The new Family Law Act that replaced the Family Relations Act last March introduced significant changes to the rules surrounding property division upon a relationship breakdown. These new rules have startling implications on the division of property, including where a spouse has an interest in a business or is a beneficiary of a discretionary trust.
Under the former Family Relations Act, three classes of assets were subject to a presumption of equal division at the end of a relationship breakdown:
•a spouse's interest in a home, RRSP and pension plan;
•property ordinarily used for a family purpose during the marriage; and
•a business or venture of a spouse to which the non-owning spouse made a direct or indirect contribution.
Under the Family Relations Act, an interest in a trust could be found to be a family asset if the court determined that the interest itself was "ordinarily used for a family purpose." The court's interpretation of "ordinarily used for a family purpose" was an elastic concept and could include assets that were never used by the family during the marriage. In addition, a non-owning spouse would have to make a recognized form of contribution to the business to be able to seek a division of its value.
Under the new act, a spouse's interest in a discretionary trust that has certain characteristics and a spouse's interest in a business will be "family property" that is subject to division on a relationship breakdown. "Ordinary use" is not relevant in the act for determining which assets will be subject to a division.
This means that where a spouse is a beneficiary of a discretionary trust, any increase in value of the property owned by the trust during the relationship will notionally belong to the beneficiary who separates from his or her spouse for the purposes of the division of property between the spouses upon a relationship breakdown. Discretionary trusts are commonly used in business ownership structures, often with various family members named as beneficiaries.
To illustrate, Jane is one of the beneficiaries of a discretionary trust established by her father, which trust owns shares of the family business. In 2010 Jane marries John and the value of the property owned by the discretionary trust is worth $1 million. In 2015, John and Jane divorce. The value of the property owned by the discretionary trust has increased to $2 million. Under the act, John will be entitled to one-half of the increase in value of the property ($500,000). Subject to other adjustments, Jane will be required to pay to John one-half of the increase in the value, even though she has no power to force the trustees of the trust to make distributions to her and even though there may be other beneficiaries who have an interest in the same trust property.
It is important to note that the new property division regime applies not only to married persons but also to a person who has lived with another person in a marriage-like relationship continuously for at least two years. This means that common-law spouses, including same-sex spouses, in addition to married spouses, are presumed to be entitled to one-half of the increase in value of property subject to division.
To date, there have been no court decisions that provide further guidance as to how these provisions will operate. This is a brief overview of some parts of the act, which can have a significant impact on business owners and their families. If you own a business or have an interest in a trust, you should review these potential risks with your professional advisers.
