What Happens to Property When Spouses Separate?
DISCLAIMER
This information is intended for business owners in Canada and serves as general guidance only. Always consult with a qualified advisor before making any legal decision.
In this article, we’ll cover the following topics:
Family property vs. excluded property
Debt incurred during marriage
Agreements between spouses during separation proceedings
Introduction
When a married couple (or a non-married couple who has lived together for at least two years) separates, their shared property is divided according to guidelines set by the Family Law Act of British Columbia.
Depending on the prenuptial or cohabitation agreement spouse may be entitled to a larger share of property than the other, but the general rule of thumb set by the Family Law Act (Part 5, to be precise) states that upon separation, both spouses are entitled to half of the family property and are jointly responsible for all debts incurred during marriage.
Family Property vs. Excluded Property
The Family Law Act distinguishes between two types of marital property: family property and excluded property. In the most basic terms, family property is what must be divided among the spouses upon separation, while excluded property is exactly what it sounds like – property that is excluded from the separation process.
Family Property
Family property is everything that you or your spouse owned individually or together on the date you separate. There is some nuance to this definition, but generally speaking, if something was acquired during the marriage, it’s considered family property.
Aside from the obvious things like houses, cars, clothes, and other material possessions, some less-obvious examples of family property include:
Shares in a corporation
Interests in a partnership or business
Tax returns owed to a spouse
Bank accounts
Pensions
RRSPs
The amount of any increase in the value of excluded property since the relationship started
That last point may be a little confusing, but it’s actually quite simple. Let’s say that two spouses – let’s call them Linda and Gavin – recently filed for divorce. Before they married, Linda owned a home worth $500,000. After they married, they both moved into the home, and over time, the home’s value grew to $1,000,000. Since Linda owned the home before marrying Gavin, it’s technically considered excluded property (more on that in a moment). But only the home’s original value is considered to be excluded. Because the $500,000 increase in value happened during their marriage, that money is considered family property. So, Linda is entitled to the initial $500,000, but the remaining $500,000 must be split.
Excluded Property
Excluded property is, in the simplest terms, any property that is not considered to be shared by spouses and therefore does not need to be split between them after a divorce.
Examples include (but are not limited to):
Property owned by a spouse before marriage
Gifts and inheritances
Damage awards
Insurance proceeds
Trust property
One important thing to keep in mind is that sometimes the legal argument can be made that a gift was intended for both spouses, not one or the other, and therefore can be considered family property. For more on this, read The Perils of Gifts and Inheritances (and How to Avoid Them).
Debt Incurred During Marriage
Each spouse is responsible for their fair portion of any debt incurred from the start of the relationship until the time of separation, as well as any debt incurred after the separation for the purpose of maintaining family property.
Debt is just as significant as property when it comes to forming a marriage or cohabitation agreement. Even if one spouse pinches pennies and the other spends money like it grows on trees, both will have no choice but to dig out from the financial hole that the spendy spouse put themselves in. There is no scenario here in which one spouse wins and the other loses – either both win (no debt) or both lose (shared debt).
Despite the Family Law Act’s standard assumption that family property and debt should be divided equally, courts may sometimes decide to divide family property unequally – but only if it’s determined that an equal division would somehow be unfair. This is less common, but not unheard of.
When the court weighs whether or not to divide property unequally, some examples of what they’ll consider are the length of the relationship, agreements between the couple, contributions either spouse made to the other's career, whether or not debt was accumulated naturally during the course of the relationship, and either spouse’s ability to pay off any family debt.
Agreements
Couples can reach a formal agreement on how property and debt will be divided between them. Though the Family Law Act’s standard is to divide equally, couples may agree to designate family property as excluded property, and vice versa. An agreement like this must be made in writing and the signatures must be properly witnessed by a third party.
However, agreements are not always recognized and honored by the court. Some scenarios in which formal agreements are nullified:
A spouse fails to disclose major assets at the time the agreement was made
A spouse took unfair advantage of the other's susceptibility
A spouse didn't comprehend the nature or ramifications of the agreement
The agreement is considerably unfair considering the length of time since it was made
Conclusion
Divorce (or any other kind of separation, for that matter) has rightfully earned its reputation as one of the messiest and most stressful legal battles someone can endure. The Family Law Act establishes some much-needed protections, but the road is never completely safe – especially without proper legal counsel.
