The Case For Excluded Property Under The Family Law Act

Since the new Family Law Act came into force March 2013, the courts have been wrestling with the legislature's intent behind ‘excluded property’ claims. One of these issues is whether funds initially received by a spouse as “excluded property”, can be traced into jointly held property, or property owned by the other spouse.

Under section 81(b) of the Family Law Act, the starting point for property division between separated spouses is that each spouse has a right to an undivided one-half interest in all family property, as a tenant in common, and is equally responsible for family debt as at the parties’ separation date.

Section 85 of the Family Law Act defines Excluded Property as follows:

Excluded property

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

(a) property acquired by a spouse before the relationship between the spouses began;

(b) inheritances to a spouse;

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

(c) a settlement or an award of damages to a spouse as compensation for injury or loss, unless the settlement or award represents compensation for

(i) loss to both spouses, or

(ii) lost income of a spouse;

(d) money paid or payable under an insurance policy, other than a policy respecting property, except any portion that represents compensation for

(i) loss to both spouses, or

(ii) lost income of a spouse;

(e) property referred to in any of paragraphs (a) to (d) that is held in trust for the benefit of a spouse;

(f) a spouse's beneficial interest in property held in a discretionary trust

(i) to which the spouse did not contribute, and

(ii) that is settled by a person other than the spouse;

(g) property derived from property or the disposition of property referred to in any of paragraphs (a) to (f).

(2) A spouse claiming that property is excluded property is responsible for demonstrating that the property is excluded property.

The most common excluded property claims relate to inheritances, pre-relationship property, and gifts from a third party.

In a case called V.J.F. v. S.K.W 2016 BCCA 186, the Court of Appeal considered a situation whereby the husband had received a large financial gift ($1 Million) from a former employer. The husband then put those funds into real estate in the wife’s name. The purpose behind putting the family home in the wife’s name was for ‘creditor proofing’ so that the asset would be out of reach if the husband were later sued. The Court of Appeal held that the husband can not ‘have his cake and eat it too’. With the family home in the wife’s name, the husband’s $1Million gift had lost its character as being ‘excluded property’, and was equally divisible with his wife.

Then in November of 2016, Justice Harris came to a different conclusion in the case of Lahdekorpi v. Lahdekorpi 2016 BCSC 2101. In distinguishing V.J.F., Justice Harris held as follows:

94] The case before the court in V.J.F. did not involve an inheritance. More significantly, in that case the Court found that there was a gift of property to the wife where the husband intentionally transferred title to her. The property was registered solely in the wife’s name. In the instant case, the Shirley Road property was purchased, in part, with the respondent’s $30,000 inheritance and the property was registered jointly in both their names. In my view, the joint tenancy effectively preserved her contribution to the property, which was purchased for approximately $130,000. In these circumstances, I am not persuaded that the respondent could reasonably be said to have intended to gift her inheritance to the claimant. I note that, although the parties purchased subsequent properties using, in part, income derived from the Shirley Road property, the properties were either held jointly or in the sole name of the respondent. In my view, the $30,000 used in the purchase of the Shirley Road property can be traced back to the inheritance, such that it does not lose its character as an inheritance.”

Therefore, in Lahdekorpi v. Lahdekorpi, the wife’s $30,000 inheritance maintained its status as “excluded property” and was returned to the wife in the parties’ final property division after trial.

As is often the case in family law, whether an asset remains excluded from division from a spouse after being put into joint names, or the name of the other spouse, is a live issue, and very fact dependant. I suspect that we have not heard the last on this topic from the B.C. Supreme Court and Court of Appeal.