22 August 2014

Supreme Court Releases Important Judgement: First Decision on Tracing, the Presumption of Advancement and the Valuation of Excluded Property

Last Friday, Mr. Justice Butler of the Supreme Court of British Columbia released his decision in Remmem v Remmem, a case which I suspect is probably the first case addressing how property brought into a relationship is to be handled under the new Family Law Act.

As frequent readers of this blog will know, the Family Law Act imposes a new plan for the division of property between separated spouses that is wholly different from the old Family Relations Act, and, if anything, is more along the lines of how property is divided under Alberta's Matrimonial Property Act and Saskatchewan's Family Property Act. This is how it works in a nutshell:
  • under s. 81, both spouses are entitled to an equal interest in the family property;
  • family property is defined in s. 84 as all property owned by either spouse on the day the spouses separate, including real property, corporate interests, bank accounts, pensions, retirement savings and so on;
  • the court can divide family property unequally under s. 95, but only if an equal division would be "significantly unfair," having regard to a list of factors set out at s. 95(2);
  • under s. 87, the value of family property — and only family property — is its fair market value, determined either at the date of trial or the date of settlement;
  • under s. 85, certain property, such as property brought by a spouse into the relationship and property received by a spouse as a gift or inheritance, is excluded from the pool of family property; 
  • under s. 96, excluded property remains the property of the spouse who owns it; however,
  • under s. 84, any increase in the value of excluded property during the relationship is shareable family property.
Although a short summary like this probably makes things look pretty straightforward, there are a whole bunch of questions that the legislation leaves unanswered. Here's a sampling.
1. What does "significantly unfair" mean? We have a whole lot of law on what "unfair" means, because that was the test under the old Family Relations Act to decide whether an unequal division was appropriate, but since the only other legislation in British Columbia to use "significantly unfair" as a legal test is the Strata Property Act, we don't yet know what the phrase means in a family law context. 
2. What do you do if you sell excluded property that you brought into the relationship during the relationship? Do you get a credit for that property against the pool of family property?  
3. What if you sold excluded property, like a car, to buy something that is family property, like another car? Is the new car your excluded property? Do you get a credit for the value of your old car? What happens if, when you separate, the value of the new car is less than what your old car was worth? Do you get the new car plus a credit against the family property? 
4. What happens if you still have your excluded property but it's gone down in value? Do you get the value of the excluded property at the date when you brought it into the relationship or the value of the property surviving at the date of separation?
Remmem goes some way toward answering difficult questions like these. The facts of the case are a bit complicated because the relationship was a long one and involved a mix of property brought into the relationship, property acquired during the relationship and property sold during the relationship. When the parties' relationship began, the husband owned a commercial fishing boat, a number of commercial fishing licences and a house which later became the family home. During the relationship, he sold some of the licences and acquired others, and incorporated a company through which he ran his fishing business. The company and the new licences were put into his name and the wife's name. The husband also sold the house he brought into the relationship to buy a new house; the new house was also registered in his name and the wife's name. Using the income from their fishing business, the parties bought other properties during their relationship and accumulated savings in the form of RRSP and TFSA accounts.

The major issues for the purposes of this discussion concerned the husband's fishing boat — should he be credited with the full value of the boat on the date that the parties' relationship started or the value when it ended? — and the house that the husband sold to buy the new house — should the husband be credited with the full value of the house he brought into the relationship even though he essentially gifted half of that value to the wife when he bought the new house? The status of the licences that the husband brought into the relationship and later sold was not an issue as the wife agreed he should receive a sizeable credit for their value.

Value of the Boat

This is how Mr. Justice Butler described the issue and the husband's position:
"[27] This issue concerns the proper approach to the exclusion of property which has depreciated since one spouse brought it into the relationship. [The husband] argues when interpreted liberally, the provisions of Part 5 of the [Family Law Act] allow the court to give credit to a spouse for the full value of depreciating property in certain circumstances. Specifically, he says where personal property which depreciates has been used by the family for business purposes, the court should exercise its discretion to exclude the full original value when dividing family property. ..."
Justice Butler's tidily succinct analysis of the statutory provisions, however led him to a contrary conclusion to that urged upon him by the husband (important bits in bold, as usual):
"[40] ... Section 85 [of the Family Law Act] excludes from the definition of family property, any property acquired by a spouse before a relationship began. Accordingly, any such property is not family property and the other spouse has no right to an undivided half interest in that property as a tenant in common. If that property increases in value then the increase would be family property pursuant to s. 84(2)(g). However, if it does not, pursuant to s. 96, the court has no discretion to order a division of that property. ... 
"[42] In British Columbia, the legislation provides that the property acquired by a spouse before the relationship began is excluded, not the value of the property. As a result, when property depreciates, no part of the depreciated property is subject to division. The court has no discretion during the first stage of its analysis (i.e. when determining the property is subject to division) to include the original value of depreciated property in the division exercise. In the present case, this means the [boat] is not and never was family property, and the ... value of the vessel in [when the relationship began] cannot be brought into the equation to apply against other family property
"[43] It is only at the very end of the exercise that equitable considerations come into play pursuant to s. 95. After determining the full extent of the family property, the court must go through the notional exercise of dividing that property equally. The court must consider if equal division would be 'significantly unfair'. If it would, then it is possible to order an unequal division."
To this point, then, the court has concluded that if property is excluded it is off the table for division as family property. Moreover, what is excluded is the property itself, not the value of the property, and as a consequence the owner of excluded property cannot look to the shareable family property to make up any depreciation in the value of excluded property. This follows the reasoning of Mr. Justice Harvey in Asselin v Roy, a 2013 case that was the first to deal substantively with the division of property under the Family Law Act:
"[222] In my view, s. 85 doesn’t provide for a tracing of otherwise excluded funds beyond the asset which was acquired through the disposition of her inheritance. Just as the claimant is entitled to no consideration for monies expended by her from the inheritance on matters such as travel or other disposables, if there is no equity or insufficient equity in [a property purchased with the inheritance] to repay her original investment [in the property], she cannot look to other family property to make up the difference."
Mr. Justice Butler then moved on to consider whether the husband might be entitled recoup the depreciated value of the boat through an unequal division of the family property, giving us a welcome opinion on the meaning of "significantly unfair" (cites omitted):
"[44] The [Family Law Act] provisions granting the court a discretion to order other than an equal division are very different from the provisions in the previous legislative scheme. Pursuant to s. 65(1) of the Family Relations Act, courts had a discretion to divide family property in unequal shares if the court found that the division of property (pursuant to agreement or the provisions of the FRA) would be unfair having regard to the factors set out in that section. The first and obvious difference between the discretion given under the FRA and the discretion given in Part 5 of the FLA is that in order to exercise the discretion, it is no longer sufficient to find that a division of property is merely 'unfair'. There must be a finding that the division of property pursuant to the statutory scheme is 'significantly' unfair. The Concise Oxford English Dictionary defines 'significant' as 'extensive or important enough to merit attention'. Significantly is understood to mean more than a regular impact — something weighty, meaningful, or compelling. In other words, the legislature has raised the bar for a finding of unfairness to justify an unequal distribution. It is necessary to find that the unfairness is compelling or meaningful having regard to the factors set out in s. 95(2). 
"[45] Of the factors set out in s. 95(2), the ones which have some importance to the assessment of unfairness here are (a) and (c): the duration of the relationship and the contribution of [the wife] to the career or career potential of [the husband]. The other factors are not relevant because there is no agreement between the parties, no family debt of significance, and neither party caused a significant reduction or increase in the value of family property or debt. 
"[46] The [parties'] 22-year relationship is a significant factor. The parties worked very much in partnership both to raise their children and to improve their financial situation. This factor strongly favours an equal division of family property. The fact that [the wife] supported and facilitated [the husband's] fishing career to the exclusion of her own career is not as significant. While this factor might suggest that family property should be divided unequally in her favour, it can be taken into account by an order for spousal support. 
"[47] In order to determine if it would be significantly unfair to divide the family property equally, the court must notionally divide the family property, taking into account the exclusions, in accordance with the provisions of the FLA. When that is done in this case, the parties will divide equally, family property with a value slightly in excess of $1.8 million. This figure does not include the RRSPs (of approximately $45,000) and CPP credits which will also be divided equally. Under the scheme of the FLA, [the husband] will receive credit for the excluded properties that he brought into the relationship, including the [licences that were sold] and the [house]. Under the scheme of the FLA, [the husband] will receive credits of $217,500 by way of the excluded properties: $100,000 for the [licences]; $52,500 for the [boat]; and $65,000 for the [house]. ... The fact that he receives a credit or benefit of only $52,500 for the [present value of the boat], rather than of $100,000 [value at the beginning of the relationship] is of little significance to the overall property division. There is nothing unfair, let alone significantly unfair about such a division and there is no basis for concluding this division of family property would result in a meaningful or compelling unfairness."
What's worth noting in this analysis is firstly the definition of "significantly unfair" as more than mere unfairness, but as weighty, meaningful or compelling unfairness, and secondly the judge's clear statement that the test for an unequal division of property under the new act is different and more onerous than the test under the old act. 

Further, the judge also laid out a convenient three-stage test to be applied where claims for an unequal distribution of family property are made.
  1. Determine the family property to be divided, excluding any property qualifying as excluded property.
  2. Undertake a notional equal division of the family property.
  3. Assess for significant unfairness in light of the global result that an equal division of family property would have as well as any credits received in respect of excluded property.
Although the court could have stopped after reaching its first conclusion, that the owner of excluded property cannot look to the shareable family property to make up any depreciation in value, applying this test to the unequal division argument left the court to weigh the $47,500 loss in value the boat had suffered since the beginning of the relationship against the excluded property the husband was keeping plus his share of a total pot of family property amounting to some $1,800,000. Given the judge's definition of significant unfairness, his refusal to order an unequal division of family property is perhaps not unreasonable.

The House

Here is the court's summary of the question raised by the husband's decision to register the new house, bought with the proceeds of the sale of the house he brought into the relationship, in his name and the wife's name:
"[48] This issue considers whether the transfer of excluded property into joint property reduces the value of the exclusion for the spouse that brought the property into the relationship. ..."
Under the Family Relations Act, this would not have been an issue at all: the assets that were shared were the assets that were "ordinarily used for a family purpose" during the relationship, and the nature of their ownership was irrelevant. Under the new act, however,
  •  the husband would have been entitled to treat the value of the old house as exempt from division; yet, 
  • under the presumption of advancement, a common law presumption that only applies to married spouses, he was deemed to have given half the value of the new house to the wife as a result of putting her on title; and,
  • the wife is entitled to treat gifts to her as excluded property under s. 85. 
(Section 85 has since been amended to correct this last problem by excluding only gifts from third parties.) Considering these problems, the court held that:
"[48] ... I have concluded that the purchase of property in joint names using the proceeds of excluded property does not reduce the value of the exclusion. The property provisions of the FLA are intended to be a complete code so that there is no need to examine the intention of the parties at the time of a transfer of excluded property to joint tenancy. To come to the opposite conclusion would bring uncertainty and a level of inequality into a property division structure that was intended to treat married and unmarried spouses equally and to provide for a greater level of certainty. ...
"[52] When I consider these difficulties, I conclude that the tracing provisions in the FLA, at least when applied to the circumstances in this case, are to be applied without considering or applying the presumption of advancement between married spouses. In other words, none of the excluded property – the fair market value of the [old house when the relationship began] – was gifted to [the wife] when the [new house] was placed in joint names. [The husband] remains entitled to the full value of the exclusion of $65,000.
This is a very important conclusion as it confirms that the property division scheme of the Family Law Act prevails over the common law presumption of advancement, thereby avoiding the significant problems that would arise were this not the case:
"[51] ... First, the apparent simplicity and certainty of the property division scheme would be lost. Exclusion would depend not only on whether property was owned prior to the commencement of the relationship or brought in by way of inheritance in the course of the relationship, but on other circumstances. The new scheme is easier to apply if subsequent transactions only have to be examined to see if property is derived from the excluded property. If the court also has to look at subsequent transactions to determine if property was gifted, it would have to consider the parties’ intentions in transactions which may have taken place many years before trial. This would be a difficult exercise which would require considerably more court time. Further, the amount of the exclusion would be different for married and unmarried spouses, a result that does not appear to have been intended by the legislation. The amount of the exclusion might also be different for married spouses in similar situations, depending on the conclusions arrived at as to application of the presumption of advancement."
This pragmatic approach is entirely in keeping with government's statement objectives of simplifying, and making more intuitive, the rules for dividing property. 

To put these conclusions into a nutshell, the court found that:
  1. The property division provisions of the Family Law Act are a complete code which excludes the application of the presumption of advancement.
  2. Family property purchased with excluded property is subject to an exclusion equal to the value of the excluded property at the commencement of the relationship.
The Legislation of Other Provinces

Finally, much has been made of the applicability of the legislation of other provinces to the interpretation of the Family Law Act. I am partly responsible for this; it was a reasonable inference to make given the similarity of the provisions of the new legislation in British Columbia to the existing legislation in Alberta and Saskatchewan, and I have encouraged people to look elsewhere when interpreting the new act.

Following this approach, counsel for both parties made arguments at trial based on the law of other provinces. However, Mr. Justice Butler found that the Alberta legislation contains "significant differences" from the Family Law Act by exempting the value of property from division rather than the property itself and in the generous latitude it allows for the unequal division of property. The legislation of Saskatchewan likewise takes a different approach to exempted property, the discretion available to the court to order unequal distributions of property and the discretion given to determine the fairness of an exemption. As a result, the court did not consider either the extraprovincial legislation or the case law interpreting that legislation:
"[40] As I have already indicated, the language in the FLA requires a different approach from that taken in either Alberta or Saskatchewan. ..."
When asking the court to adopt interpretations of the Family Law Act based on the legislation of other provinces, counsel should take care to ensure the similarity of the legislation with exactitude. I have previously written about the distinction between the treatment of the federal Divorce Act on matters relating to the care of children under Alberta's Family Law Act and that of the British Columbia legislation.

1 comment:

  1. Great decision that will help us settle our family property and excluded property cases.

    ReplyDelete