Exemptions in Property Division

One of the more complex aspects of separations and divorce includes how to divide property once the marriage or relationship ends.

Property Division in Alberta is governed by the Family Property Act, which applies to married couples and adult interdependent partners (or common-law partners). Under the Act, property includes everything that is owned or possessed by either one of the parties or both parties. This includes:

• Real estate (i.e., homes, condos, etc)

• Vehicles (i.e., cars, RVs, bikes, etc)

• Bank Accounts (i.e., chequing, savings, TFSAs, FHSAs)

• Investments (i.e., registered retirement plans, registered investment accounts, etc)

• Pensions (i.e., work-provided pension plans, Canada Pension Plan, etc)

• Other valuable possessions (fine jewelry, paintings, your LEGO collection, etc).

All of these items are considered “divisible” under section 7 of the Act. Typically, this division is often an equal, 50 -50 split, similar to what you would see on TV. But the Courts are not required to split things equally if doing so would be unfair.

However, section 7 and 8 outline instances where property or part of a property may be “exempt” from being divided. Some examples include:

• An inheritance (i.e, property bequeathed via a will)

• Gifts from third parties to one spouse exclusively (i.e., if a parent gives their child, who is married, a gift and specifically notes the gift is for their child alone)

• Settlement funds from a lawsuit (i.e., funds from a personal injury claim)

• Property that was acquired prior to the marriage or relationship

How this exemption was treated can impact whether it is exempt. For example, if Person A receives a $100,000 inheritance, and deposits it in a joint bank account with Person B, and that joint bank account is used by both parties, then the full $100,000 will not be exempt from division.

But if Person A received the funds and put them into a separate account in their sole name, then it can be found to be exempt because it did not get mixed in with shared/joint property and it’s straightforward to trace the money back to where it came from.

A common example that family lawyers often see are the following:

1. Downpayments for the Family or Marital Home, and

2. Property acquired prior to marriage or the relationship

Below is a scenario that takes both into account.

---

Example

Rachel and Ross are common law partners, and began living together on January 1, 2020. They decided to separate on January 1, 2025.

Prior to their relationship, Ross owned and lived in a Blue home he purchased for himself, and he is the only name on title. The Blue home was worth $400,000 the day Rachel moved in with him.

On January 1, 2024, Ross decided to sell the Blue home so they could purchase a larger one. The Blue home is sold for $700,000. There is no mortgage owing. Ross deposits the $700,000 in his sole bank account and ten days later, uses the entire sum to put a downpayment on their new Orange home.

Now that they are separating and selling their Orange home, Ross puts forward the claim that $700,000 of the net sale proceeds of the Orange home should go to him, because he put in a downpayment of $700,000 from the Blue home. In order to prove his claim, he and his lawyer provide documents showing the following:

1. That he was the sole owner of the Blue home;

2. That the value of the Blue home on the date Rachel moved in was $400,000;

3. That when the Blue home was sold, he deposited the funds into a sole bank account;

4. That those funds were then moved from his bank account to the real estate lawyer for the purchase of the new home.

The Courts often refer to the document trail above as “tracing” in order to trace the movement of exempt property through different assets. Where a person cannot provide the documents to trace an exemption, the exemption may be lost.

In this case, one could argue that perhaps Ross should be entitled to the full $700,000.

But in most cases, the Court would say that the date Rachel moved into the Blue home is the date that she began sharing in the value of the Blue home. Perhaps Rachel made contributions to the Blue  home, like doing Do-it-Yourself renovations to increase the Blue home’s value or paying the expenses. Or perhaps she didn’t contribute anything. A Court might say that Ross only has a $400,000 exemption, attributed to the value of the Blue home the day that Rachel moved in. After that, the remaining $300,000 should be split evenly between Ross and Rachel, as outlined in the Act.

---

Conclusion

Either way, one of the best ways to prevent a complex tracing analysis is to ensure that any property that is gifted, inherited, paid out via a lawsuit or otherwise acquired by you or your partner/spouse is kept separate from any joint property. Reach out to Stokes Law Family if you are going through a separation and you believe you have an exemption claim that should be taken into consideration when you and your partner/spouse’s property is divided.

BOOK A CONSULT