02 May 2015

Dividing Property Under the FLA: Where We're At

The Family Law Act has been law in British Columbia for just over two years now, and we're starting to accumulate a good number of court decisions interpreting the parts of the act dealing with the division of property and debt. Since I've just spoken about these cases for the Trial Lawyers' Association of British Columbia and the Continuing Legal Education Society, I thought I'd provide a short summary of where we've gotten to.

The first case dealing with property under the new act was Asselin v Roy, a 2013 decision of Mr. Justice Harvey. This was a helpful case, as the judge had to address property that was brought into the parties' relationship, property bought during the relationship with inheritances, property bought during the relationship using the property brought into the relationship, and property bought during the relationship using property brought into the relationship plus new money earned during the relationship. This is important because:
  1. property brought into the relationship is supposed to be excluded from the property the spouses  share after separation;
  2. inheritances received during the relationship are supposed to be excluded from shared property; 
  3. spouses are presumed to share in property bought during the relationship; and,
  4. spouses are also supposed to share in the increase in value of excluded property during their relationship.
The judge decided that the equity in property brought into the relationship (the sale value minus the amount of any mortgages that had to be paid off from the sale proceeds) is what is excluded from sharing, and that all increases in value above the equity when the relationship started is to be shared. If that property is sold and the proceeds used to buy a new property, the person who bought the first property into the relationship is entitled to get the equity in the first property out of the new property. Inheritances are excluded from sharing between spouses, and a spouse who puts money from an inheritance into buying a property is entitled to get that money out of the property. However, the judge also decided that if a property excluded from sharing goes down in value during the relationship, the spouse who owns the property isn't entitled to get a credit for the decrease from shared property.

Perhaps most importantly, the judge also decided that the new act is intended to:
"[105] ... create more certainty for litigants in the division of their assets. The broad discretion formerly available under the [old legislation] has been replaced with a more formulaic approach to both the identification and division of family property ..."
Oh, would that the new act was indeed more certain.

The next important case was Remmem v Remmem, a 2014 decision of Mr. Justice Butler that I've written about elsewhere. Like in Asselin, the judge had to deal with property that was brought into the relationship and went down in value, property that brought into the relationship and sold and used to buy new properties, and property bought during the relationship with money earned during the relationship, as well as one spouse's excluded property that is put into the names of both spouses.

Justice Butler reached the same conclusion about property going down in value as Justice Harvey: if property excluded from sharing goes down in value, the spouse who owns the excluded property has to eat the loss and cannot make up the lost value from shared property. Good. This approach is consistent with what the Family Law Act appears to want the court to do, and it's good to have two decisions making the same decision on the issue.

On the excluded property that was transferred into both spouses' names, the judge decided that the transfer didn't affect the amount of the exclusion that the spouse who formerly owned the property would be entitled to. This was a really important point because of a principle of the old common law called the "presumption of advancement" that normally would have characterized the transfer as a gift between spouses essentially erasing the exclusion that the former owner would have been entitled to.

The common law, the rules made by judges when there is no legislation that requires a specific result, is full of odd quirks that aren't part of legislated laws and are sometimes counterintuitive, like the presumption of advancement, the presumption of gift and the presumption of resulting trust. The main problem with these presumptions is that they're not only not part of the legislated law, the legislated law doesn't even refer to them! As a result, both the rules of the common law and the rules of the legislation might apply to a problem, but someone who doesn't know about the common law would have no idea just reading the legislation that there is a whole other collection of uncodified laws that also needs to be considered. This, I humbly suggest, is a real problem from an access to justice perspective.

In the case of the presumption of advancement, Justice Butler observed that the presumption only applies to married spouses, and applying the presumption would:
  1. create a differential treatment of married and unmarried spouses contrary to what the act intends, and the presumption is at odds with the overall scheme of the act;
  2. defeat the owning spouse of the excluded equity he or she would normally be entitled to; and,
  3. rob the act of the simplicity and certainty of it's plan for the division of property.
Accordingly, the judge decided that the plan for the division of property set out in the act was a "complete code" such that the presumption of advancement, and presumably the other presumptions of the common law, no longer applied to the division of property between spouses.

This conclusion is really appealing to me, and I think that Justice Butler's reasoning is fully in line with the overall design of the Family Law Act. It really would be helpful for everyone, lawyers and spouses alike, if the act were a complete code. Avoiding those old common law principles would lend a great deal of certainty to the division of property between spouses; fewer spouses would have unreasonable expectations as to what they are and aren't entitled to; lawyers would be able to more accurately predict the outcome for their clients and more cases would settle out of court as a result; and, people without lawyers wouldn't have to go spelunking until the bowels of the common law just in case theres some dusty old rule there that applies to them that the legislation doesn't even mention.

However, this was not the conclusion reached by the Chief Justice in Cabezas v Maxim. In this case, the spouses lived in a property that was purchased with help from one spouse's parents, who also contributed to the mortgage from time to time. According to the case law, when the parents of a married person give the person money to buy the family home, without an agreement in place, the court is required to presume that the money was a gift to the person receiving it which, through the presumption of advancement, also becomes a gift to the person's spouse. The Family Law Act, of course, says that gifts received by a spouse during the relationship are the property of the spouse and are excluded from sharing with the other spouse.

The Chief nonetheless applied the presumption of advancement, holding that:
"[68] ... This presumption of advancement is limited in scope, and does not apply to all gifts or inheritances received by a spouse from his or her parents. Generally, such gifts are excluded property under s. 85(1)(b) of the Act ... However, where a parent chooses to provide funds to a child for the purchase or maintenance of the family residence ... those funds are presumed to be a gift to both the child and his or her spouse. Absent evidence rebutting this presumption, the funds ... are family property under s. 84 of the Act."
The presumption of gift was applied by Mr Justice Masuhara in Wells v Campbell, in the context of a property brought into the relationship by one spouse and later transferred into the names of both spouses. The judge said that:
"[32] I find that [the claimant] at the time he transferred the [property] into joint tenancy he did so as a gift to [the respondent]. ... The transfer of an interest in the [property] was a perfected inter vivos gift and the gift cannot be revoked. I do not read the Act as altering the law of inter vivos gifts. Accordingly I cannot see how [the respondent] can be denied the entirety of her interest in the property ..."
Commenting on Remmem, Justice Masuhara said that:
"[38] ... I am not persuaded that [the problems identified by Justice Butler] lead to the conclusion that the Act displaces or extinguishes the presumption of advancement, or the effect of an inter vivos gift resulting in a joint tenancy. There is no explicit extinguishment in the Act [of these presumptions], as has been done in other jurisdictions ..."
Mr. Justice Walker reached the same decision as the Chief and Justice Masuhara more recently, in the 2015 case of V.J.F. v S.K.W. Justice Walker addressed the issues raised by Justice Butler, applied the reasoning of Justice Masuhara, and further observed that the Family Law Act seems to preserve the rules of the old common law:
"[63] ... in s. 104(2), the FLA provides that common law and equitable rights are retained. That section provides:
104(2) The rights under [the part of the act dealing with the division of property] are in addition to and not in substitution for rights under equity or any other law.
"[64] In looking through the reasons for judgment, I cannot find where s. 104(2) was raised before Justice Butler in Remmem. ... 
"[67] ... I am of the option that it cannot be said that the FLA does not contain any provision that permits for the presumption of advancement."
With much regret, I do believe that Justice Walker is correct, much though I wish this were not the case. With the greatest respect for the drafters of the Family Law Act, in my view it would be better for British Columbian families if s. 104(2) were repealed; leaving the act open to the vagaries and uncertainty of the common law does a disservice to all.

The other issue that's been working its way through the courts is what "significant unfairness" means. This is important as the act says that:
  1. shared family property should be divided equally between spouses unless an equal division would be "significantly unfair;" and,
  2. a spouse's excluded property should not be divided between spouses unless it would be "significantly unfair" not to do so.
There's only one other law in BC that uses this phrase, and I'm afraid it's the Strata Property Act, which uses the term in the context of the actions taken by a strata property council against a strata property owner, which I don't think is really analogous to the relationship between spouses under the Family Law Act.

In L.G. v R.G., a 2013 case of Mr. Justice Brown, the court referred to a thesaurus for the idea that "significant" means something that is "important, of consequence, of moment, weighty, material, impressive, serious, vital, critical." Looking at some of the Strata Property Act cases, the court noted that "significant" has been held to mean something that is "burdensome, harsh, wrongful, lacking in probity or fair dealing," and that:
"[70] ... the use of the word 'significant' before 'unfairness' indicates to the Court that it should not interfere with the actions of a strata council unless the actions result in something more than mere prejudice or trifling unfairness."
With respect, I don't think that the threshold intended by the Family Law Act is something as modest as unfairness that is "more than mere prejudice or trifling unfairness." It seems to me that the act means to raise a much higher burden to unequal divisions of family property, or the division of excluded property, than this.

In Remmem, Justice Butler took an approach closer to the dictionary definitions and held that "significant unfairness" means something that is "weighty, meaningful, or compelling," and that:
"[44] ... the legislature has raised the bar for a finding of unfairness to justify and 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) ..."
The court also helpfully provided a three-part test to decide when the equal division of shared family property might be significantly unfair:
  1. determine the family property to be divided, excluding any property qualifying as excluded property;
  2. equally divide the family property; and,
  3. determine whether the equal division is significantly unfair, taking into account the overall result of the equal division including the excluded property each spouse is keeping.
This approach was followed by Madam Justice Fitzpatrick, in the 2015 case of Walburger v Lindsay.

To summarize the general trend of the case law to date, then, when property is brought into a relationship, the equity in the property on the date the relationship begins is the excluded property of the spouse who owns it. However, when that property decreases in value during the relationship, the decreases value is the excluded property and the owning spouse can't look to the shared family property to make up the loss. The family property to be shared by the spouses is the property brought with new money during the relationship plus any increase in the value of excluded property occurring during the relationship. Family property also includes the value of new property bought with the proceeds of sale of excluded property, less the amount of the excluded property that was contributed to the purchase of the new property.

In general, gifts from third parties and inheritances that are received by a spouse during the relationship are excluded property, except when one of the common law presumptions applies to make the gift or inheritance the property of both spouses. Likewise, a spouse who transfers excluded property into the names of both spouses may also be considered to have lost his or her excluded interest in the property.

And this, more or less, is where we're at.

5 comments:

  1. My wife and I are separated and headed to a divorce. So in reading these judgements I'm still unclear as to whether the $30,000.00 down payment I made on the home that is paid off and has increased in value is excluded property.My parents also gave 2 gifts of money,one cheque made out to me and one made out to both of us,is the one to me excluded property.Thank you.

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    1. I'm afraid that I can't give legal advice through this blog, and the questions you're asking - the question about the gift to you in particular - are not yet wholly settled by the courts. You really must get proper legal advice from a family law lawyer in your neighbourhood. You are not talking about insignificant sums of money; the $400 you'll spend for legal advice will be well worth it.

      The case law on these issues is quite muddled. Make sure you're seeing a lawyer who mostly practices family law.

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  2. I have an interesting question re cases related to excluded property that I haven't seen answered. If someone makes their living off buying and selling stocks (or any other assets) : a) Is each transaction considered a disposition and purchase of a new excluded property? b) Or would simply the total value of the account be the "excluded property" and over time any increase in the account total be considered a family asset? The problem with option a) is over time the excluded property would drop to zero after a few 1000 transactions since gains would be moved to family assets and losses would not.

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    1. That is indeed an interesting question. Trading accounts like that weren't a problem under the Family Relations Act, since all you had to show was that it was "ordinarily used for a family purpose," like generating money that paid the mortgage, to qualify as a shareable family asset.

      Under the Family Law Act, the value going in would be excluded property and the increase in value would be shared family property. The excluded value could decrease from what was brought in if, for example, a couple of stocks crashed and the value of the account went from $80K to $40K... it'd be the $40K that would be excluded, and any increase above that low-water mark would be shared family property.

      I don't think that the transactions within the account would matter so much as the net value of the account over time. That might be fairer to the account holder than if you looked at the family property being the individual stocks held within the account.

      I'm afraid that we're going to need the courts to tell us how to manage situations like this. We had a huge body of law covering every conceivable circumstance under the Family Relations Act, from wine collections to brokers' books of business, since we had some 35 years of cases to figure these things out. We're still learning how the Family Law Act works; we really only have one or two years' worth of decisions on the books.

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    2. Thank you very much for your thoughts. I agree these type of situations are definitely going to need some real world cases to have clarity. I look forward to reading your blog in the next few years to see how this settles out.

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