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The concept of “tracing” is relevant to a number of different areas of law and each area has its own nuances and interpretation.

In family law, tracing is required when parties are claiming a section 4(2) Family Law Act exclusion from their net family property (“NFP”). Any gift or inheritance received by one of the spouses during marriage may be excluded, but in order to be excluded the gift or inheritance must be identifiable and traceable by the person claiming it. For example, if a person receives a gift of $200,000.00 during marriage and that money is put directly into a car of the same value, then, at separation date, the car may be excluded from the persons NFP, because the gift of cash can be directly traced into the car.

This is an easy example, but often tracing is complicated by multiple transactions or by gifts/inheritances being deposited into joint accounts. These complications have led to different approaches to tracing.

Three different approaches to tracing have emerged over the last two hundred years. They are:

  1. The common sense approach;
  2. The "first in, first out" approach; and
  3. The "pro-rata" approach

Each will be examined in turn.

The Common Sense Approach

The common sense approach requires that experts and counsel use their common sense to determine whether something is traceable. Any evidence adduced will be weighed in the context.

The "First In, First Out" Approach

The next approach is the ‘first in, first out’ approach which assumes that the first money put into an account is the first money taken out. Therefore if we take the same $200,000.00 gift from above and start a bank account with it (sole or joint) and then add $200,000.00 of personal earnings to it, and subsequently remove $200,000.00 from the account there will be no exclusion.

The approach presumes that the money removed was the first put in and not the money subsequently added.

The "Pro-Rata" Approach

The final ‘pro-rata’ approach is more formulaic than the previous two approaches. It requires that the gift be translated into a percentage of the fund into which it has been deposited.

Once again, using the above example, we would have $200,000.00 in the account at the time of separation. Of the total amount in the account, 50% came by way of gift and 50% came by way of personal earnings deposited. Consequently, 50% of the funds in the account are traceable to the original gift. Therefore, rather than receiving no exclusion, as would be the result of the ‘first in, first out’ approach, the ‘pro-rata’ approach would allow for a $100,000.00 exclusion.

The ‘pro-rata’ approach is now the preferred method of tracing in the family law context (see paragraph 70 of Goodyer v. Goodyer). In Goodyer v. Goodyer, Justice Perkins reasoned that “[t] here is no reason to resort to the old legal fiction in these circumstances” and, instead, Courts should stick to the more fair and equitable ‘pro-rata’ approach (para. 70).