Amendment to Family Law Act Enhances Protection for Inheritances

 

A recent change to British Columbia’s Family Law Act provides greater protection for inheritances from claims of spouses on the breakdown of a marriage or marriage-like relationship. The basic structure of our Family Law Act provides that some assets are “included property” in the division of property and other assets are “excluded property.” In most cases, included assets are divided equally between spouses following the breakdown of the marriage or marriage-like relationship, and excluded property is, well, generally excluded from the division. The court may in some circumstances deviate from this scheme of division, but for the purpose of this blog, lets keep it simple.

When one spouse receives and inheritance or gift, that property is excluded. However, if the property appreciates in value during the marriage or relationship, then the gain is included, and divided equally. Say, for example, one spouse inherits a house worth $800,000 from her mother (probably not in Vancouver), and on separation from her spouse, the house is worth $1 million, then she keeps $800,000, but shares the $200,000 gain with her ex-spouse.

This seems simple enough, and strikes me as fair. The mother intended to benefit her daughter, rather than her daughter’s spouse, but on the other hand, the appreciation in value occurred during the marriage. Where things get murkier is if the daughter transfers the house into her spouse’s name during the marriage. Perhaps she transfers title into a joint tenancy with her spouse, so that if she dies before him, he will receive the house by right-of-survivorship. In that case, does the house remain excluded property? 

The British Columbia Court of Appeal, answered that if excluded property is gifted by one spouse to the other, it is no longer excluded. I wrote about the case of V.J.F v. S.K.W., 2016 BCCA 186 here. In that case, the husband inherited $2 million from his employer, and used most of the funds to buy land, the title to which he and his wife registered in her sole name. On the breakdown of the relationship, both the trial judge and the Court of Appeal held that the residence was no longer excluded property.

The British Columbia Government published a discussion paper in August 2016 discussing this issue and invited comments for potential legislative change.

Now, the legislation has been changed, effective May 11, 2023. The following provision has been added to section 85:

(3)          If property is excluded from family property under subsection (1), the exclusion applies despite any transfer of legal or beneficial ownership of the property from a spouse to the other spouse.

85 (1) excludes from family property inheritances as well as certain other categories of property such as assets brought into the relationship, and any property derived from the sale of excluded property.

If this new subsection 85(3) had been in effect when the proceeding in  V.J.F. was commenced, it is likely that the $2 million would have been excluded, rather than shared between the spouses.