Tracing Excluded Property

Today, we'll be discussing one specific aspect of the equalization of net family property: the tracing of excluded property

Hello. My name is Andrew Feldstein, and today I am speaking to you about equalization of net family property, and, specifically, about the tracing of excluded property.

In Ontario, when married spouses are separated with no reasonable prospect of reconciliation, either spouse may apply for an equalization of net family property. Section 5 of the Family Law Act says the spouse with the lesser of the two net family properties will be entitled to half the difference between them.

Generally speaking, a parties’ net family property is calculated by deducting the net property owned on the date of marriage from the net property owned on the date of separation, or what is also called the “valuation date.”

However, there are certain exceptions to this general rule. Section 4 of the Family Law Act also describes “excluded property”, which, although owned on the valuation date, is excluded from a parties’ net family property.

Pursuant to the legislation, there are several categories of excluded property.

These include gifts or inheritances during the marriage, and any income received from such properties; damage awards; life insurance proceeds; and property excluded by domestic contract.

As long as such property or income was not put into the matrimonial home and as long as it can still be “traced,” the value may still be excluded from a parties’ net family property. The best way of understanding excluded and traceable property is by way of an example.

Let us assume that a wife receives, during the marriage, a $20,000 inheritance from her great aunt.

The wife then uses $10,000 of those funds to purchase a vehicle; a further $5,000 goes towards repairs to the matrimonial home; and finally, the remaining $5,000 gets put into a separate investment fund which only includes the inherited funds. Two years later the wife separates from her husband.

In this instance, the wife would be able to exclude the value of the vehicle she purchased, as well as the value of the investment fund (including any interest accruing providing that there was a deed of gift made that excluded the interest). However, the wife would not be able to exclude the $5,000 value she put towards improvements to the matrimonial home.

While this straightforward and simple example is helpful in explaining how items can be excluded and traced, tracing can often become quite complex, particularly when excludable property is deposited into joint accounts or mixed with other assets.

Over time, the Courts have developed and evolved “tracing rules” to assist with these more complex situations. In the instance where a spouse transfers inherited funds into a joint account with the other spouse, this confers an interest in the spouse. As a result, the spouse in receipt of the inheritance loses the exclusion only to the extent of the gift he or she made to the other spouse.

The spouse who originally received the inheritance and then put it into a joint account will still be permitted to exclude one half of the value of the joint property, or property into which the gifted property can be traced.

Dealing with tracing excluded property can complicate the equalization of net family property.

To learn more about tracing excluded property, please visit our website. If you need advice on your own family law matter, please call us at (905) 581-7222 to schedule an initial consultation. We’re always happy to assist.

From Feldstein Family Law Group, I’m Andrew Feldstein.

Thanks for watching.

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