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As part of a divorce, parties may need to divide the property that they accumulated during their marriage through the equalization of net family property. The assets that are included in this calculation will impact the eventual equalization payment. But some assets that are acquired during a marriage can be excluded from the recipient’s net family property. And sometimes, if the excluded property is exchanged for other property or assets, so long as the property can be traced, subsequently acquired assets can still be excluded.
Spouse Seeks to Exclude Gifted Funds
In Lau v. Tao, the parties separated after being married for nearly five years. They had resolved several issues, but several remained unresolved, including the parenting schedule, child support, and property exclusions from the calculation of net family property. In particular, the mother wished to exclude certain property that she received as a gift from her parents (the maternal grandparents) during the marriage. The question was whether those gifted funds could be traced to assets the mother owned on the valuation date. Section 4(1) of the Family Law Act (FLA) sets out the definition of net family property. However, assets that are included in a spouse’s net family property will impact any equalization payment. Section 4(2) of the FLA lists excluded property that a spouse may own on the valuation date, which does not get included in their net family property. This includes “property, other than a matrimonial home, that was acquired by gift or inheritance from a third person after the date of the marriage”.
In this case, it was clear that the mother received property from her parents after the parties were married. The maternal grandmother testified that funds were given without any expectation of repayment. She explained that their custom was to gift each of their children property upon their marriage, as they wanted each child to have their own home. The mother’s older siblings each received such a gift. The mother subsequently purchased a property in Hong Kong using gifted funds. Later, the maternal grandmother provided the mother with additional funds, which were deposited into her bank account. When the parties decided to move to Canada, the mother sold the Hong Kong property and transferred the money into her accounts. The issue was whether the gifted funds could be traced to assets the mother owned upon separation.
Courts Can Depart From Strict Tracing Rules
The mother argued that in conducting a tracing analysis, the judge should adopt the “common sense or sufficient link” approach. This method was used in Bennett v. Bennett. That case involved tracing the use of inherited funds used to purchase a piece of property. The judge concluded that the proximity of the inheritance to the purchase was sufficient to conclude on a balance of probabilities that the inherited funds were used for the purchase. The judge acknowledged that the finding would not result from the application of strict tracing rules, but concluded that a “common sense and a reasonable view of how this couple could have found the amount of money required for the purchase of the land leads to a conclusion that the strict tracing rules should be relaxed”. The judge believed that the facts in that case justified relaxing the rules regarding property tracing.
Here, the father did not suggest that a different approach should be adopted. Instead, he argued that the mother was not entitled to any exclusion because she could not prove the nexus between the money gifted to her and the property that she claimed she owed at the date of separation, which should be excluded. Yet, the mother claimed that the documents she provided as evidence supported the finding that the assets she owned could be traced back to the gifts she received from her parents. In this case, tracing required following the cash gifts that were used to purchase property and investments in Hong Kong, into the property that the mother owned on the separation date. The judge noted that this would be a complicated task, considering the years of bank statements from numerous accounts. Consequently, Justice Tobin was prepared to adopt the reasoning in Bennett that strict tracing rules should be relaxed. That approach, along with taking a reasonable view of how the mother acquired her assets, would “best result in an equitable sharing of the parties’ respective net family properties as contemplated by the Family Law Act”.
Court Traces the Gifted Funds to Property Owned on the Separation Date
The judge adopted the analysis in Ludmer v. Ludmer. That case emphasized that tracing is not limited by the quantity of transactions or the number of times that an asset changes form. Instead, the focus is on whether the claimant can continue to show that the proceeds were acquired with assets traceable to the original property. In Ludmer, the judge stated that there is “no case which suggests that the excluded nature of property begins to “peter out” merely because it is exchanged for equally identifiable property or through the effluxion of time”.
Examining the source of the mother’s gifts, she received funds from her maternal grandparents, which were used to purchase a Hong Kong property, as well as additional cash gifts. Overall, she held 50% of the equity in the Hong Kong property. However, in 2018, before moving to Canada, she sold the property, and 50% of the sale proceeds constituted the amount traceable to the money gifted for the property purchase. Those proceeds, along with the additional cash gifts, were deposited into a bank account and could be traced to assets the mother owned on the valuation day. However, the mother had transferred additional funds to her Canadian bank accounts, including the other half of the property sale proceeds, and this amount was not traceable to gifts she received. Justice Tobin felt that the mother had established, on a balance of probabilities, that $982,068.80 came from the proceeds of the property sale and the cash she brought to Canada, which could be traced to the gifts. The judge accounted for the source of the savings and the timing of the funds being transferred to Canada, which suggested the funds could be traced into the mother’s half-interest in the matrimonial home, the purchase of a vehicle, and the purchase of a condominium, with the balance invested in several accounts. The value of all those assets, except for the interest in the matrimonial home, could be excluded from net family property, as the mother was able to prove they were excluded property.
Income Earned on Gifted Funds Is Not Automatically Excluded
The balance of the mother’s gifted funds was invested in various accounts, and the mother also asked that the separation date value of those accounts also be excluded from the calculation of her net family property. The total amount was $680,772 of additional investments and savings, which she sought to exclude from the calculation. Justice Tobin recognized that this amount would include increases in value resulting from the income earned by the investments over time. But permitting those value increases to be excluded would be contrary to section 4(2) of the FLA. That section sets out the categories of assets that can be excluded from an individual’s net family property. And that section lists income from property that was acquired by gift or inheritance after the date of marriage, if the donor expressly stated that it was to be excluded from the recipient spouse’s net family property.
But there was no evidence that the maternal grandparents expressly stated that the income from the gifts was to be excluded from the mother’s net family property. The judge determined that the mother should be permitted to exclude 62.7 percent of the value of her investments held in those accounts. This was calculated by subtracting the funds available to the mother for investment from the funds traceable to the gifts given to her, and then dividing the result by the total amount of savings she claimed as excluded property. The judge found this would ensure that the income attributable to the gifts was not excluded.
Tracing Property Can Be a Complex Process
The party claiming an exclusion from net family property has the onus of proving that an exclusion applies and that gifted funds can be traced to subsequent property owned on the valuation date. Tracing property can complicate equalization, but in some cases, strict tracing rules may be relaxed.
Contact Johnson Miller Family Lawyers for Advice on Complex, High-Asset Property Division in Windsor-Essex
Property equalization can turn on detailed tracing evidence and nuanced interpretations of Ontario’s Family Law Act. If you are navigating a divorce involving gifts, inheritances, or complex financial histories, experienced legal advice is essential. At Johnson Miller Family Lawyers, our team of family and divorce lawyers can assess whether exclusions apply, assist in gathering the necessary documentation, and protect your interests throughout the equalization process. To book a consultation, please contact us online or call 519-973-1500.
