The division and distribution of assets between married spouses is governed by Parts 5 and 6 of the provincial Family Relations Act. Part 5 of the act deals with the division of property, including personal property, financial assets and real estate. Part 6 deals with the division of pensions.

Unmarried couples, including common-law couples, are expressly excluded from the parts of the act that deal with property and, as a result, they must seek property-related relief through the rules of the common law, most often through the law of trusts, and sometimes through laws like the Partition of Property Act. In general, unmarried couples receive far less of each other's assets than they would if they had been married.

Presumption of Equal Interest

When a marriage breaks down, each spouse is presumed to have a one-half interest in all assets that qualify as "family assets." Section 56 of the Family Relations Act states, in part, that:

As long as an asset qualifies under the act as a "family asset," each spouse is presumed to have a one-half interest in that asset. Family assets are defined in s. 58(2) of the act, and the focus is on how an asset was used rather than on who bought it or when it was bought:

This section casts a very broad net: as long as an asset is owned by a spouse and is ordinarily used for a family purpose, the asset will be a "family asset" for the purposes of the Family Relations Act, and it doesn't matter whether the asset was brought into the marriage by one spouse or bought afterwards, during the marriage.

When a marriage breaks down, the spouses are presumed to own all family assets equally, no matter whose name the asset is in or whether the asset was brought into the marriage by one spouse or bought during the marriage. This presumption only applies between the spouses. As far as the rest of the world is concerned, an asset is owned as the title to the asset says it's owned, which might be:

1. owned only by one of the spouses;
2. owned by both spouses as joint tenants;
3. owned by both spouses as tenants in common; or,
4. owned by one or both spouses and one or more other people either as joint tenants or as tenants in common.

Each spouse's presumptive equal interest can crystallize as a real one-half interest which all the world must respect if certain things called triggering events happen. Before going any further, it will be helpful to understand the difference between owning something as "joint tenants" and owning it as "tenants in common."

Owning Property as Joint Tenants

A "joint tenancy" is a kind of shared ownership of a thing. When two or more people own a thing as joint tenants, they are each owners of the whole thing. This is a fuzzy kind of shared ownership, however, as it is impossible to separate out one owner's interest in the asset from the interests of the other owners — together all the owners own the whole thing. If one joint tenant dies, his or her interest evaporates, so to speak, and the remaining tenants continue to have exactly the same ownership in the thing that they did before the death.

Owning Property as Tenants in Common

A "tenancy in common" is another way that ownership of a thing can be shared. With this type of ownership, however, each owner's interest in the thing is separate and distinct. Since each owner's interest is separate from the other owners, a tenant in common can, for example, sell his or her share in the asset to someone else. If a tenant in common dies, his or her interest in the thing becomes a part of his or her estate.

From a family law perspective, the most important thing about owning an asset as a tenant in common is this idea of two separate, distinct interests in an asset. Say the family home is registered in only one spouse's name and that spouse goes bankrupt. The only part of the house that can be taken by the bankrupt's trustee is the bankrupt's one-half interest; the other spouse's interest in that asset will be preserved from the bankrupt's creditors, and it doesn't matter who owns the asset on paper.

The Triggering Events

A "triggering event" is what changes the spouses' ownership of an asset from owners as joint tenants to owners as tenants in common. Section 56(1) of the Family Relations Act describes the four different kinds of triggering events:

1. the parties make and sign a separation agreement;
2. the court makes a declaration that the spouses have no reasonable prospect of getting back together and resuming married life (a "section 57 declaration");
3. the court makes an order for divorce; and,
4. the marriage is annulled.

Once any one of these triggering events happens, each spouse receives a one-half legal interest in all of the family assets as tenants in common, regardless of who bought the asset, who owns the asset, or when it was bought... subject to whatever a separation agreement might say about the assets. This new situtation will last until the division of the assets is finally determined by an order of the court or is otherwise agreed to by the parties in a settlement the matter.

This can be really important because legal title to the family assets actually changes, and this may have an effect on the rights of other people. Three obvious examples are when a spouse goes bankrupt (the trustee in bankruptcy can only take the bankrupt spouse's one-half of everything), when a spouse is successfully sued by someone (the plaintiff can only realize judgment against the defendant spouse's one-half of everything), and when a spouse dies (his or her estate only gets the deceased spouse's one-half of everything).

Triggering events are discussed in more detail in the segment that follows this introduction.

Equal and Unequal Division of Family Assets

Under s. 56 of the Family Relations Act, each spouse is presumed to have a one-half interest in all family assets. This is, however, only a presumption, a presumption which can be challenged, or "rebutted."

When assets are divided more in one spouse's favour than the other, the assets have been "reapportioned." A party who successfully rebuts the presumption that the family assets should be divided equally obtains an order for the reapportionment of those assets. The court may order, or the parties may agree, that only a few specific assets rather than all of the family assets should be reapportioned in one party's favour. This might happen to allow one party to keep more of a personal disability pension or more of a personal inheritance, while dividing all the other family assets equally.

Section 65(1) of the Family Relations Act describes the factors a judge can take into account in deciding whether to reapportion the family assets:

Family assets are most commonly reapportioned when:

1. the marriage was short, say less than six or seven years, and one of the spouses brought the majority of the assets into the relationship;
2. one of the spouses was responsible for racking up a lot of debts not related to the family;
3. some assets are located outside of British Columbia;
4. one of the spouses requires more than half of the family assets to become financially independent; or,
5. one of the spouses has wrongfully disposed of family assets or negligently allowed them to decrease in value.

The unequal division of assets is discussed more thoroughly in the chapter Family Assets > Basic Principles.

Defining "Family Assets"

Of course not all assets are family assets. The sections of the Family Relations Act quoted above only provide for the division of assets that qualify as family assets; other sorts of assets may be exempt from division, so that the spouse who owns the asset will be allowed to keep that asset, without necessarily having to compensate the other spouse for its value.

Family assets are defined in s. 58 of the Family Relations Act as:

If an asset does not fall into these categories, it may not be something in which both parties can share. The basic rule of thumb is this: an asset is a family asset if it was ordinarily used or was intended to be ordinarily used for a family purpose.

The definition of "family asset" and the sorts of assets which don't qualify as family assets are discussed more thoroughly in the chapter Family Assets > Basic Principles.

Back to the top of this chapter.

A "triggering event" is an event described by the Family Relations Act which takes place after the relationship between the parties has broken down and has the effect of crystallizing each spouse's interest in the family assets as tenants in common. When a triggering event happens, each spouse owns a one-half interest of all of the family assets, regardless of whether an asset was previously owned only by one spouse or jointly by both spouses, and whether it was bought before or during the marriage.

As was described above, joint tenants in an asset have a sort of fuzzy shared ownership of that asset. Tenants in common have indentifiable and distinct interests in an asset. A triggering event changes each spouse's interest in an asset from a shared interest in the whole asset to a separate ownership of one-half the asset.

The Four Triggering Events

The different triggering events are set out in s. 56 of the Family Relations Act. They are:

1. the execution of a separation agreement;
2. the pronouncement of a judicial declaration that the spouses have no reasonable prospect of reconciling with each other and resuming married life;
3. the pronouncement of a divorce order; and,
4. the pronouncement of an order that the marriage is a nullity.

Note that while separation agreement can be executed before litigation has started, the last three events all require a court action to have been commenced.

The two most common triggering events are the execution of a separation agreement and the making of a declaration that the spouses have "no reasonable prospect of reconciliation," pursuant to s. 57 of the act, usually called a "section 57 declaration."

A declaration under s. 57 can easily be obtained by making a simple application to the court. Section 57 declarations are usually made with the consent of both parties as people rarely dispute such applications.

The Effect of a Triggering Event

It can be extremely important to ensure a triggering event occurs, mostly because the effect of giving each party a defined one-half interest in a family asset helps to protect each spouse's interest in that asset from things like:

1. a claim a third-party creditor might have against one spouse in debt;
2. the bankruptcy of one spouse and the consequent loss of his or her assets from the pool of family assets available for division;
3. a unilateral decision to sell an asset made by one spouse; and,
4. a claim against the estate of a dead spouse.

Needless to say, it can be critical to obtain a triggering event early on in a family action.

A triggering event also fixes the pool of family assets subject to division, so that assets acquired after the triggering event may not necessarily qualify as "family assets" that must be shared. Of course, the sale of a family asset to buy a new asset after a triggering event is not going to protect the new asset from division. A new asset bought with a family asset will become a family asset subject to division between the spouses.

Getting a triggering event can be a bad idea when a spouse is asking for a reapportionment of the family assets and the other spouse is looking at bankruptcy or is in danger of dying before the litigation is resolved. In both cases, the triggering event fixes the spouse's interest in the assets when the spouse might have gotten more than half the family assets. If you have any concerns about the effect of a triggering event, you must speak to a family law lawyer immediately.

Back to the top of this chapter.

For many people, there will be no tax impact from the division of their assets. There will be a tax impact if the division creates what the Canada Revenue Agency (the CRA) considers to be "income" for either spouse.

The most common kind of taxable income people have is employment income. Some other kinds of taxable income include:

1. the money you get when you cash in an RRSP;
2. money received from the sale of real property when the property has increased in value;
3. money received by a shareholder from the company as a dividend;
4. money received by a shareholder from the sale of the company;
5. interest you get from a loan you've made to someone else; and,
6. the profit realized from the sale or transfer of property that isn't the family's principle residence.

When you report this sort of income in your tax return, the CRA considers it to be taxable income, income which may be taxable at different rates.

The purpose of this segment is to alert you in a general way to the possibility that there might be some tax implications in the way family assets are divided and that there are sometimes ways to avoid this sort of unfairness. This is, however, a complex area of family law, and if you have a problem of this nature, you really should get the advice of a lawyer.

Avoiding Unfairness

The tax consequences of a particular arrangement in a court order or separation agreement can be taken into account when property is being divided, since the payment of tax by one party may fundamentally change the fairness of the agreement or order. Consider the following example:

Say Spouse A receives $100,000 in cash and Spouse B receives a rental house worth $100,000, and the cash and the rental house are all of the family assets. At first glance, this seems like a fair, 50-50 split of the family assets, which together come to a total of $200,000. In fact, it isn't.

No tax will be payable by Spouse A as a result of receiving the cash. Tax will be payable by Spouse B if the rental house has to be sold, since it wasn't the family's primary residence. If the tax payable on the income Spouse B earns from the sale is $20,000, really, Spouse A has received $100,000 and Spouse B has received $80,000. If you count the tax which Spouse B has to pay, the division of the family assets wasn't equal at all.

To make the split equal, Spouse A should pay Spouse B an extra $10,000 so that each spouse will have $90,000 once the rental house is sold.

The same problem can arise if one spouse has to sell an asset in order to satisfy an order or agreement for the division of the family assets, such as making a lump-sum payment to equalize the value of the assets held by each party. This may result in the CRA assessing extra of taxable income to the party who had to sell the asset, with the consequence of an additional tax debt owed by that party to the CRA.

There is an easy way to avoid unfair tax consequences and preserve the intention of the agreement or court order: the agreement or order can recognize the negative tax consequences of a particular term and compensate the affected spouse, as in the example involving the house above. If you need to convince a court to take tax considerations into account in dividing assets, there are three general rules you should keep in mind:

1. each case will depend on the particular circumstances of the parties;
2. you should be able to provide a specific dollar figure for the tax which will be payable; and,
3. you must be able to show that the sale or transaction which will result in tax being payable is likely to occur in the reasonably near future.

RRSPs

Normally, if you wish to cash out an RRSP, you must pay tax on the RRSP as if the RRSP was taxable income, like employment income. Under the federal Income Tax Act, transfers of RRSPs between spouses are tax neutral, under what is called the "tax-free spousal roll-over" provisions of the act.

When RRSPs are to be transferred between spouses according to a separation agreement or court order, the RRSPs are simply transferred between the spouses' RRSP accounts without having to cash them out, and no tax is payable.

Real Property

When a piece of property is to be transferred between spouses according to a separation agreement or court order, the parties should use the province's Special Property Transfer Tax Form, to take advantage of the tax-free status of transfers between spouses made pursuant to family agreements and court orders. This form is normally completed during the process of transferring title to the property at the Land Title and Survey Authority, and no tax will be payable on the transfer.

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