UPDATE: the treatment of "excluded" property that is gifted to the other spouse

On April 28, 2016, the British Columbia Court of Appeal provided guidance as how to treat "excluded" property that is gifted between spouses.

To frame the question in practical terms: If spouse #1, who owns "excluded" property, gifts that property to the spouse #2, can spouse #1 still claim the exclusion? With the release of the decision by the Court of Appeal in the case of V.J.F. v. SK.W., 2016 BCCA 186, it appears that the answer is "no". The result is that by way of the gifting, the property that is subject to the gifting loses its excluded character and becomes "family property". The court may still then assess whether unequal division of family property would be appropriate in the circumstances.

Of note, this case refers to a "gift" of excluded property between spouses, and does not touch on other types of transfers between spouses.

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The link to the full case is as follows: https://www.canlii.org/en/bc/bcca/doc/2016/2016bcca186/2016bcca186.pdf

I include some pertinent excerpts from the case below: 

[8]           The definition of “family property” in s. 84 has been said to establish a “communal pot” (see P.G. v. D.G. at paras. 83-4) from which only excluded property is removed. The definition in s. 84(1)(a) is very broad, reaching all property owned or beneficially owned by “at least one spouse” on the date of separation. Section 84(1)(b) then extends the reach of the definition to property or a beneficial interest acquired after separation if it was “derived from” property described in s. 84(1)(a). Section 84(3) confirms the inclusion of various forms of property as well as:

(g) the amount by which the value of excluded property has increased since the later of the date

(i)   the relationship between the spouses began, or

(ii)  the excluded property was acquired.

[9]           Section 85(1) defines “excluded property” to include inter alia property acquired by a spouse before the spouses’ relationship began, property inherited by a spouse, and gifts received by a spouse from a third party (para. (b.1)). Ms. Hamilton on behalf of Ms. W. emphasized that para. (b.1) was added by amendment to the FLA in 2014. When asked to explain the effect of this section, the Attorney General told the Legislature:

Again, we’re not aware of case law, but family law lawyers were concerned with the way the provision was written. There was a possibility that gifts between spouses might be excluded, and the intention is only that a gift from a third party should be excluded. [British Columbia, Official Report of Debates of the Legislative Assembly, 40th Parl., 2nd sess., Vol. 9 No. 3 (March 27, 2014) at 2531; emphasis added.]

Importantly for our purposes, para. (g) of the definition of excluded property also reaches “property derived from” excluded property or from the disposition of excluded property.

[10]        The consequence of the categorization of property as either family property or excluded property is that on separation, each spouse is generally entitled under s. 81 to an undivided half interest in family property as a tenant in common. The court may divide it unequally only if equal division would be “significantly unfair” having regard to all the factors listed in ss. 95(2) and (3). Excluded property in contrast must not be divided unless it would be significantly unfair not to divide it having regard to only two factors – the duration of the parties’ relationship and any direct contribution by a spouse to the preservation or maintenance of the property (s. 96(b)). Obviously, the phrase “significantly unfair” is intended to set a higher bar for the exercise of judicial discretion than the ‘unfairness’ test in the FRA: see Family Law Explained, supra, at s. 95; L.G. v. R.G. 2013 BCSC 983 (CanLII) at para. 71; Jaszczewska v. Kostanski 2015 BCSC 727 (CanLII) at para. 166-9. As observed by Mr. Justice Savage (as he then was) in Slavenova v. Ranguelov 2015 BCSC 79 (CanLII):

The “significant unfairness” contemplated by s. 95 requires much more than differing financial contributions in a relationship. Exactly equal contribution is more likely exceptional than commonplace. The new regime under the FLA recognizes that partners will come to a relationship in differing circumstances and accounts for those in the concepts of “family property” and “excluded property”. The starting point in the division of property analysis already applies significant exclusions. [At para. 60.]

...

[30]        The main issue at trial was the characterization of the $2 million in trust. Other issues relating to spousal and child support were raised and determined, but since they are not challenged on appeal, I need not recount them in detail. It will be sufficient to note that the Court found it would be premature to determine the parties’ income for purposes of a final spousal support order and the apportionment of s. 7 expenses. A review no later than October 31, 2015 was ordered, pending which Mr. F. was to continue to pay child support of $7,800 per month and spousal support of $8,000, as previously ordered by a master. (Para. 117.) The judge also ordered that Mr. F. would be entitled to purchase Ms. W.’s half interest in the Richmond property for $775,000 before the end of June 2015, failing which he was to list it for sale. As far as I can discern from the order, each party received approximately half of the value of the remaining assets.

...

[40]        At para. 77, the trial judge ruled that the funds in trust were family property and were therefore to be divided equally, there being “no basis to rebut the presumption of equal division.” He did not refer specifically to the factors listed in s. 95.

[41]        The judge then considered in the alternative whether, even if the $2 million payment had remained excluded property, it would be “significantly unfair” not to divide it under s. 96. Although the phrase sets a high bar, he said, it is not so high as to make it “next to impossible” to find a significant unfairness. He referred to Cabezas v. Maxim 2014 BCSC 767 (CanLII), where the Court had found that significant unfairness would have resulted if the excluded property were not divided, in light of the respondent’s contributions to its maintenance, her decision to undertake liability on a mortgage, her greater contribution towards expenses, and the length of the couple’s cohabitation (6.5 years).

[42]        The trial judge found that in this instance, Ms. W. had contributed significantly to the improvement and management of the Vancouver property. Her efforts to proceed with the construction of the house on West 33rd, he said, had saved Mr. F. from a significant loss. As well, she had made significant contributions to the household throughout the nine-year marriage, which were said to have greatly assisted her husband in developing his relationship with M.I.

[43]        In all the circumstances, the trial judge concluded that even if the property had remained excluded property, it would have been significantly unfair not to order that the trust funds be divided equally. He found it unnecessary to consider Ms. W.’s other submissions in favour of unequal division. (Para. 89.) At para. 116, he summarized his findings:

The $2 million payment to Mr. F. was, at the time of receipt, an inheritance to Mr. F. and therefore excluded property under the FLA. Mr. F. then gifted the bulk of the funds to his wife in order to buy property and to pay some of the pre-construction costs of a new family home in Vancouver for the ongoing benefit of his wife and children. Those funds became family property under the FLA. The parties are entitled to an equal share of the funds presently held in trust. [At para. 116; emphasis added.]

...

Characterization of the $2 Million

[31]        At para. 42 of his reasons the trial judge turned to the question of the “character” of the $2 million in sale proceeds from the Vancouver property which are being held in trust. He noted that Ms. W. had taken inconsistent positions in her pleadings, prior affidavit evidence, discovery, and testimony at trial as to the nature of the funds. Late in the trial, however, she had settled on the position that the payment by M.I.’s estate had been a gift to Mr. F. which had “lost its status as excluded property” almost immediately after he received it. (Para. 47.) In her submission:

… nearly all of the $2 million payment was gifted to her to be used to provide a new family home and to pay for some of the pre-construction costs. She also says that Mr. F. also used nearly all of the rest of the $2 million payment to pay off the mortgage balance on the Richmond property and to pay off credit card debt and a loan on a vehicle registered in Mr. F.’s name (and regularly driven by Ms. W.), all of which Mr. F. agreed at trial is family property. [At para. 49; emphasis added.]

[32]        Mr. F. agreed that he had received the $2 million as a “gift from a third party”. He took the position, however, that he had not in turn “gifted the payment” to Ms. W. In his submission, she could not rely on the presumption of advancement because the presumption had been “effectively reduced… to ashes” by the FLA scheme. (Para. 56.) Although the funds had been co-mingled, he said, they could be readily “traced” through the West 33rd property to the proceeds of sale, to the funds now in trust.[1] He then relied on Remmem for the proposition that:

… Once excluded property is brought into the relationship by one spouse,… under the regime contemplated by the FLA it cannot be gifted to the other. Intention, he submits, is no longer a relevant consideration. [At para. 56; emphasis added.]

If this was correct, Mr. F. contended, it meant that “effectively one spouse can never gift excluded property to the other.” (At para. 56.)

...

[74]        With all due respect to the contrary view, I conclude that the new FLA scheme does not constitute a “complete code” that “descends as 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 (CanLII) 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 (CanLII) 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.

[79]        Finally, I take some comfort from the fact that my conclusions are generally in accord with the conclusions arrived at by other appellate courts under other “excluded property” legislation, and in particular from the fact that most jurisdictions regard inter-spousal gifts as constituting family property rather than exempt or excluded property.

Would equal division be significantly unfair?

[80]        In light of the foregoing, we must go on to determine whether the equal division of the funds would be “significantly unfair” having regard to the factors listed in ss. 95(2) and (3). As noted earlier, the trial judge found simply that there was “no basis” to rebut the presumption that equal division would be unfair. His analysis dealt with the alternative assumption that the $2 million remained excluded property, such that the onus was on Ms. W. to show it would be significantly unfair not to divide it. It is not necessary for us to comment on that analysis or to address Mr. F.’s final ground of appeal relating thereto.

[81]        Mr. Daykin on behalf of Mr. F. submitted that at most, paragraphs (a), (c) and (i), the ‘basket clause’, in s. 95(2) could be relevant in this case.

Duration of Relationship: The parties’ relationship lasted almost ten years. Mr. Daykin emphasized that Mr. F. had been begun working with M.I. at P. Co. in 1997, some years before he met Ms. W.

Contribution to Career or Career Potential: Although the trial judge found at para. 86 that Ms. W. made “significant contributions” to the household which “greatly assisted” Mr. F. in developing his relationship with M.I., Mr. Daykin suggested that paragraph (c) should be construed fairly narrowly. On this point, he referred to A.M.D. v. K.R.J. 2015 BCSC 1539 (CanLII), where Sharma J. agreed at para. 66 with the Court’s comments in Nearing v. Sauer 2015 BCSC 58 (CanLII) that:

Section 95(2) does not appear to allow for the wide ranging examination of each spouse’s contribution to the accumulation of family assets and their respective capacities that occurred pursuant to s. 65(1)(f). Instead the court may consider a spouse’s contribution to the career or career potential of the other spouse under s. 95(2)(c) or a spouse’s detrimental impact on to the value of family property or potential family property under s. 95(2)(g) which appears focused on the spouse’s direct actions vis-à-vis the value of family property. I interpret the words “spouse’s contribution” in s. 95(2)(c) as including the full spectrum of all levels of contribution from one spouse negatively impacting on the other spouse’s career to greatly enhancing the career or career potential of the other spouse. [At para. 141; emphasis added.]

Counsel emphasized that Mr. F. had completed his education and begun working at P. Co. before he met Ms. W. On the other hand, the trial judge’s finding that she greatly assisted him in developing his relationship with M.I. is a finding of fact that has not been shown to be clearly wrong.

Other Factors: The additional factors that might “lead to significant unfairness” in this case relate mainly to the circumstances under which M.I. gave the $2 million gift to Mr. F. The purpose of that gift was very specific – to protect Mr. F. from personal liability that might arise sometime in the future as a result of his acting as a director of companies in the P. Co. group. As I understand it, M.I. did not intend to make a gift for the more general purposes of enriching or increasing the wealth of Mr. F. or his family. If Ms. W. retains a substantial part of the funds, that portion will not be available to Mr. F. for his protection in the future. This, however, is an inevitable consequence of his decision to use the $2 million to purchase the West 33rd property rather than to retain it for his protection from possible future liability.

While I might have viewed these considerations as supporting an unequal division, we are bound under the FLA to apply the standard inherent in the phrase “significantly unfair”. (See especially Jaszczeswka, supra, at paras. 166-9.) I cannot say that equal division would meet this high threshold in this case.

[82]        It follows that I would uphold the trial judge’s order that the funds in trust (less the small amount in respect of which Mr. Rose told us no claim was being asserted) should be divided equally as family property.

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