Understanding Exempt Property in Alberta Family Law
In family law matters, it is commonly understood that “family property” (which includes both assets and debts) is to be split 50/50 between the parties. As per section 7(4) of the Family Property Act, RSA 2000, c F-4.7 (“FPA”), the presumption is equal division of all property acquired by either spouse during the marriage and/or during the relationship of interdependence.
However, the FPA does contain provisions declaring certain kinds of property exempt from division. What this means is that, provided the spouse can demonstrate the property is exempt, it may not be divided equally or at all.
Categories of Exempt Property
Section 7(2) of the FPA sets out the categories of property which may be exempt from equal division:
- Property acquired by gift from a third party;
- Property acquired by inheritance;
- Property acquired before the marriage, if the spouses were not in a relationship of interdependence prior to the marriage;
- Property acquired before the relationship of interdependence began, if the spouses were in a relationship of interdependence before the marriage;
- Property acquired before the relationship of interdependence began, where the parties are not married;
- An award or settlement for damages in tort, unless the award or settlement is compensation for a loss to both parties; and
- The proceeds of an insurance policy that is not in respect of property, unless the proceeds are compensation for a loss to both parties.
If either spouse has acquired property that falls into any of these categories, they may be able to claim an exemption for that property.
How Does an Exemption Affect Division?
Establishing an exemption over property does not automatically mean that party is entitled to keep 100% of its value. Where parties were not in a relationship of interdependence prior to the marriage, the exempt value will be the market value as of the date of the marriage or the date the property was acquired, whichever is later.
Where parties were in a relationship of interdependence prior to marriage, the exempt value will be the market value as of the date the relationship of interdependence began or the date the property was acquired, whichever is later.
For unmarried individuals, the valuation date is the date the relationship of interdependence began or the date the property was acquired, whichever is later.
The difference between the exempt value and the current value is family property that is presumptively shared equally between the parties.
A simple example would be where one spouse purchased a home prior to the marriage, and the other spouse moved in upon marriage. If the home was worth $500,000.00 at the date of the marriage and is currently worth $700,000.00, the $200,000.00 increase in value would be presumptively split 50/50 between the spouses while the other $500,000.00 would be exempt.
Co-Mingling Exempt Property with Family Property
While the types of property elaborated on above may be exempt, it is important to know that an exemption can be lost if that property is mixed in with non-exempt family property. This is referred to as “co-mingling”.
When co-mingling occurs, there is a presumption that half the value of the exempt property has been gifted to the other spouse. The gifted half becomes family property that is presumptively shared equally.
Therefore, if a spouse is receiving an inheritance, gift from a third party, proceeds from an insurance settlement, or proceeds from the sale of exempt property, it is important that they keep that property separate. As soon as that property is placed in a joint account or registered in joint names, any exemptions are presumptively erased.
Tracing Exempt Property
When there is a dispute around whether property is exempt, the spouse claiming the exemption will bear the onus of “tracing” the property to an exempt source. This is typically required where the source of the property is not immediately clear.
An example where tracing may be required is where a spouse received inheritance money and then used that money to purchase real property in their sole name. Upon a breakdown of the relationship, that spouse may want to claim an exemption over the value of that property as of the date it was acquired.
That spouse would need to demonstrate that the property was purchased using their inheritance funds, which are presumptively exempt under the Family Property Act. This could be done by providing bank account statements, documents related to the estate administration process, and documents related to the purchase.
Depending on how well that spouse maintained their records, this may be a simple process or may become both costly and time-consuming. Tracing can become daunting when there are multiple exemptions being claimed, the claimed property has gone through several iterations, or where records are outdated and/or unavailable.
How West Legal Can Help
Our family law team at West Legal has plenty of experience advising clients on exemption claims.
We understand that gathering tracing documentation in support of claimed exemptions can become time-consuming and overwhelming. West Legal is committed to assisting clients dealing with exemption claims by advising them of their options, likely outcomes, and providing guidance on gathering tracing documentation.
If you have a family law matter where exempt property is in issue, contact West Legal to discuss your rights and appropriate next steps.
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