Canada: Defining "Excluded Property" – Recent Developments Regarding The Effect Of Transferring Property To A Spouse

Herein lies a cautionary tale as to the continuing effect of the presumption of advancement upon "Excluded Property" under the Family Law Act. Individuals who come into a marital relationship with substantial funds, or who receive inheritances during their relationship, have no guarantee that these assets will retain their character as Excluded Property following a breakdown of marriage.

Section 85(1) of the Family Law Act ("FLA") defines "Excluded Property", which is exempt from division between spouses after the marriage breaks down: property acquired prior to the beginning of the relationship; inheritances; settlements or awards of damages; insurance policy proceeds; trust property; and property derived from Excluded Property. However, Section 84(2)(g) provides that any increase in value of Excluded Property during the relationship is  family property.

Three recent cases have given rise to a debate, both among family lawyers and, apparently, among the judges of B.C.'s Supreme Court, as to the interpretation of FLA s. 85. The first, Remmem v. Remmem, 2014 BCSC 1552, considered whether a husband's inheritance remained Excluded Property after he used it to purchase property in the names of himself and his spouse. Justice Butler held that the FLA was a "complete code" that had extinguished the presumption of advancement. Justice Butler concluded that the purchase of property in both names did not alter the nature of the Excluded Property. In other words, once a spouse brings Excluded Property into the relationship, its character cannot be changed regardless of the intention of the parties, either by transferring it into joint names, or into the name of the other spouse entirely.

Remmem was questioned in Wells v. Campbell, 2015 BCSC 3. Justice Matsuhara held that the FLA did not expressly extinguish the presumption of advancement, or the possibility of inter vivos gifts between spouses. Specifically, the definition of "Excluded Property" includes gifts to a spouse from third parties, but does not include gifts between spouses. Matsuhara J. concluded that, although the presumption of advancement had been reduced in its significance, it had not been extinguished, and that the intention of the gifting spouse remains a relevant factor in determining the character of assets transferred between spouses during marriage.

The questions raised by Remmem and Wells were revisited in V.J.F. v. S.K.W., aka S.K.F., 2015 BCSC 593. The husband in V.J.F. transferred funds he had received as a gift from his employer to purchase a home registered solely in the name of his wife. This was done for creditor protection against the husband's potential future creditors. At trial, the husband relied on Remmem for the proposition that the proceeds of sale of the property derived directly from his Excluded Property.  In the alternative, he argued that if the presumption of advancement continued to exist, (per Wells and contrary to Remmem), he had rebutted the presumption because his intent in registering tile to the property in his wife's name was solely for creditor protection. The wife argued that to deem the proceeds of sale to be other than joint property made the title a sham; that her husband had not rebutted the presumption of advancement; and that the sale proceeds should be shared equally as family property. Alternatively, she argued for an unequal division of the Excluded Property, as to do otherwise would be "significantly unfair."

Justice Walker had no difficulty finding that the original assets transferred to the wife were "Excluded Property". However, by mingling the Excluded Property with family funds in order to immunize it from potential creditors, the exclusion was lost because the husband had gifted it to his wife. To say the wife held the funds in trust would be inconsistent with the purpose of the transfer. Notably, Walker J. found it compelling that the husband had not set aside the funds to apply to future creditors' claims, but instead had gifted the funds to his wife to purchase property for the benefit of his family.

The Excluded Property debate is far from over. V.J.F. has been appealed. For the time being, spouses who have property that qualifies as Excluded Property should proceed cautiously when deciding whether to transfer any portion to their partner.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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