Exemptions from Division of Family Property

In Alberta, the Matrimonial Property Act has been amended and renamed the Family Property Act. The primary purpose of the amendments is to include property acquired by spouses in a non-married relationship as subject to the (rebuttable) presumption of equal division upon termination of the relationship. The Family Property Act has maintained four categories of exempt property which are not divisible upon separation or divorce. They are:

  1. property owned by one of the spouses prior to the relationship;
  2. gifts from third parties;
  3. proceeds of settlement or judgment arising from a tort claim, and
  4. proceeds of a life insurance policy.

It is important to keep several things in mind. First, any growth in the exempt property is considered to be divisible family property. Second, these exemptions from family property can be diminished or lost over time if not kept in a form that is identifiable or traceable to the exempt property. Third, adding a spouse to title of an exempt asset will effectively reduce the exemption. Finally, the onus on proving the exemption falls on the party claiming the exemption.

This becomes a problem, particularly in long term relationships, where an exempt asset has been mixed with a non-exempt asset. For example, if a residence owned prior to the relationship is sold and the equity put into a new jointly owned residence, perhaps multiple times over the course of a relationship, it becomes increasingly difficult to trace the exemption. Likewise, inheritances, settlements from tort claims and life insurance proceeds are frequently used either in full or in part to pay down mortgages and lines of credit, and buy vehicles and furniture, or pay for vacations. As a result, the exemption becomes increasingly difficult to trace and is often lost entirely. Third party gifts are rarely documented as gifts to only one of the parties at the time of receipt. For example, funds received from the parents of one of the parties as a down payment on a house are often documented as a gift to both parties in “gift letter” for purpose of mortgage qualification, thus making it exponentially more difficult to prove the exemption.

The best solution is to enter a cohabitation, pre-marital or post-marital agreement as contemplated by sections 37 and 38 of the Family Property Act, that details what property will or will not be divided upon separation or divorce, including pre-relationship property and the growth in the value of that property, as well as property acquired by either spouse during the relationship.

Written by Gary Kirk

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