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Home/Blog/Family Law/EXCLUDED PROPERTY IN BRITISH COLUMBIA by Cristen Gleeson and Jessie Ramsay

EXCLUDED PROPERTY IN BRITISH COLUMBIA by Cristen Gleeson and Jessie Ramsay

 

When the Family Law Act came into force it introduced an excluded property regime to British Columbia’s family law. Specifically, section 85 of the Family Law Act established two categories of property at separation of married or un-married spouses: excluded property and family property.. The difference between the two classes is that on the breakdown of a relationship the parties are presumptively entitled to division of the value of family property in equal shares, while excluded property is not divisible between the parties. Some of the recognized categories of excluded property include, but are not limited to, property owned by either spouse prior to the relationship and gifts or inheritances exclusively received by one spouse during the relationship. However, the distinction between family and excluded property becomes less clear when excluded property is transferred into the other party’s name, either jointly or solely, during the relationship. Subsequently, case law has interpreted the meaning and effect of section 85 in the context of these situations. Unfortunately, the case law has served to confuse the matter.

As set out below, the approach to excluded property taken in the case law varies. One line of cases suggests that excluded property retains its excluded status despite being put into the name of the other spouse during the relationship because the Family Law Act operates as a “complete code” that fully governs property division at separation. An opposing line of cases suggests that the excluded property regime in the Family Law Act is merely instructive and does not eliminate common law and equitable principles such as the presumption of advancement that effect property division. Following this line of cases, when one party puts excluded property into the other party’s name, the transfer is deemed to be an absolute gift to the other party and the excluded property becomes family property that is divided equally.

At this time the law in BC remains very uncertain and even judges and lawyers are uncertain on the best approach to take. As will be seen below, the case law varies on the correct approach to determining the status of property. The current situation is uncertain enough that the BC government has issued a call for discussion papers with a deadline of September 2016 in order to try to the address the issue and it is possible legislative change will soon follow.

 

LAW: DISTRIBUTION OF PROPERTY

Legislation

The Family Law Act introduced the concept of excluded property to British Columbia law. Under section 85 of the Family Law Act, certain categories of property are considered “excluded” from family property and, as such, are not subject to the presumption of equal division that applies to all family property. Specifically, section 85 of the Family Law Act states:

85(1) The following is excluded from family property:

  • property acquired by a spouse before the relationship between the spouses began;
  • inheritances to a spouse;

(b.1)     gifts to a spouse from a third party;

  • a settlement or an award or damages to a spouse as compensation for injury or loss, unless the settlement or award represents compensation for
    1. loss to both spouses, or
    2. lost income of a spouse;
  • money paid or payable under an insurance policy, other than a policy respecting property, except any portion that represents compensation for
    1. loss to both spouses, or
    2. lost income of a spouse
  • property referred to in any of paragraphs (a) to (d) that is held in trust for the benefit of a spouse;
  • a spouse’s beneficial interest in property held in a discretionary trust
    1. to which the spouse did not contribute, and
    2. that is settled by a person other than the spouse;
  • property derived from property or the disposition of property referred to in any of paragraphs (a) to (f).

 

[Emphasis added.]

Under section 85 of the Family Law Act, any property acquired prior to cohabitation and brought into the relationship is excluded from the division of family property and remains the property of the acquiring party. Importantly, section 85(1)(g) states that any property derived from excluded property is also excluded property. This means excluded property can be sold or changed into different property without losing the protected status of excluded property. For example, a party can receive excluded property such as an inheritance, use that inheritance to purchase different type of property such as land, and that land purchased will be excluded property. The burden of proving that property is excluded property rests on the party making that assertion.

However, only the value of excluded property at the time of cohabitation is excluded from equal division. By virtue of section 84 of the Family Law Act, any increase in the value of the excluded property during the relationship is considered family property and will be divided accordingly. Section 84 of the Family Law Act states:

84(2) Without limiting subsection (1), family property includes the following:

  • a share or interest in a corporation;
  • an interest in a partnership, an association, an organization, a business or a venture;
  • property owing to a spouse
    1. as a refund, including an income tax refund, or
    2. in return for the provision of a good or service;
  • money of a spouse in an account with a financial institution;
  • a spouse’s entitlement under an annuity, a pension, a retirement savings plan or an income plan;
  • property, other than property to which subsection (3) applies, that a spouse disposes of after the relationship between the spouses began, but over which the spouse retains authority, to be exercised alone or with another person, to require its return or to direct its use or further disposition in any way;
  • the amount by which the value of excluded property has increased since the later of the date
    1. the relationship between the spouses began, or
    2. the excluded property was acquired.

 

Case Law

At first glance, the categories of excluded property appear to be well defined, but they have recently been interpreted by the British Columbia courts in a contradictory manner. One of the most contentious issues before the courts is whether property that falls within the definitions of excluded property in section 85 remains excluded property when it is put into joint names with the other party.

Two distinct lines of case law have emerged since the introduction of section 85 of the Family Law Act. The first line of cases argues that the Family Law Act forms a “complete code” and holds that excluded property remains excluded from equal division upon dissolution of the relationship even though the excluded property was transferred it into the other party’s name during the relationship. In essence, this line of cases argues that the courts should look only at the rules in the Family Law Act when determining entitlement to property. The second line of cases holds that certain common law and equitable property concepts continue to apply under the Family Law Act.

Line 1: Family Law Act as a “Complete Code”

The case of Remmem v. Remmem, 2014 BCSC 1552 (“Remmem”)

In Remmem, one of the issues facing the Court when dividing family property between the parties was whether Mr. Remmem should receive compensation for a property he owned prior to the relationship despite selling that property and using the funds to purchase a subsequent property that was put into the names of the parties jointly. In concluding that the proceeds of sale of the excluded property are also excluded, the Court emphasized the purpose of the exclusion provisions in the Family Law Act. At paragraph, 48, the Court states:

[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. 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.

[Emphasis added.]

The Court in Remmem then went on to express that no provision is made in the Family Law Act for the application of the common law presumption of advancement. The presumption of advancement is a common law principle stating that a gratuitous transfer of property into joint tenancy results in a presumption that the transfer was a gift to that party.

In this regard, at paragraphs 50 through 52, the Court states:

[50] The FLA contains no provisions dealing with the presumption of advancement between spouses which would suggest that the presumption still applies. However, as noted by Mr. Booth, the presumption would raise a number of problems when applied under the scheme of the FLA including:

  1. a)   The presumption only applies to married spouses and so gratuitous transfers between married and unmarried spouses would be treated differently.
  2. b) The presumption is at odds with and would thus limit the utility of the tracing provisions. Property (such as the Middle Point property) placed in joint names is clearly derived from excluded property and so it is easy to trace the full amount of the exclusion. Unlike the presumption of advancement, tracing does not depend on the parties’ intentions. The application of the presumption of advancement and an examination of whether property was gifted is at odds with the simple concept of tracing.
  3. c) When applied, the presumption of advancement would significantly reduce the value of the exclusion to the donor spouse.
  4. d) Further, if half of the excluded property is a gift to the donee spouse, shouldn’t he or she be able to claim that his or her half of the property is excluded?

[51] These issues would have two significant consequences. 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.

[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 Greaves Road property in October 1990 – was gifted to Ms. Remmem when the Middle Point property was placed in joint names. Mr. Remmem remains entitled to the full value of the exclusion of $65,000.00. ]

[Emphasis added.]

As such, the conclusion reached in Remmem supports the conclusion that even where excluded property is put into joint names of the parties or where the proceeds of that property is used to purchase a different property that is put into joint names of the parties, the original excluded property remains excluded and the common law presumption of advancement does not apply.

The case of P.G. v. D.G., 2015 BCSC 1454 (“P.G.”)

In P.G., the Court was again faced with the issue of property held by one spouse prior to the relationship. In P.G., Mr. G owned a property located at 5806 Main Street in Vancouver, British Columbia (the “Main Street Property”) at the time the relationship commenced. One issue before the Court was whether the equity in the Main Street Property at the time the relationship commenced was excluded in accordance with section 85 of the Family Law Act despite the facts that Mr. G added Ms. G to the title of the Main Street Property as a joint tenant.

The Court concluded that the approach taken in Remmem was the correct approach to dealing with excluded property put into joint names and that the equity in the Main Street Property at the date of cohabitation remained excluded property at the date of separation. At paragraph 75, the Court stated:

[75] Section 85(1)(g) does not restrict tracing to an asset held solely by the spouse who owned the original excluded asset. Recognizing the presumption of advancement when applying Part 5 of the FLA would generally “extinguish” the right of a spouse who has brought property into the relationship to retain it on separation whenever the pre-owned property is mingled with property held by the other spouse. The implications of this are far-reaching. Arguably an inheritance deposited into a joint bank account, a gift from a parent to one spouse used to pay down the mortgage on a home held as joint tenants, or an award of damages for pain and suffering used by a spouse as a down payment on a house placed in both names or place din the other spouse’s RRSP would be subject to the presumption of advancement. It would follow that the spouse who was the original owner of these assets, which are expressly defined as excluded property under s. 85(1) of the FLA, would not be able to claim them as excluded property at the end of the relationship, unless he or she could marshal evidence to rebut the presumption of advancement at the time the transfer occurred.

[Emphasis added.]

Further, at paragraphs 85 through 87, the Court set out that the approach taken in Remmem was the approach most consistent with the objectives of the Family Law Act:

[85] The interpretation of s. 85 adopted in Remmem is also, in my view, more consistent with the objectives of the FLA and the reality of most marriages. In a majority of cases, assets owned by one spouse before the couple comes together will be mingled with property held in both names. The cost of owning a home in many parts of British Columbia practically compels spouses to pool their assets. Registering the home so acquired in both names as tenant in common reflects the unity of the couple in marriage; placing a home in joint tenancy is a practical tool for estate planning; and placing the home in the name of one spouse is an accepted way to protect a core family asset from business creditors.

[86] The adoption of an excluded property regime “to better fit with people’s expectations about what is fair…[so] that they keep pre-relationship property and gifts and inheritances given to them as individuals[,] but share property and debt that accrued during their relationship” (White Paper on Family Relations Act Reform, at 81) is effectively negated if the excluded property cannot be traced into assets placed in whole or in part in the name of the other spouse.

[87] It is unlikely that when the legislature drafted the new excluded property regime under the FLA it was unaware of the practical reality that many spouses will combine assets during their marriage.

The case of Pearson v. Pearson, 2016 BCSC 671 (“Pearson”)

In Pearson, Mr. Pearson purchased a property on Centre Street in Mission, BC (the “Centre Street Property”) prior to commencing a marriage-like relationship. During the relationship, the Centre Street Property was sold with net sale proceeds of $378,878.25. Those funds were used to purchase a property known as the Inn which was registered in the parties’ joint names. Mr. Pearson also received $48,842.06 from the sale of the Centre Street Property in addition to the funds required to purchase the Inn. Most of these funds were used to pay for improvements to the Inn and cover the parties’ living costs.

In concluding that the approach taken in Remmem and P.G. was the appropriate approach to dealing with excluded property, at paragraphs 63 through 65 the Court stated:

[63] The decisions in Remmem and Wells, are, in my opinion, irreconcilable. However, I tend to agree with the findings of Mr. Justice Butler in Remmem and the referenced article by Scott L. Booth to the effect that applying the presumption of advancement would limit the effect of the tracing provisions included in the FLA. I also note commentary in an explanation from the Ministry of Justice entitled “Family Law Transition Guide” issued by the Continuing Legal Education Society of British Columbia, 2014 update, in which it is stated at p. 3-126:

Section 85(1)(g) is a tracing provision that is similar in construction to s. 84(1)(b). The intent appears to be that excluded property will remain excluded property despite its use or conversion from one form to another.

With regard to this quote, the position that the presumption is of no application in the context of an action under the FLA accords better with the overall scheme and objectives of the act: see also P.G. v. D.G., 2015 BCSC 1454 per Fenlon J. (as she then was) at paras. 41-89.

[64] I thus conclude that the proceeds of sale from the Centre St. property was “property derived from property or the disposition of property referred to in any of paragraphs (a) to (d)” which includes, as per s. 85(1)(a), property acquired by a spouse before the relationship between the parties began.

[65] Were the doctrine of advancement to apply, I also find the explanation of Mr. Pearson as to the agreement reached between him and Ms. Graham at the time the property was purchased to be a credible and realistic explanation for having registered title to the Inn in their joint names. As of 2008, the parties had been living together in a marriage-like relationship for three years, during which time Ms. Graham had not been gainfully employed and had few assets save for a small inheritance from her mother’s estate. On moving to Terrace, she continued a relatively minor share of the effort that went into operating and maintaining the Inn. It would have been an extremely unwise decision of Mr. Pearson to gift one-half of his only major asset to his then partner. That it was also unwise for Mr. Pearson to make this arrangement without documentation to that effect makes it no less believable. Mr. Pearson’s intention was thus to retain the value of the excluded property invested in the Inn. The presumption of Mr. Pearson having made a gift to Ms. Graham would then be rebutted by the evidence of the oral agreement.

[Emphasis added.]

The importance of the foregoing extracts was the Court’s findings regarding Mr. Pearson’s intention at the time he transferred the excluded property into Ms. Graham’s name jointly. The Court found that Mr. Pearson at no time intended to gift the excluded property to Ms. Graham and accepted that there was an oral agreement between the parties in this regard. Accordingly, the Court was satisfied that the proceeds of the Centre Street Property, including the money put towards the Inn, remained excluded property.

Line 2: Continued application of common law and equitable concepts

The case of Wells v. Campbell, 2015 BCSC 3 (“Wells”)

The Court in Wells came to the opposite conclusion that was reached in Remmem, P.G., and Pearson. Mr. Wells owned a property on Hornby Island prior to cohabitation (the “Hornby Property”). During the relationship, in or about 2008, Mr. Wells transferred the Hornby Property into joint tenancy with Ms. Campbell. The Hornby Property was worth $185,000.00 at the date of cohabitation. The issue at trial was whether Ms. Campbell was only entitled to an equal share of the increase in value of the Hornby Property since cohabitation, or whether she was entitled to an equal share of the entirety of the Hornby Property.

In concluding that the transfer of the Hornby Property into joint tenancy had eliminated its excluded property status, the Court stated that the Family Law Act had not eliminated the presumption of advancement and that the presumption continued to operate. At paragraphs 32 through 33, the Court stated:

[32] I find that Mr. Wells at the time he transferred the Hornby Property into joint tenancy he did so as a gift to Ms. Campbell. At that time, the relationship was intact and there was no evidence to suggest that it was failing. The transfer of the interest in the Hornby Property was a perfected inter vivos gift and the gift cannot be revoked: see for example the comment of Madam Justice Newbury in Bergen v. Bergen, 2013 BCCA 492 at para. 41. Ms. Campbell as a result obtained legal and equitable interest in the property. I do not read the Act as altering the law of inter vivos gifts. Accordingly, I cannot see how Ms. Campbell can be denied the entirety of her interest in the property, subject to the division of family property under s. 95(1).

[33] In my view the presumption of advancement operates in this case. If the presumption of resulting trust were operative, again, I find that the evidence is sufficient to rebut this presumption.

[Emphasis added.]

Further, at paragraphs 41 through 44, the Court stated:

[41] Also, I note that the definition of excluded property includes gifts to a spouse from third party but does not include gifts between spouses.

[42] Further, intention has not been eliminated from the considerations, given that the definition of “property” in the Act includes a beneficial interest “unless a contrary intention appears.”

[43] It seems that the excluded property relates to property which was held by a spouse prior to the relationship and in which an interest in title was not transferred to the other during the relationship.

[44] Given my finding that the transfer of the interest to Ms. Campbell was perfected, I cannot see how a portion of her interest, i.e., her share in the Start of the Relationship Value, can be considered excluded property. She [is] the holder of a legal and equitable interest in the property. Had the policy makers intended to alter the well-established concept of a joint tenancy and/or the presumption of advancement, they have done so explicitly as has been done in other jurisdictions. I do not accept that s. 85(1)(a) negates an intended disposition of an interest in land from one spouse to another. I note again that intention is a consideration under s. 83(1) of the Act; and that a gift between spouses is not included as an excluded property under s. 85(1). Further, the tracing provisions can still operate under different scenarios.

[Emphasis added.]

Ultimately, the decision reached by the court in Wells strayed from the decisions reached in Remmem, P.G. and Pearson in that the Court did not agree with the assertion that the Family Law Act was a “complete code” for the division of assets on separation. Instead, the Court in Wells held that equitable and common law principles continue to apply under the Act and that if the legislature had intended to eliminate such principles, they would have indicated this intention explicitly within the Family Law Act.

The case of V.J.F. v. S.K.W., 2016 BCCA 186 (“V.J.F.”)

The most recent case law addressing excluded assets that are subsequently put into the name of the other party is V.J.F. This was a decision of the Court of Appeal, the highest Court in BC. In V.J.F. the British Columbia Court of Appeal upheld the decision reached at trial where a $2 million gift from a third party to the husband (the “Gift”), which was subsequently put in the sole name of the wife for creditor protection, was found to not be excluded property under section 85 of the Family Law Act. Instead, the Gift was found to be family property as defined by section 81 of the Family Law Act that was subject to the presumption of equal division.

Despite the approach taken in Remmem, P.G. and Pearson, the Court in V.J.F., like in Wells, decided that the excluded property regime in the Family Law Act is not a “complete code” governing property division upon separation. Instead, the Court held that the Act built upon existing common law and equitable principles, such as the presumption of advancement, and that these principles continued to apply. Accordingly, after the Gift was put into the name of the wife it constituted a gift between parties and thus became family property as defined under section 81 of the Family Law Act.

In reaching this conclusion, at paragraphs 74 through 78 the Court stated:

[74] With all due respect to the contrary view, I conclude that the new FLA scheme does not constitute a “complete code” that “descends between the spouses” and eliminates common law and equitable principles relating to property. Rather, the scheme builds on those principles, preserving concepts such as gifts and trusts, and evidentiary presumptions such as the presumption of advancement between spouses. Thus I find that the gift of (slightly less than) $2 million made by Mr. F. to Ms. W. became her property and was “property owned by at least one spouse” under s. 84, as opposed to “property derived from the disposition of [excluded] property” within the meaning of s. 85. At the time the definitions are applied – the date of separation – the fact Mr. F. had originally received the $2 million as a gift was no longer relevant. He lost the exclusion when he voluntarily and unreservedly directed that the West 33rd property be transferred to Ms. W. and ‘derived’ no property from that disposition.

[75] I do not interpret the FLA as reversing the gift or requiring that it be ignored because of the spouses’ separation. Nor do I agree that the FLA effectively ‘prohibits’ gifts between spouses, as Mr. F. suggested. (See para. 56) Gifts between spouses can continue as they have through the ages. It would take much clearer wording to render them suddenly revocable or null or illegal. (See the comments of Chief Justice Farris in a slightly different context in Duncan v. Duncan (No. 2) [1950] B.C.J. No. 50 at para. 13 (S.C.), aff’d [1950] B.C.J. No. 41. (C.A.).)

[76] Contrary to the suggestion made in P.G., moreover, the $2 million gift received by Ms. W. does “fall back into the communal pot” on separation and is divisible as family property in the normal way. The spouses are presumptively entitled to equal shares as tenants in common. The fact s. 95 does not list the same set of factors previously listed in s. 65 of the FRA is, with respect, a choice made by the Legislature. (see Ward v. Ward, 2012 ONCA 462 at para. 25.) The FLA is not to be interpreted by means of a comparison of the fairness of its provisions with those of the FRA.

[77] In the absence of a clear statement abolishing the presumption of advancement, I also conclude that it continues to apply under the FLA (although I would not necessarily refer to it as a “right” within the meaning of s. 104). Had the Legislature intended to abolish the presumption, it would have been an easy thing to so state, as other provinces have done. It would also be an easy matter to provide, or perhaps clarify, that the presumption applies to common law as well as formal marriages and even that it should apply to gifts from a wife to her husband, not just the reverse. (See Donavan Waters, Mark Gillen and Lionel D. Smith, Waters’ Law of Trusts in Canada (4th ed., 2012) at 413; J.B. v. S.C., supra, at paras. 85-7; Lawrence v. Mulder, supra, at paras. 66-75; Kerr v. Baranow, 2011 SCC 10 at para. 20.)

[78] I acknowledge that judges may in some cases have to determine whether transfers of excluded property that may have taken place years before, were gifts or not. This seems likely to occur most often in cases where inherited property is transferred by the heir to his or her spouse or into joint names. (Of course, the presumption of advancement was invented as a way of resolving such questions where the evidence is unclear or equivocal.) That said, there are means by which the inheriting or recipient spouse can protect against ‘losing’ the exclusion. Subject to other relevant provisions of the FLA, for example the transferor can require the transferee to acknowledge that no gift of the excluded property (or its value) is intended.

[Emphasis added.]

The significance of the V.J.F. decision is the Court’s discussion regarding gifts between parties. However, it should be noted that the facts in V.J.F. are unique since the husband transferred the Gift solely into the wife’s name. While V.J.F. clearly establishes that excluded property placed solely in the name of the other spouse becomes a family asset upon the breakdown of the relationship, uncertainty remains regarding the legal consequences of placing an excluded asset is placed into the parties’ joint names.

As a result of the findings in V.J.F. and the significance the Court placed gifts between spouses, two interpretations of the decision can arise. The first interpretation is, as in Wells, that placing excluded property into the other party’s name, either solely or jointly, results in a presumption of advancement and the excluded property becomes family property and is presumptively divisible equally between the parties.

The second potential interpretation, which is not set out in case law and is thus speculative, is that where excluded property is put into the other party’s name jointly, the excluded property would be presumptively divisible on a 75/25 basis. The rationale behind this interpretation is the fact that placing an excluded property into joint names essentially gifts half of the excluded property to the other party. Thus, upon the relationship breaking down, that gift to the other party would fall into the pot of family property to be divided on a presumptively equal basis, while the other half of the gift would remain excluded.

Summary of Law pertaining to Excluded Assets

In light of the decisions reached in the foregoing case law, there is uncertainty in regards to which line of cases a court will prefer when determining whether assets are excluded property or family property at separation. One line of cases suggests that the Family Law Act is a complete code governing property division upon separation, the other line suggests that the Family Law Act, while instructive, does not eliminate common law and equitable principles pertaining to gifts made between parties.

It is difficult to reconcile the approaches taken in the case law decided thus far. However, the intention of a party who has transferred excluded property into the name of the other party and whether these assets were transferred into that party’s name solely or jointly remain essential considerations of the courts when determining the status of assets on the breakdown of the relationship.

 

CONCLUSION 

In summary, the distribution of family assets is subject to a variety of factors and considerations that are by no means concrete or entirely predictable. There are two diverging lines of authority regarding the classification of excluded property once it is put into the name of the other party, either jointly or solely. The most recent decision of the British Columbia Court of Appeal regarding excluded assets, V.J.F., affirms that the presumption of advancement continues to apply under the Family Law Act and suggests that when parties put excluded funds towards property held in the other spouse’s name those funds lose their classification as excluded and can become family property subject to a presumption of equal division unless a contrary intention of the parties is evident.