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The BC Family Law Act and your assets

Important rules for dividing property in the BC Family Law Act.

In the spring of 2013 the Family Law Act came into effect in BC replacing the Family Relations Act, seen by many as an outdated and inadequate piece of legislation. Undergoing significant change in the new Act are the rules governing division of property when relationships break down.

This means if you're going through a separation or divorce, living in a common law relationship, getting married, or have children who are in relationships, it's essential to understand how these new rules can affect your rights and your assets.

Why the change

When it came to handling cases of property division equitably, the old Family Relations Act (FRA) was not easy for the legal system to work with.

Under the FRA, a key test for determining if a particular asset was eligible for division, or family property, centered on whether it was "ordinarily used" for a "family purpose". By giving the courts ample discretion in interpreting and applying the law, how these words were construed could vary widely from case to case, creating inconsistency and promoting litigation. Further, by leaving common law relationships out of the property division sections of the law entirely, partners often had to pursue legal action as their only recourse to establish their property rights.

Key changes to property division

The Family Law Act (FLA) makes property division rules simpler and less costly to apply while bringing the law more in line with public attitudes towards inclusion and fairness.

The FLA has established clearer definitions classifying property, explicitly addressed the treatment of debt (lacking under the old law) and embraced common law relationships in property division considerations.

1. "Family" versus "Excluded" property

Under the FLA, all property, real and personal, owned by either or both spouses at the time of separation is considered Family property and eligible for division. However, certain assets are now specifically excluded from Family property. Importantly, how an asset is used is no longer relevant in determining its status.

Family assets can represent a variety of property ranging from shares, bank accounts and investments, to RRSPs, pensions or interest in a business. Unless set out differently in an agreement, spouses are entitled to equal shares of Family property. The following types of assets are considered Excluded property and therefore not subject to division:

  • Property brought to the relationship (from date of marriage or when cohabitation began)
  • Gifts or inheritances
  • Damage awards
  • Life insurance proceeds
  • Certain trust property
  • Assets funded through the ownership or disposition of Excluded property (e.g. spouse sells a home and puts those funds into a new home occupied by the family).

An important qualifier affecting Excluded property is that any increase in its value during the relationship is considered Family property and therefore subject to division. Here's an example: Six years ago Jessica married Paul and moved into his $1 million North Vancouver home. With the home now valued at $1.5 million, only the increase in the residence's value, or $500,000 would be considered Family property and subject to division should the couple's relationship dissolve. Paul would be eligible to retain the $1 million value the home had when Jessica moved in. This example highlights the need under the Family Law Act for reliable record keeping.

Establishing property values at the start of cohabitation and at the time of separation takes on more urgency, as does tracing the value of Excluded property when that property is used later on. For example, if you use an inheritance to pay down a mortgage or make family purchases, it's wise to document those activities.

2. Treatment of debt

Debt held during a relationship was not specifically addressed in the old FRA. The Family Law Act takes the position that people should share the debt as well as the assets they build together in their relationship. As with Family property, the new Act specifies that debt taken on during the relationship, or afterwards in maintaining family property, is also subject to equal division.

3. Including common law relationships

Statistics Canada reports that the formation of common law relationships now outpaces traditional marriages by a margin of 4 to 1, so changes to recognize these unions in property division governance has been long overdue. The property division sections of the FLA extend to common law spouses living together for a minimum of two years.

This revision brings family law in line with estate and income tax law which already treat common law relationships the same as married couples. When Excluded property isn't, and other exceptions A noted benefit of the Family Law Act is it limits the amount of latitude judges have to decide division of property.

However, the new Act still gives courts the option to reapportion Family property in cases where it would be "significantly unfair" to equally divide. Influencing factors might include the length of the relationship, if one spouse made a meaningful contribution to the other's career, or the reasons why debt was incurred. Courts may also order a division of Excluded property in some limited circumstances including when Family property is located outside BC, or a spouse maintains or improves Excluded property.

How your children's relationships can affect your estate

Are you thinking about lending your adult children a hand, perhaps by helping them buy a home? Or is your priority to leave them a sizeable legacy?

While these are goals many parents share, if your children are in marriages or common law relationships that eventually end, property division rules can jeopardize your generosity. For instance, even though the Family Law Act gives an inheritance more protection than under the old law, it doesn't mean that position can't be challenged by your child's partner.

How can you protect your child's interests – and yours? In these situations, trusts can help families accomplish their estate planning objectives. However, the property division provisions of the Family Law Act can be complex when it comes to using trusts. If not structured properly assets in a trust could be considered Family property and subject to division.

If you are planning to set up a trust, it's essential to seek professional guidance to avoid the pitfalls and ensure your desired outcome.

Having a Marriage Agreement can be a smart decision You don't necessarily have to live with how the Family Law Act divides property if your relationship breaks down. A marriage or cohabitation agreement gives couples the chance to "opt out" and make their own rules regarding property division to suit their needs.

What's more, an agreement defends your assets from claims against your estate, helping ensure those assets will be directed to the beneficiaries of your choice (e.g. your children). An agreement can document each spouse's property and obligations prior to cohabitation. This makes it much easier to prove ownership and calculate any change in the value of assets (or debts) should the relationship end. At a minimum an agreement should:

  • Identify property you and your partner brought into the relationship when cohabitation began;
  • Declare what property will remain yours during the relationship and afterwards, even if any of it has been used for family purposes;
  • Note the value of each asset you plan to keep;
  • Deal with the provision in the Act specifying any increase in the value of Excluded assets is Family property and subject to division.

In creating your own formula for property division you and your spouse can choose to split Family property and debt equally or unequally, or exclude it from division altogether. Or, identify which Excluded property is eligible to share.

While the Family Law Act provides opportunities for couples to better govern their own affairs, a court can still intercede and not recognize an agreement it feels is significantly unfair. It can also act if there are concerns with procedural fairness in drafting the agreement. This might occur where a party failed to properly disclose assets, took advantage of the other spouse's ignorance or vulnerability, fail to obtain legal advice or other circumstances under the common law that would cause all or part of a contract to be voidable.

The full scope of the Family Law Act goes beyond property division, featuring new directives that affect a variety of family issues including child support, guardianship and family dispute mechanisms.  To learn more, read the Legal Services Society's Guide to the New BC Family Law Act.

By tackling long-standing weaknesses in property division, including giving common law couples equal status with their married counterparts, the new Family Law Act is helping open a more modern and equitable chapter for family law in BC. But the changes can also have serious implications for your assets and your estate if not planned for properly.

Your BlueShore Financial financial advisor, in partnership with legal experts, can put together the tools you'll need to manage your assets and your estate plan with peace of mind.

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This article is provided as a general source of information and should not be considered personal financial or investment advice or solicitation. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete.
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