When the now not-so-new Family Law Act was brought into force in 2013, the property division provisions were generally applauded for bringing a common-sense fairness to dealing with pre-existing assets that a spouse brought into a relationship – especially for parties who were entering second marriages, had built up a certain net worth, and were not planning on having children with their new spouses.
Under the previous Family Relations Act, if pre-existing property (by “property” I mean any asset, not just real estate) was never “used for a family purpose” (which was interpreted quite broadly), it was deemed not to be a “family asset” and not subject to division. If it had been “used for a family purpose”, it was presumptively subject to the equal division under s.56. That said, a party could avoid having to equally divide such an asset by demonstrating that this would be “unfair” under s.65. Such arguments were routinely and successfully made and depending on the circumstances, pre-existing assets such as recreational or revenue properties in respect of which the new spouse had no role, to which no contribution had been made, were often re-apportioned 100% to the spouse who owned them. In most people’s minds, these were appropriate outcomes, but unless the non-owning spouse agreed, it would require the cost and uncertainty of actually convincing a Supreme Court judge to make the ruling.
Back to the currently applicable Family Law Act: instead of the “used for a family purpose” test, pre-existing assets that a party brings into a relationship are excluded as family property under section 85(1) [“property acquired by a spouse before the relationship between the parties began”].
So far so good. But here’s the problem: under s.84(2)(g), while this “excluded property” is not subject to division, any increase in the value of this property from the date the relationship began, until the time when the matter is resolved, is “family property” and subject to an equal division. In the event the case does not settle and is resolved in court, the period for which any increase is determined is the difference in value from the date the relationship commenced (assuming it was acquired previously), as compared to the value as of the asset at court hearing (not the separation date) that decides the issue.
For some assets, this may be a fair means to divide things. But what about assets that are subject to rapid increases in value (i.e. real estate in the Lower Mainland, high tech stocks)? Consider someone who worked hard for many years and struggled and manage to acquire a second revenue property, planning to use it as the asset to fund retirement, who brings the asset into the second marriage. At that point, it is worth $800,000. The property is completely self-financing in the sense that it is either paid off, or the rental income covers the mortgage and other carrying costs. The second marriage ends after 4 years, and the case does not go to trial until another two years after separation. Over that 6-year period, the property increases in value by $400,000 (anyone from the Lower Mainland will acknowledge these sums as realistic, if not conservative).
Is it fair that the non-owning spouse – without lifting a finger; without making any contribution of any kind; and without even having to had miss out on relationship income by the owning spouse using his/her resources to maintain the property – gets to cash in on $200,000, tax free? What is the moral claim (at root, all law is founded some sense of values or morality) to this windfall?
In theory, the Family Law Act has an “out” by way of s.95(2) which allows the court to order something other than a 50-50 division of “family property” after consideration of certain circumstances. The list is about 10 items long, but the only ones that typically would apply to the scenario set out above are:
(a) the duration of the relationship between the spouses;
(i) any other factor … that may lead to significant unfairness.
Ss. (f) appears to clearly preclude the argument that mere market factors should be weighed in favour of non-equal division. Moreover, unlike the previous Family Relations Act, which contained its own list of factors, there is no reference to the “acquisition” of the asset being a factor for consideration (presumably because this is already addressed in excluding the pre-relationship value,).
The owning spouse is faced with the burden of convincing the court that equally dividing the increase in value is not just “unfair”, but “significantly unfair”. The court decisions on “significant unfairness” have generally made it clear that most judges are opting for the 50-50 presumption, although there have been a few cases where the increase in value was not equally divided, but all-in-all, an expensive, dicey proposition.
Allow us to conclude this piece with some good news: the Family Law Act allows for the parties to opt-out of this statutory presumption by way of a prenuptial or marriage agreement. They are relatively inexpensive, and if drafted properly and not contrary to the provisions of s.93, are generally enforceable and will hold up in the face of any attempt later on to challenge the agreement.
Protect your assets and future now by contacting the Separate Property Agreement Lawyers at Grandview Law Group LLP, Tel. (604) 560-1400.
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