25 July 2016

Excluded Property 2016: Where are we now?

It has been an interesting year for family law lawyers giving advice to clients about division of property and how to ensure they can keep the assets they are bringing into the relationship in the event of separation.  Since blended families are more and more common, parties are entering into relationships and asking the question together, "How can we plan our relationship so we each keep our property separate so we can leave it to our own children?"  This is a good question and one I am asked almost on a daily basis.  My answer to that question has consistently been that parties should enter into Cohabitation Agreements or Marriage Agreements (also called Pre-Nuptial Agreements)  in order to clarify their intentions early on in the relationship; when things are going well it's much easier to talk about these types of things.  A Marriage Agreement can be a simple document in which each person sets out what they own and owe, what they earn, and what their intentions are regarding division of property and payment of support to each other in the unlikely event that their relationship should end.  This just makes good sense, and it avoids a lot of ugly arguments and payment of legal fees if you end up separating in the future.

Some basic facts about property division in British Columbia.
  1. The Family Law Act ("FLA") came into effect March 18, 2013 providing a new regime for property division in BC, defining family property and excluded property, in the hopes that parties would  more easily be able to resolve disputes without having to use lawyers and go to court. Section 84 defines family property as all real and personal property owned by either spouse on the date of separation and Section 85 defines Excluded Property  to include property acquired by a spouse before the relationship began, inheritances, gifts to  a spouse and so on.  Any growth in value of Excluded Property is captured back in Section 84(2)(g) as Family Property and presumptively divided between the parties on separation.  Put simply, if you owned a house worth $500,000 when you got together with your spouse, and when you separated your house was worth $600,000, if you didn't have a marriage agreement stating otherwise, according to the FLA you get to keep your initial $500,000 but you share the growth of $100,000 with your spouse.  Any inheritances are yours to keep, but again, the growth in value between the date you received the inheritance and the date you separate, are divided with your spouse.  The intention of the FLA was to keep things simpler and allow parties to keep what was theirs going into the relationship and to divide what they grow together.    All sounds good so far.  Right?
  2. The Family Law Act also made it more difficult to divide Excluded Property by raising the bar to one of Significant Unfairness so that under the FLA, equal division occurs unless it would be significantly unfair to do so.  This section of the FLA has been interpreted by the courts as a "caution against departure from the default of equal division in an attempt to achieve perfect fairness."  In L.G. v. R.G. 2013 BCSC 983 the court said that "only when equal division brings consequences sufficiently weighty to render an equal division unjust or unreasonable should a judge depart from the default equal division."  An analysis of the cases that consider this issue leaves us to advise our clients that the issue of significant unfairness needs to be dealt with on a case by case basis, which for me, always brings me back to my initial advice to clients:  do a Cohabitation Agreement or Marriage Agreement if you want to avoid problems in the future.
  3. Under the new FLA, parties who are not married are able to rely on the property division regime once they have been living together in a marriage-like relationship for two years, and are therefore considered "spouses" for the purpose of the Act.  What does this mean for the average person?  If you are living together and you intend to keep living together, you need to think about having an agreement prepared so you and your 'spouse' can write down what you each own and owe, and what your intentions are if you separate.  If you are together for five years, you are considered spouses from the date you started living together, not starting at the two year mark, and it doesn't matter if you have been living together for over two years, you can still do an agreement now.  Talk to your spouse, gather all of your financial documents together and go and see a Family Law Lawyer  to talk about your options.  These are not comfortable conversations to have with your beloved, but they can save a lot of heartache if your relationship doesn't go the way you planned.
Family Law Lawyers have been watching the Court roll out some interesting and sometimes conflicting decisions about property division since the new FLA.  Some of the prominent cases are described here, but this is by no means an exhaustive list.  First, we had Asselin v. Roy 2013 BCSC 1681, a decision of Mr. Justice Harvey, that told us if you could trace your excluded property (with documents and other evidence), then you could keep it as your separate property.  Then we had Remmem v. Remmem 2014 BCSC 1552, a decision of Mr. Justice Butler, in which the husband was allowed to keep the value of his excluded property, even though it had been sold and the funds used towards the purchase of the parties new house.  From this case we were reassured that our clients could comfortably use their excluded property, or funds derived from their excluded property to purchase property jointly with their spouse, and they would not automatically lose their exclusion.   A line of cases followed Remmem, including P.G. v. D.G. 2015 BCSC 1454, which basically said, "once property is excluded it is always excluded".

Then came Wells v. Campbell 2015 BCSC 3, a decision of Mr. Justice Masuhara which contradicted the Remmem  and P.G. decisions and found that the husband had lost the ability to claim his exclusion by putting property into joint names with his wife.  In the fall of 2015, Mr. Justice Walker's decision, following the trial in V.J.F. v. S.K.W. aka S.K.F. 2015 BCSC 593, followed the line of reasoning in the Wells v. Campbell case and the husband lost his exclusion of $2,000,000 by purchasing a property with his inheritance and putting it into the sole name of his wife.

In April of 2016, The Court of Appeal handed down the decision in V.J.F. v. S.K.W. 2016 BCCA 186, and provided clarification regarding the state of the law when it comes to excluded property.  The Court found that the husband, in putting the $2,000,000 inheritance into a house and putting it into the sole name of his wife, had gifted that property to his wife and could not then later claim that property as his excluded property.  The husband's evidence at trial was that the purpose of his 'gift' was to protect the property from creditors, but the Court said he could not have it both ways, meaning he couldn't give it to her for one reason and then get it back for another.  The 'gift' of the $2,000,000 property to the wife was found to be Family Property, not Excluded Property as claimed by the husband, and it was subject to equal division between the parties.

So.........
What does this mean for you?  It means you should have an Agreement with your spouse about how you want to hold and manage your property during your relationship and in the unlikely event that you separate.  It means that if you had excluded property, and you sold it and used it to buy property jointly with your spouse, you risk losing your claim to that excluded property.  The safest way to keep excluded property excluded, is to keep it separate.  Plain and simple.  But, that isn't always possible, particularly when we live here in Vancouver and people want to have nice homes so they sell their previously owned home and in a state of bliss they go with their new spouse and buy a new bigger house for the family, putting all of their 'eggs' into one literal and legal basket.  The facts of the V.J.F case were a little unique in that the husband placed the entire $2,000,000 home into the wife's sole name and not into joint names, so we are still waiting for the Court of Appeal to give us a decision where the facts are more along the lines of the P.G. case where funds and property were co-mingled.

So, stay tuned, and talk to a lawyer if you have any doubt about whether your property is being held and managed in a way that is consistent with your intentions.

Karen Redmond
Redmond Law

3 comments:

  1. intresting article!
    when a couple get together it is all nice and tidy. both know what they are "bringing to the table" but after several years of together evrything is mixing togethere and it is much more complicated to know what is what. indeed aprenup can make it all easy.

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  2. Krista L (lawyer)11/8/16 1:55 PM

    Thanks for this update!

    ReplyDelete