The Ontario Court of Appeal Clarifies Rules for the Division of Property in Buttar v. Buttar

On its face, the Family Law Act, R.S.O. 1990 (“FLA“) appears to set down a fairly clear rule for the division of property in a divorce.   The net family property (“NFP”) that is in the hands of each spouse is calculated, and the one who has more pays an amount to equalize their positions.  The recent case of Buttar v. Buttar, 2013 ONCA 517, shows just how complicated this division can be for couples who have substantial property interests. 

The Court of Appeal had to go through some tricky points of statutory interpretation, with the result that significant portions of the lower court judge’s decision were overturned.   Some may lament this complexity, but the circumstances of property ownership in different families varies greatly.  The rules have to anticipate a vast array of possibilities in order to achieve fairness. 

The case involved the divorce of a dairy farming couple after 36 years of marriage.  They owned several different properties, with a total net worth of over $2 million between them.  The judgment of the unanimous court was delivered by Rosenberg J.A.  It sets out the court’s reasoning about these issues of statutory interpretation with admirable clarity.   There were three main legal principles that had to be dealt with on appeal, and these will be considered in turn.

The Definition of What is a Gift

One of the rules of calculating NFP is that gifts or inheritances received are excluded from the total value of property.  This is particularly significant for a gift of property received many years ago, whose value may have increased, as its full market value at the time of the marital separation gets excluded. 

Under Ontario farm regulations, the amount of milk that a farmer is allowed to sell is limited by a quota (a fact lamented by consumer advocates because it artificially increases the price of dairy products).   These quotas are quite valuable, and can be bought and sold.  When his parents retired from farming in 1979, Mr. Buttar received their milk quota.  By the time his marriage broke down, this quota had a market value of about $400,000.

Mr. Buttar sought to characterize it as a gift, and exclude this amount from his NFP.  The Court denied his claim, preferring function over form.  It was suggested that the reason that the transfer of the milk quota was recorded at no cost was to reduce income taxes.   The Court found that there was consideration for the transfer, specifically in the form of providing support and care for his parents in their retirement.  It was noted that Mrs. Buttar had contributed substantially to caring for her in-laws.   Rosenberg J.A. cited the Supreme Court in another family law case, Peter v. Beblow,  [1993] 1 S.C.R. 980, that “giving without expectation of remuneration [is] the central element of a gift at law.”

Capital Gains Tax

The FLA and the jurisprudence that has arisen around it are very conscious of the subtleties of financial calculations.   NFP is, of course, calculated net of the liabilities of each spouse.   In thinking about liabilities, the courts go beyond the obvious such as bank loans, and include the liability for future taxes that will have to be paid when the property is sold. 

Farmers are allowed a lifetime tax free limit on capital gains of $750,000.   Mr. Buttar had, unlike Mrs. Buttar, already used up his whole exemption, and any further property he sold would be subject to tax.   Therefore, he asked for this to be subtracted from the value of his NFP.

However, the liability for tax depends on when the property will be sold.  If it is in the distant, indefinite future, the discounted present value of the tax may be minimal.  The lower court judge had suggested that the possibility of Mr. Buttar selling further property was too speculative for this to be taken into account.  The Court of Appeal overruled her, saying that the test she applied was too stringent.  The issue would in any event be rendered moot because of the next part of their judgment.

How Property Gets Distributed

The issue that may be the most controversial in this decision relates to the mode of distribution of property.   In this case, the couple owned eight different farms and houses as joint tenants.  Mrs. Buttar liked one of those houses, and was living in it.

The lower court judge effected the distribution of property by giving each of them a few of these properties.  Looking at s. 9(1) of the FLA in isolation, there appears to be a power to distribute property in specie under it.  In the alternative, Mrs. Buttar argued that the Partition Act, R.S.O 1990, could be used to divide the properties among them.

The Court of Appeal vetoed both of these propositions.   They pointed out, quite correctly, that the purpose of the Partition Act is completely different.   It applies to situations where two or more people together own a single property.  If there is a dispute, one of them can go to court and ask the court to either divide the property up among them, or if this is not feasible, order that it be sold on the open market:

“The distribution of different properties between joint owners as was done in this case is simply not partition; rather, it is an enforced sale between two parties at a set price. And, as I have said, it is fundamentally inconsistent with the scheme of the dominant legislation, the Family Law Act.” (para. 67).

Looking at s. 9(1), the Court found that it had been wrongly interpreted by the application judge, and she had no jurisdiction to make that order.   On this view, s. 9(1) is limited to transfers in specie for marginal adjustments to the equalization.  They cited with approval a 1991 opinion by Galligan J.A. (taken from a rather different case, where the wife’s money had paid for the matrimonial home and cottage, and she disputed equalization on the doomed grounds of unconscionability):

“[Equalization] is done by the sharing of the value of the assets. The distinction is crucial and is one that is not infrequently overlooked…. the FLA does not provide for the distribution of property. Rather, it provides for the payment of money when the net family property of one spouse is less than that of the other…. I make particular reference to s. 4(1), which defines “net family property” as the value of all property which a spouse owns on valuation day. In this way, net family property is distinct in nature from “property” in the statutory sense found in s. 4(1) and from the word “property” in its ordinary sense.”  (para. 52)

The Court further cited with approval an earlier opinion of Galligan J. that puts the issue starkly into perspective:

“Certain suggestions were put to the court about how this dispute could be resolved by transferring assets to discharge corresponding liabilities. In my view, that is the stuff of settlement. Separating spouses can settle their differences as they see fit, but if they do not settle them and decide to come to trial, they are entitled to, and should expect to get adjudication, not mediation.”  (para. 51)

Galligan J. seemed to imply that the threat of having to sell all the properties might serve as providing an incentive to reach a reasonable settlement.   However, it can also have perverse effects in the case of embittered spouses, where one of them is willing to cut off his own nose to spite the other.   The spouse who is sentimentally attached to a property is particularly disadvantaged.   This can give one spouse unfair bargaining leverage.  If the court orders properties to be sold, it triggers taxes and other transaction costs. 

Mr. Buttar had argued that he could not be assured of being credited with a proper value for the properties being transferred to Mrs. Buttar unless their value was determined by selling them on the open market.  This is a questionable argument.   In other contexts, courts often apportion values among disputants based on professional appraisals.   The properties owned by the Buttars were not exotic, and a reasonably accurate value could have been estimated for them.   When there is a single property at stake, there might be concern about potential unfairness due to an error of valuation where one spouse keeps the property and compensates the other financially.   It should be less of a concern where there are several properties, and each spouse keeps some of them.

The interpretation applied by the Court to the FLA may be reasonable if one takes a literalist approach.  It is more questionable on policy grounds.   It is perhaps doubtful whether the legislature considered this contingency, and whether it makes sense to insist that properties always be sold and converted into cash instead of being apportioned.  

(The author would like to thank Professor Shelley Kierstead for her comments.)