In the last blog we described the difference between family property, which is generally shared by spouses upon separation, and excluded property, which generally is not. In this blog we will talk about how a spouse may lose their exclusion.
There are a number of ways a person may lose their exclusion, the most common of which are below. Note, however, this list is not exhaustive.
Spending the money: If the spouse spends the money during the spousal relationship (for example, on debt payments, vacations or the general costs of living) then the spouse who previously owned the excluded property will no longer have a claimable exclusion. So if you want to maintain your exclusion, make sure you keep the money outside your general spending account.
Transferring the property into the other spouse’s name: A person will lose their exclusion if they transfer the property into the sole name of their spouse. For example, if you take excluded funds out of an RRSP registered in your sole name to purchase a car in your spouse’s name, the car will become family property even though the funds would have been excluded if they had been left in the RRSP.
Transferring the property into joint names: A recent B.C. Court of Appeal decision suggests that, absent positive proof of a contrary intention to maintain the exclusion, a transferor will lose their exclusion when they transfer property into joint names with their spouse. If there is clear evidence that a gift was not intended, then the spouse may be able to keep the excluded property.
Where the transfer leads to loss of the exclusion, the court may then decide to divide family property unequally in favour of the transferor if it would be significantly unfair not to.
A point to note is that if you transfer property into joint names with your spouse to receive tax and estate planning benefits (even though you may not actually want to “gift” them 50% of the property) you will likely be found to have gifted the property to your spouse, because you cannot “have your cake and eat it too.“
Conclusion and Takeaways
The most certain way to maintain your excluded property is to keep it in your sole name and in a segregated account where it will not be spent. However, for practical reasons and for estate planning purposes, this may not be ideal.
The best practice, therefore, is to enter into an agreement which specifically sets out how the excluded property will be managed during the spousal relationship and after separation. These agreements may be included within a marriage agreement (also known as a prenuptial or “pre-nup” agreement), a cohabitation agreement, a “postnuptial” agreement, or created on an ad hoc basis.
It is also prudent to maintain documentary evidence of excluded funds so that the excluded property can be traced. Please consult with a lawyer to get a better understanding of the documents you will want to maintain in order to keep your property exclusions upon separation.
The bottom line is, when it comes to protecting your property, be prepared and get good advice.
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