Excluding the Value of Jointly Owned Property from Divorce Proceedings
The family farm holds an important place in our society and the lives’ of farmers. Not only is it likely a farmer’s most valuable asset, but it is also likely that it has been passed down through generations by way of inheritance or gift. We all know many farmers whose interest in the family farm has been passed down from parent to child and will continue to passed down to future generations. We all also know farmers that have gone through the unfortunate experience of a divorce. As part of their divorce the farmer and their husband or wife would have had to divide the financial gain experienced by them during their marriage, including the farm assets.
In Ontario, the law with respect to the division of the financial gain is set out in the Family Law Act. An important feature of the Family Law Act, particularly for farmers or rural property owners, is section 4(2). This section outlines that if an asset is received during the marriage, from someone other than their spouse, as a gift or inheritance, the value of the asset is ignored in the financial division process. Using section 4(2), if the farmer is able to prove that the property was transferred to him or her as a gift or an inheritance, during his or her marriage, he or she is able to exclude the value of the property from the financial division process.
Sometimes, inherited farm land is transferred from one spouse into the names of the husband and wife together. This is often done for tax purposes or to involve the other person in the farming operation. When this happens, the transfer may change the spouse’s ability to ignore the gifted property for financial division purposes. The extent of the change depends on the application of section 14 of the Family Law Act.
Section 14 outlines that the fact that property is held in the joint names of the spouses is proof, in the absence of evidence to the contrary, that the two of them are intended to own the property as joint tenants. However, if a husband or wife can show that when he or she put property into the joint names, he or she did not intend to benefit the other person in any way, the law will conclude that, despite the transfer, the person transferring the property is still the beneficial owner of the whole property.
If the husband or wife can show that he or she did not intend to benefit the recipient spouse, and the property was gifted or inherited from a third party during the marriage, the transferring spouse will be able to ignore the value of the property when dividing the family property.
An issue which occasionally comes up is what happens in situations where the person did intend to benefit the other spouse. Does the transferring spouse lose the ability to ignore the value of the property? If so, do they lose it in whole or in part? A recent local case addressed the issue head on. In this case, the husband’s mother gifted farm property to him during his marriage. The husband then sold the property and put the proceeds of sale into investments held in the name of the husband and his wife. The Court found that the investments were made possible from the proceeds of sale from the farm that had been gifted to the husband by his mother. The central issue in the case was whether the husband was able to exclude the value of the investments from the division of the family property.
The Court allowed the husband to ignore the value of his half interest in the value of the investments. The Court stated “to conclude otherwise, to find that the husband cannot have his exclusion because he has a joint ownership interest, rather than a sole segregated ownership interest, is illogical. It would be manifestly unfair”.
As a result, when a spouse transfers gifted or inherited property into joint names with his or her spouse, the transferring spouse loses the ability to exclude the value of the asset, but only to the extent of the gift he or she has made to the other spouse.
In summary, when a spouse transfers property that they obtained by way of gift or inheritance into the joint names with their spouse, such a transfer can have significant financial consequences. As a result, a spouse should seek legal advice with respect to the nature and consequences of such a transfer to protect their property in the event of a breakdown of their marriage.