A huge BC Excluded Property and Gifts Decision has just been handed down that will send chills throughout the family law bar in BC. We have been warning our high net worth clients for some time to NEVER place inherited or gifted monies in joint names with their spouses nor in the sole names of their spouses. Financial advisors may foolishly tell their clients to do so for creditor protection or estate purposes but this advice can cause catastrophic losses in BC excluded property and gifts cases.
This new decision is the second decision saying once an excluded inheritance or gift is transferred by the receiving spouse into the other spouse’s name either jointly or solely, the exclusion from sharing this asset equally is lost. The presumption of advancement principles many lawyers thought was extinct seems to be alive and well in BC. Further, this new case also says that in long marriages there is even a risk that excluded property that remained in the name of the spouse who received it can be equally divided.
This case marks the high water mark for saying excluded property is not necessarily safe from equal division. This case will lead to routine claims to divide equally excluded property inherited or gifted to one spouse or brought into the marriage by one spouse alone. The impact cannot be overstated. We would love to be the lawyers that appeal this case all the way to the Supreme Court of Canada. Lorne MacLean, QC has handled some of Canada’s biggest family law cases and looks forward to setting the law on BC excluded property and gifts.
BC Excluded Property Just Might Not Be?
The score is now 2:1 in favour of sharing an excluded asset transferred wholly or in part to a spouse with Remmem being the only case that says an excluded inheritance , gift or asset brought solely into a relationship remains excluded despite changes in ownership of this asset. in VJF v SKW 2015 BCSC 593 Mr Justice Walker concluded:
[59] The law has historically found for the presumption of advancement to apply from husband to wife and from parents to children in cases of dependency. In Pecore v. Pecore, 2007 SCC 17, the Supreme Court of Canada said at para. 28:
Historically, the presumption of advancement has been applied in two situations. The first is where the transferor is a husband and the transferee is his wife: Hyman v. Hyman [1934] 4 D.L.R. 532 (S.C.C.), at p. 538. The second is where the transferor is a father and the transferee is his child, which is at issue in this appeal.
[60] The common law presumes that a spouse who purchases property and puts it in the other spouse’s name or voluntarily transfers property to the other spouse will be found to have made a gift. The presumption of advancement has been defended on the basis that it provides certainty, particularly where evidence concerning the transferor’s intent is unavailable or unpersuasive. The presumption is rebuttable: Pecore at paras. 23-24; Zhu v. Li, 2009 BCCA 128; Anderson v. Anderson, 2010 BCSC 911 at para. 152; Levy v. Levy Estate, [1981] N.S.J. No. 555 at para. 28.
[61] Ms. W. relies on this Court’s decision in Wells v. Campbell, 2015 BCSC 3, which was decided after Remmem.
[62] In that case, Mr. Justice Masuhara observed that although the presumption of advancement has been reduced in its significance in the new legislative regime, it has not been extinguished. He determined that the FLA did not exclude the possibility of inter vivos gifts being made from one spouse to the other during their marriage:
[38] While I do not disagree certain problems can be presented; I am not persuaded that they lead to the conclusion that the Act displaces or extinguishes the presumption of advancement, or the effect of an inter vivos gift resulting in a joint tenancy. There is no explicit extinguishment in the Act as has been done in other jurisdictions. See for example: Waters’ Law of Trust in Canada, 4th ed. [Waters’], at p. 414. In those other jurisdictions, the application of the presumption of resulting trust is required in questions of ownership of property between spouses. The legislation in those jurisdictions state where a property is held by the spouses as joint tenants, that fact is proof, in the absence of evidence to the contrary, that the spouses are intended to own the property as joint tenants.
[39] In jurisdictions where the presumption is said to remain such as in this province, the authors of Waters’ state the presumption has arguably been reduced to no significance because of the comprehensiveness of the discretionary powers in the family property legislation to divide between married persons’ property owned by either or both of them. Significance is obviously not the same as extinguishment; and it is notable that the Act has narrowed the court’s discretion from its predecessor, the Family Relations Act.
[40] The view that the presumption of advancement has been rendered insignificant in British Columbia as opposed to extinguished, was expressed in the case of Zhu v. Li, 2009 BCCA 128 at para. 51 et seq. by Madam Justice Neilson where she found that there was a basis for the presumption to operate in regard to certain of the properties in question in that case. While I note that the decision was made under the Family Relations Act, now repealed, I do not see anything in the present act which would lead to a different view regarding the presumption. See also M. Dhaliwal Holdings Inc. v. Pacific Blue Farms Ltd., 2014 BCSC 1482.
[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.”
[Emphasis added]
[63] Indeed, in s. 104(2), the FLA provides that common law and equitable rights are retained. That section provides:
Rights under this Part
104 (2) The rights under this Part are in addition to and not in substitution for rights under equity or any other law.
[64] In looking through the reasons for judgment, I cannot find where s. 104(2) was raised before Justice Butler in Remmem.
[65] Masuhara J. ultimately concluded that excluded property is property held by a spouse prior to the relationship over which an interest in title was not transferred to the other spouse during the relationship:
[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.
[66] In making those remarks, Masuhara J. was dealing with the effect of transferring title to what was otherwise excluded property during the relationship and did not consider whether an inheritance or gift received by one spouse during the relationship could be subsequently gifted to the other.
[67] I agree with the submission of Mr. F. that no contrary intention was raised in Wells, so that the remarks of Masuhara J. could be seen as obiter dicta. At the same time, it does not appear that Butler J. was drawn to s. 104(2). In view of that section I am of the opinion that it cannot be said that the FLA does not contain any provision that permits for the presumption of advancement.
[68] Masuhara J. also considered the effect of Remmem and confined the decision to its facts. In the circumstances, I find myself bound to follow Wells, particularly where, in effect, the principles from Re Hansard Spruce Mills, [1954] 4 D.L.R. 590 were argued in respect of Remmem but not Wells.
[69] I conclude that the FLA does not prohibit inter vivos gifts between spouses. In this case, when excluded property owned by one spouse was comingled with funds derived from family property to purchase an asset that is placed solely in the name of the other spouse in order to immunize it from potential creditors, the exclusion is lost because the disposing spouse gifted it to the other. It is not open for Mr. F., as the transferor, to say that Ms. F., the transferee, holds the property in trust for him because it is inconsistent with the purpose of the transfer: Bernard v. Weiss (1986), 70 B.C.L.R. 318 (S.C.). In other circumstances, involving different purposes, the result may be different. The rebuttable aspect of the presumption of advancement allows for individual circumstances to be considered.
[70] Mr. F. cannot say that he gifted the funds to his wife insofar as creditors are concerned, but as between them, she held the property in trust for him. That proposition was rejected in Bernard at para. 21:
[21] The transfer to Mrs. Weiss of her husband’s half interest in the Wolf Willow Road home in 1977 raises the presumption of law and she received the same by way of advancement and thereby became the sole owner, unless it is established that she was holding the same as trustee for her husband. There is no evidence in writing of a legal trust. The only evidence of a possible trust is that of Mr. Weiss, who said he transferred his interest in the property to his wife because he did not want the family home to be subject to claims of potential creditors, and the evidence of Mrs. Weiss who said her husband had always owned the respective homes. Since Mr. Weiss did not have creditors at the time of the transfer, there was nothing illegal or improper in transferring his interest in the house to his wife provided it was an absolute transfer. However, if it was a sham arrangement for the illegal purpose of concealing from potential creditors property which his wife held in trust for him, then the court will not assist Mr. Weiss in establishing the trust arrangement through the medium of an illegal transaction to which he was a party.
[71] I agree with Ms. W. that the character of the $2 million payment changed almost immediately after Mr. F. received it. Mr. F. made a gift of the bulk of the funds to his wife to purchase the Vancouver property and to cover some of the preconstruction cost. He used the remainder to pay for debt on family property.
[72] What I found compelling in this case was Mr. F.’s actual conduct when he received the funds. Mr. F. did not seek to isolate the funds for use to pay potential future claims against him as a director. Instead, I find that he disposed of the funds to buy property as a gift for his wife and to creditors all for the benefit of his wife and family.
[73] Further, in acting as he did, Mr. F. acted to keep the entire payment immune from seizure by any future potential creditors and to keep it protected in his wife’s hands.
[74] In an e-mail Mr. F. wrote to his wife the same day he deposited the $2 million payment into his bank account, he said:
I had a really tough week and am exhausted. I feel I am managing everything on my own; normally that’s Ok but this week it was a bit much. Anyways what brought me back to reality and really grounded me was hearing our lovely boys cheer me a good bye while my beautiful and loving wife drove off in our safe vehicle and realizing we have the financial security to make the rest of our lives success.
[75] The FLA does not define “gift”. It found it instructive to consider definitions in other cases where the statute is silent, such as Neville v. National Foundation for Christian Leadership, 2013 BCSC 183, aff’d 2014 BCCA 38, [2014] S.C.C.A. No. 111. In that case, the Court of Appeal also considered definitions from other cases involving different subject matters. It considered a gift to be the act of unqualified giving accompanied by delivery and acceptance by the recipient where the gift cannot be revoked by the donor. I find that is what occurred in the present case. Mr. F. used the funds to purchase land which he gifted to his wife. His intention was to immunize his assets from creditors for the protection of his wife and his family. He did not seek to obtain any beneficial interest in the Vancouver property. The interest he has in that property is what is afforded to him by statute only.
[76] My determination is not simply based upon Mr. F.’s failure to rebut the presumption of advancement. In this case I have found that Mr. F. made a gift to Ms. W. based upon Mr. F.’s actual conduct and as evidenced by his clear written and viva voce testimony of his purpose at the time.
[77] Accordingly, the funds currently held in trust are family property and are to be paid out to the parties on an equal basis. There is no basis to rebut the presumption of equal division.
In essence when the husband in this case transferred the asset into the name of the wife to protect it from other creditors he lost the creditor protection he sought against his own wife. The key thing we learn from this case is to attend upon a top family lawyer immediately upon entering into a new relationship or upon receiving a sizeable inheritance or gift to ensure the intentions for those assets are made clear to both spouses at the start as opposed to letting legal mayhem rule at the end of your relationship.
Even More Frightening Conclusion For BC Excluded Property
Losing the excluded property exemption as a result of transferring title or placing an asset in a joint account is bad enough but what this case says that is even more disturbing to high net worth individuals in a relationship who brought or received sizeable assets into a relationship is that excluded property might now be a misnomer in BC. If this case is not successfully appealed excluded property may be reduced to equally divisible family property which seems at odds with the intent of our new legislation. Here is what Justice Walker says:
[79] In Remmem, Butler J. considered the meaning of “significantly unfair”. Although his comments were made in the context of an unequal division of family property per s. 95 of the FLA, I find them instructive for the approach to be taken to s. 96 (even though the factors to be considered are different in s. 96). He stated at para. 44:
The FLA provisions granting the court a discretion to order other than an equal division are very different from the provisions in the previous legislative scheme. Pursuant to s. 65(1) of the Family Relations Act, R.S.B.C. 1996, c. 128 (the “FRA”), courts had a discretion to divide family property in unequal shares if the court found that the division of property (pursuant to agreement or the provisions of the FRA) would be unfair having regard to the factors set out in that section. The first and obvious difference between the discretion given under the FRA and the discretion given in Part 5 of the FLA is that in order to exercise the discretion, it is no longer sufficient to find that a division of property is merely “unfair”. There must be a finding that the division of property pursuant to the statutory scheme is “significantly” unfair. The Concise Oxford English Dictionary defines “significant” as “extensive or important enough to merit attention.” Significantly is understood to mean more than a regular impact — something weighty, meaningful, or compelling. In other words, the legislature has raised the bar for a finding of unfairness to justify an unequal distribution. It is necessary to find that the unfairness is compelling or meaningful having regard to the factors set out in s. 95(2).
[80] In L.G. v. R.G., 2013 BCSC 983, at para. 71, Mr. Justice Brown described the phrase “significantly unfair” as found in s. 95(1) of the FLA as “essentially … a caution against a departure from the default of equal division in an attempt to achieve ‘perfect fairness’”. It is, he said, “Only when an equal division brings consequences sufficiently weighty to render an equal division unjust or unreasonable should a judge order depart [sic] from the default equal provision.”
[81] A determination of significant unfairness turns on the individual facts of each case. In the absence of a definition of the term in the FLA, I found it useful to draw on cases defining the phrase in other contexts where no specific definition is found in the applicable statute. In 459831 B.C. Ltd. v. Strata Plan BCS 1589, 2012 BCCA 44, in dealing with the Strata Property Act, S.B.C. 1998, c. 43, the Court of Appeal said at para. 15 that the “characterization of an action as significantly unfair is not a matter of discretion but is an inquiry requiring consideration of the facts before the court and what legally constitutes unfair action.” The Court referred to the definitions given to the phrase in other strata property and unrelated oppression cases such as Reid v. Strata Plan LMS 2503, 2001 BCSC 1578, Blue-Red Holdings Ltd. v. Strata Plan VR 857, [1994] B.C.J. No. 2293 (S.C.), BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 – “unfairly prejudicial”, “burdensome, harsh, wrongful,” and “lacking in probity and fair dealing” – and, as I read the reasons for judgment, concluded that significantly unfair must be something more than “mere prejudice and trifling unfairness”.
[82] The Court adopted a two-part test that included an objective assessment of the reasonable expectations of the petitioner. That test was not advanced by the parties in this case. In my opinion, the factors set out in s. 96(b)(i) and (ii) of the FLA point to considerations that are different than reasonable expectations.
[83] The FLA has not set the bar so high that finding significant unfairness is next to impossible. For example, in Cabezas v. Maxim, 2014 BCSC 767, the Court found that significant unfairness would result from the unequal division of the claimant’s purported excluded property given the respondent’s contributions to the maintenance of the property, her decision to undertake liability on the mortgage, her greater contribution towards expenses, and the length of their cohabitation of 6.5 years, which is some three years less than the marriage between Mr. F. and Ms. W.
[84] Ms. W. also made significant contributions to the preservation, maintenance, and following separation, improvement and management of the Vancouver property. She incurred debt to increase its value of the excluded property in order to avoid a loss to Mr. F. if it was sold at the time of separation. In all, Ms. W.:
(a) agreed to encumber the Richmond property which she owned to obtain funds to build the new house in Vancouver;
(b) pledged her credit to obtain a line of credit and encumbered the matrimonial home with a mortgage to secure it, without which it would not have been possible for Mr. F. to proceed beyond purchasing the bare land;
(c) agreed to proceed with construction of the house after separation, which in turn saved Mr. F. from at least a one-half million dollar loss in the value of the property, and increased her indebtedness on the line of credit from just over $10,000 at separation to approximately $1.1 million, and thus put her interest in the Richmond property at risk in the event of cost overruns on the project or a downward change in market value or both;
(d) was legally responsible to pay the construction bills which were invoiced to her in her name; and
(e) worked closely with contractors, tradespeople, and suppliers in the construction of the new home, and, at the request of Mr. F., paid the bills so that he would not be distracted from his duties at P. Co.
[85] Thus, as a result of her agreement to proceed with the construction of the house on the Vancouver property and her ongoing involvement with the project, Ms. W. saved Mr. F. from a significant loss (assuming it was still excluded property) and freed Mr. F. to pursue his work duties without distraction. There was no upside to her agreeing to proceed since her share of the debt at the time of separation was $5,000 (i.e., one-half of the amount drawn on the line of credit). Ms. W. agreed to proceed with construction to avoid the loss. There was no expectation at that point of making a profit, and in fact, the profit was minimal at approximately $50,000 to $60,000.
[86] As well, Ms. W. made significant contributions to the household and her ongoing support for Mr. F. for close to 10 years, which I am satisfied greatly assisted Mr. F. to develop his relationship with M.I.
[87] I find the contributions made by Ms. F. to have been direct and in accordance within the meaning given to that concept in other cases decided in this province: Campbell v. Campbell, [1990] B.C.J. No. 1267 (C.A.); Detta v. Detta, 2001 BCSC 1222.
[88] In the circumstances, given the weight of her significant contributions relevant to the factors set out in the FLA, I would order the trust funds to be divided equally in the event that the $2 million payment was excluded property. To do otherwise would be significantly unfair.
[89] In light of these findings and this determination, there is no need to determine Ms. W.’s other submissions concerning unequal division of family property.
This case emphasizes the need for persons of wealth to get a prenuptial agreement or marriage agreement that protects excluded property from equal division. Call us to create an effective strategy so everything you worked so hard for or what you received from a loved one are protected. Call Lorne MacLean, QC founder of our 20 lawyer family law boutique firm at 1-877-602-9900.
