British Columbia practitioners were shocked by paragraph 85(1)(f) of the Family Law Act (British Columbia), which was brought into force on March 18, 2013, because it effectively presumes that property held by a discretionary trust is 100% owned by a spouse/beneficiary for the purposes of the division of family property rules. Specifically, paragraph 85(1)(f) provides that to the extent that property held by a discretionary trust has grown in value from marriage, or the beginning of a common-law relationship, until the settlement of the division of family property claim following a separation that property is “excluded property”. Excluded property is a subset of family property; only the growth in value of excluded property is family property.

Section 96 of the Family Law Act provides that the British Columbia Supreme Court normally cannot order a division of excluded property. However, this means that a spouse/beneficiary will be required to account for the growth in assets of a discretionary trust as his or her family property even though the spouse/beneficiary may never receive any assets from the trust. It is only a presumption because subsection 95(1) of the Family Law Act permits the British Columbia Supreme Court to order an unequal division of family property if it would be “significantly unfair” to divide family property equally.

Given that paragraph 85(1)(f) can apply to spouse/beneficiaries of trusts created many years ago (see section 252 of the Family Law Act), it is easy to envisage situations where multiple claims could be made against spouse/beneficiaries of the same trust in respect of the same trust property.

A detailed discussion can be found in Property Held by Discretionary Trusts and the Family Law Act which is a paper presented at the 2012 British Columbia Tax Conference sponsored by the Canadian Tax Foundation.

On March 3, 2014, the British Columbia government tabled Bill 14, Justice Statutes Amendment Act, 2014 which proposes to change, inter alia, paragraph 85(1)(f) of the Family Law Act so that only a spouse’s beneficial interest in property held by a discretionary trust (i) to which the spouse did not contribute and (ii) that is settled by a person other than the spouse will be excluded property.

Existing paragraph 85(1)(f) avoids the difficulties associated with valuing an interest in a discretionary trust by providing that the property of the trust is excluded property. Draft paragraph 85(1)(f) provides that only a spouse’s beneficial interest in the property held by a discretionary trust is excluded property.

Although it is trite trust law that the beneficiary of a discretionary trust normally has no beneficial interest in trust property, it is unlikely that the British Columbia Supreme Court will treat draft paragraph 85(1)(f) as a nullity because that language should be read in a common rather than technical fashion and in a fashion that permits draft paragraph 85(1)(f) to serve a useful purpose (see for instance Williams v. R. [2005] 4 C.T.C. 2499).

Will draft paragraph 85(1)(f) invite judges of the British Columbia Supreme Court to attach significant value to a spouse’s beneficial interest in the property held by a discretionary trust as was done in Sagl v Sagl, [1997] OJ No. 2837 (OCJ Gen. Div.) where Macdonald, J. acknowledged that a pro rata valuation of an interest in a discretionary trust involved “turning trust law upside-down”? Normally, that will not be possible because the Family Law Act, unlike the old Family Relations Act (British Columbia), provides in paragraph 87(a) that the value of family property must be based on its fair market value.

While you might question the way in which draft paragraph 85(1)(f) proposes to fix the existing problem, perhaps the intention is to leave the status of discretionary trusts as uncertain under the Family Law Act as under the Family Relations Act. The Family Relations Act was first enacted in 1978 and I believe it is reasonable to say that the status of an interest in a discretionary trust is a family asset has never been clearly resolved. Certainly, this is an issue still being debated in division of family property disputes under the Family Relations Act. I think most would agree that the “old status quo”, although less than perfect, is significantly better than the “new status quo.”

Section 73 of the Justice Statutes Amendment Act, 2014 provides that the changes to the Family Relations Act come into force by regulation rather than by Royal Assent. Accordingly, draft paragraph 85(1)(f) will not apply with retroactive effect.