Excluded Property In Family Law

Why does this matter?

The Family Law Act (FLA), which is the current legislation that governs what happens when spouses break up, came into force on March 18, 2013.  The FLA overhauled the old legislation and introduced a new regime for property rights of ex-spouses.

One of the FLA’s most notable changes to property rights was the introduction of excluded property: if a spouse owned assets prior to moving in with the other person, or if that spouse received a gift or an inheritance from a third party either before or during the relationship, then those assets, gifts or inheritances constitutes the owning spouse’s excluded property upon relationship breakdown.  Excluded property is not subject to division with the other spouse, except for the increase in value.

In other words: if I owned a house prior to moving in with my spouse, and that house was worth $500,000 at the time we moved in together, but is worth $800,000 when we break up, then I get to keep the first $500,000, but the $300,000 increase in value constitutes family property and is subject to division between me and my spouse. (after subtracting the mortgage and any other debts registered against the house of course)

Among the most significant debates currently occurring in family law in B.C. relates to what happens when you place excluded property into an asset in joint names.  In the example above, we know exactly what happens with the house if it remains in my sole name during the relationship.  However, what happens if I place that house in joint names with my spouse during the relationship?

The B.C. Supreme Court has been grappling with this question and up until now, the case law has been split into two different camps.  One camp says a spouse’s excluded property remains their excluded property even if that property was placed into an asset in joint names, or in an asset solely owned by the other spouse.  The other camp says that excluded property lost its exclusion when it was placed into a joint asset, and the property becomes a family asset to be divided between the spouses upon the breakdown of their relationship.

 

What does the Court of Appeal say?

V.J.F. v. S.K.W., 2016 BCCA 186 marks the first time the Court of Appeal, the highest level of court in B.C. weighs in on this controversial issue.

In this case, the husband received a $2 million dollar gift during the relationship, and he placed  that money into a house solely owned by his wife.  The husband and wife subsequently separated, and the question now became whether those $2 million dollars remained the husband’s excluded property, or whether the $2 million dollars stopped being excluded property as soon as it was placed into an asset solely owned by the wife.

Siding with the wife, The Court of Appeal concluded that the $2 million dollars were no longer excluded property.  The Court stated that by placing the money into an asset solely owned by the wife, the husband had effectively gifted the entire $2 million dollars to her.  Upon relationship breakdown, however, the $2 million dollars automatically became family property, to be divided equally between the husband and wife.  At paragraph 76 of the judgment, the court states that “the $2 million dollar gift received by Ms. W. does ‘fall back into the communal pot’ on separation and is divisible as family property in the normal way.”

 

What does this mean?

The Court of Appeal has now provided binding authority on what happens when excluded property is placed into an asset solely owned by the other spouse: the property becomes family property upon relationship breakdown and is presumptively divisible 50/50 between the spouses.  However, what remains less clear is what happens if an excluded property is placed into an asset that is jointly owned by both spouses.

Following the court’s reasoning, I believe we now have a foundation for an argument that excluded property placed in joint names will be presumptively divisible 75/25.

The Court of Appeal said the entire $2 million dollars became the wife’s sole property because the house was in her sole name, and the money then “fell back into the communal pot” when the spouses separated.  If that $2 million dollars had been placed into a house jointly owned by the husband and wife, then it stands to reason that the husband gifted half of the $2 million dollars to the wife, and the other half remained his excluded property.  Upon relationship breakdown, it is the wife’s $1 million dollars that falls back into the communal pot to be divided as family property.  The husband, therefore, gets $1.5 million dollars and the wife gets $500,000.

In summary: excluded property placed in an asset solely owned by the other spouse gets divided 50/50 upon relationship breakdown, which means that excluded property placed into a jointly owned asset should be split 75/25.  However, I anticipate that last issue will likely continue to be fought about in court until the Court of Appeal weighs in again.

Property issues, and specifically excluded property issues, in family law are complex and have far-reaching consequences.  Be sure to speak to a qualified family law lawyer if you are contemplating separation or contemplating moving in with your partner.

Jennifer Lin exclusively practices family law, representing numerous clients on matters of spousal support. Visit Jennifer’s profile page to contact her.

Tags: Jennifer M. Lin, Family Law, Property