involved to determine for themselves a resolution process and how the division of assets will be addressed if a marriage or relationship dissolves.
On the farm, a cohabitation agreement can be used as a succession and legacy preservation tool as well. The idea is to protect the farm business and its assets while treating everyone fairly in the event of a relationship breakdown.
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Karla Dane, lawyer and partner at Meighen Haddad LLP, says the greatest benefit to a cohabitation agreement is choosing your own parameters in the event of a separation rather than leaving your livelihood in the hands of decision-makers or the legal system.
For example, without an agreement the Family Property Act in Manitoba would determine how assets, including property, are divided between partners. “You can imagine how that could affect a large farm business that has acquired assets over generations or a farm business with multiple family members or shareholders,” says Dane, explaining that if a farm had to divide or dilute assets by selling to fairly compensate a spouse or partner leaving a relationship, the impact on the entire farm business and anyone else involved could be debilitating.
The two questions Dane gets asked the most about cohabitation agreements are “who needs one” and “when do we need one”? Her answers are clear. First, anyone needs one who has something they want to preserve for family or themselves or who wants the ability to protect and eventually dispose of assets themselves.
And the when? The right time to start the process, says Dane, is as soon as the idea of a prenup or cohabitation agreement is on someone’s radar.
A cohabitation agreement is a practical consideration before entering into a marriage or common-law relationship. (In most provinces, two or more years of cohabitation constitute a common-law relationship.)
“Starting the conversation and legal process earlier rather than later can make the experience easier and reduce any strain on relationships,” says Dane. “These discussions take time to make sure they are practical for all parties, engage everyones, and ensure proper communications throughout the entire process.”
First steps
According to Ray Riel, farm transition consultant with MyFarmPlan.ca, the best way to broach the topic of a cohabitation agreement is through a third party such as a consultant, lawyer or accountant. The topic can naturally come up within the context of establishing or updating a shareholder or partnership agreement or through farm succession planning.
Riel says he has these conversations with every client and often starts with the founders or the farming parents. “There’s always a fear of challenging the family dynamics because these aren’t comfortable conversations,” says Riel.
His advice is to approach the discussion from a business perspective. Have a trusted advisor explain what could happen if an agreement isn’t in place and what the process would be to establish one.
Below are some clear circumstances where a prenup or cohabitation agreement makes farm sense.
New relationships
Often a new relationship or marriage is the trigger for a cohabitation agreement. In many cases, the topic may be raised by an individual within the relationship or by a member or partner of the farm.
Rather than launching into what could be an uncomfortable conversation, Riel recommends asking a third-party to address it in a business planning context.
Too often Riel has seen parents or the older generation of a family farm delay rolling over assets to their children or develop farm succession plans because they are concerned about a child’s rocky relationship and are waiting to see how or if the marriage or relationship is resolved.
His advice? “Talk to your farm advisor, especially a farm transition consultant to understand your options, and stop delaying.”
Shareholder’s agreement
If a business partner — whether a family member or not — is involved in the farm, a cohabitation agreement is recommended, especially within a shareholder’s agreement. This condition can ensure the farm business remains viable no matter what happens to any of the partners and their relationships and it can be added to an agreement at any time.
“If a cohabitation agreement is required as a condition of a shareholder’s agreement, it approaches the topic from a business perspective, rather than being perceived as commentary on a prospective partner’s domestic relationship,” notes Riel.
Set the example
Consider using the development of a transition plan or change in the family farm business structure to trigger a cohabitation agreement. It may be easier to introduce the topic when everyone is working to preserve or transition the farm.
The requirement for a cohabitation agreement can be written into any formal plan as a tool to protect assets and ensure the family farm is maintained.
No matter how long the farming parents have been married, they can set an example for the next generation by signing their own agreement, commonly referred to in this case as a post-nuptial agreement or spousal agreement.
Parents with children in their late teens can set a pattern and enter into an agreement even though they have an established relationship.
“Founders having entered into interspousal agreements can form a basis for mature conversations with young adults prior to them being engaged in serious relationships of their own,” says Riel. “It becomes part of the family’s culture and establishes that preserving the family farming legacy is taken seriously.”
Where to start
The decision to act can be the hardest part. Actually creating the agreement itself can be easier in comparison. Dane’s advice is to start with a lawyer to determine if an agreement is the right step. Be aware though that you will want to bring in the farm’s transition consultant to help with family dynamics, plus your accountant or other trusted advisors.
Dane also points out that when it comes to the regulations and legal requirements for your specific agreement, every province is different. She advises farmers to consult a local legal advisor.
The take-home message, Riel says, is that cohabitation agreements don’t have to be messy. They can be beneficial for everyone. They ensure that if the worst happens and a relationship cannot be rescued, a spouse leaving the farm will be treated fairly.
An agreement also ensures the farm can remain intact to provide a livelihood for the exiting and remaining partners, and even provide a farm or business future for the next generation.
– This article was originally published in the January 2024 issue of Country Guide.
