If you are contemplating separating from your partner or are in the midst of a divorce, you may be wondering what entitlement you or your spouse may have to unequal division of family property where there are significant excluded assets.

The BC Court of Appeal’s recent judgment in Healey v. Healey, 2024 BCCA 68 considered a number of complex financial issues, including the unequal division of family property for significant unfairness in the face of significant excluded property and inclusion of repayments of a shareholder loan from an excluded company for the purposes of support.

Background

The parties were married for 21 years and had three children. During the marriage, the appellant wife was primarily responsible for child care and managing the home, and had only limited paid employment during the marriage. The respondent husband was a successful financial advisor and earned income through his personal corporation.

The Property

The husband had significant excluded property, including an interest in two companies gifted to him by his father and stepfather, which the parties agreed was his excluded property. The companies were an investment company (Alco) and a holding company (KFD). Since 2016, the husband received monthly tax-free distributions of $4,000 from KFD as repayment of a shareholder loan.

The husband’s excluded property was valued at $12 million and the family property was valued at approximately $5.1 million. During the parties’ separation, the husband liquidated $2.165 million in Alco investments to fund his purchase of the wife’s interest in the family home, as well as a purchase of a townhome for the wife and their children to live in. This resulted in a significant tax liability.

The Legal Framework

The legal framework applicable to the division of family property and family debt is set out in Part 5 of the Family Law Act (the “FLA”).

Section 81 of the FLA provides that upon separation, the spouses are each presumptively entitled to half an interest in all family property and family debt.

Section 84(2)(g) of the FLA provides that if there has been an increase in the value of excluded property during the spouses’ relationship, that appreciation is considered family property.

Section 85 of the FLA describes categories of excluded property which remain the sole property of the spouse who claims the exclusion. This includes property acquired by a spouse before the relationship began and gifts and inheritances received from others.

Section 95 of the FLA allows the Court to unequally divide family property, family debt, or both if it would be significantly unfair to divide family property or family debt. Section 95(3) further allows the Court to consider the extent to which the financial means and earning capacity of a spouse have been affected by the responsibilities of their relationship. The FLA considers whether the obligations of spousal support have been met and whether applying an equal division of family property would be significantly unfair to either party.

The Trial Decision

In determining the husband’s income for payment of support, the trial judge chose not to include the $4,000 tax-free monthly payments from KFD in the husband’s income. The trial judge found the monthly payment to be a return of capital, not a return on capital, and thus did not constitute income.

Given the wife’s history as a stay at home parent, the trial judge found she had a very strong compensatory and non-compensatory claim to spousal support, and awarded periodic spousal support at the high end of the range for an indefinite duration.

Regarding the division of property,  the trial judge declined to award the division of excluded property pursuant to s. 96 of the FLA, as the wife had not made a direct contribution to Alco. The trial judge further declined to award an unequal division of family property under s. 95(2) of the FLA, finding that the husband’s decision to liquidate Alco assets (some of which were family property) to fund his buyout of the wife’s interest in the family home was a unilateral disposition of family property that decreased its value beyond market trends, but found that the wife had not met her onus of showing that the husband had no good faith basis for doing so.

The trial judge also decided that the wife was partially responsible for the tax consequences arising from the sale of property during separation which were used to buy her interest in the family home and purchase a townhouse for her and the children.

The Court of Appeal’s Decision

Unequal Division of Family Property

The Court of Appeal found that the trial judge overlooked the starting point for an analysis of significant unfairness, which is the financial situation the parties would be in if family property is divided equally.

In considering the financial situation of the parties, the Court of Appeal noted that the husband is now the sole owner and sole occupant of a $4.5 million house, has a successful and longstanding career (that was supported by the wife’s contributions), and retains sole ownership of almost $12 million in excluded assets, a portion of which were used during the marriage to cover family expenses and maintain the family standard of living. Conversely, the wife owns a three-bedroom townhouse valued at $2.25 million that she lives in with their three children, has no established career path, and a support order that covers less than half of their monthly expenses.

The Court of Appeal found that the trial judge had failed to consider the following factors in his decision not to unequally divide family property:

• the length of the parties’ relationship, being a 21-year marriage
• the wife’s contribution to the husband’s career and the corresponding impairment of the wife’s ability to earn income
• the fact that the parties had relied on the husband’s excluded property during the marriage to fund family expenses, maintain their lifestyle, and plan for retirement
• the reality that the periodic support order made by the trial judge was not sufficient to meet the objectives of compensatory and non-compensatory spousal support

The Court of Appeal found that an equal division of family property would be significantly unfair to the wife. The Court of Appeal set aside the trial judge’s order for a compensation payment of $60,024 from the husband to the wife and replaced it with an order for a compensation payment of $1 million, which resulted in a division of family property of roughly 65% to the wife and 35% to the husband.

Taxes Incurred in Disposition of Family Property

The tax liability arose from the husband’s decision to dispose of excluded corporate assets (the increase in value of which was family property) to finance his purchase of the wife’s interest in the family home. The wife argued that there would not have been tax consequences if the family home had simply been sold and the proceeds equally distributed, and she should not received less compensation due to the husband’s preference to keep the family home and raise the necessary funds by selling other assets.

The Court of Appeal agreed with the wife and found that the trial judge erred in reducing the wife’s share of family property as a result of the husband’s preference to retain the family home and his unilateral decision to purchase the wife’s interest in the family home by disposing of family property. The husband’s decision to sell assets to allow him to retain the family home should not impose responsibility on the wife for the resulting tax liability.

Shareholder Loan Repayments as Income

The Court of Appeal found that the $4,000 monthly non-taxable shareholder loan repayments from KFD should be included respondent’s income for the purposes of calculating support. The trial judge erred in limiting his consideration of whether the KFD payments were a “return of capital” versus a “return on capital.”

The Court of Appeal found that the KFD payments should be imputed as part of the husband’s income under s. 19 of the Child Support Guidelines for the following reasons:

• The KFD shareholder loan was a device adopted by the husband’s father for estate and tax planning purposes to facilitate regular payments to beneficiaries of a former family trust, and in this sense, the KFD payments are analogous to benefits paid from a trust, which can be included in income for the purposes of support
• The KFD payments are tax-free and provide the husband with enhanced resources
• The husband has received the KFD payments monthly since May 2016 and expects to continue to receive them for the foreseeable future
• During the parties’ marriage, the KFD payments formed part of the family’s income and covered family expenses.

The Court of Appeal also found that the tax-free KFD payments should be grossed up for income tax.

Further Unpredictability in Unequal Division?

In finding that it would be significantly unfair to divide family property equally, the Court of Appeal made much of the fact that the husband was leaving the marriage with $12 million in excluded property and that his excluded property had been utilized during the marriage to pay family expenses, maintain their standard of living, and had formed part of the family’s retirement planning.

None of these factors are expressly set out under s. 95 of the FLA. Consideration as to the use of excluded property as a factor in significant unfairness may introduce more uncertainty on whether a spouse’s excluded property will be truly protected from the reach of the Court, or whether reapportionment of family assets will be used to put the “have not” spouse on more equal footing.

The division of property, particularly when it involves exclusions, is a complex area of family law. If you or someone you know has questions about the nature of property disputes and what this case means for the division of your property, please contact our Family Law group for more information.