What Happens to an Exempt Asset That Depreciates in Value?

The Family Property Act, RSA 2000, c F4.7 (FPA) governs the distribution of property in the event of a separation/ divorce or the breakdown of an adult interdependent relationship.

Although property acquired outside the marriage/ relationship is exempt from sharing, there are categories of property, such as increases in the value of exempt property, that will be distributed in a way that is “just and equitable”. The seminal cases setting out the framework for tracing and sharing exempt property are Harrower v Harrower^[1] and Jackson v Jackson^[2].

The principles guiding tracing exempt property are as follows:

1. an exemption will be maintained if exempt property can be traced into replacement property, but some tracing must be possible;
2. “tracing can be inferred, implied or presumed.” Physical or accounting precision in tracing is not required, as long as a fair connection between the exempt property and the replacement property can be seen. See also Roenisch v Roenisch (1991), 1991 ABCA 163 (CanLII), 115 A.R. 255, 32 RFL (3d) 233 (CA); Hughes v Hughes 1998 ABCA 409 (CanLII), 168 DLR (4th) 112, [1999] 6 WWR 243;7
3. if exempt property is dissipated, it loses its exemption. See also Brokopp v Brokopp (1996), 1996 ABCA 4 (CanLII), 181 AR 91, 19 RFL (4th) 1 (CA); Roenisch, supra;
4. the consumption or dissipation of exempt property does not create any “notional debt” that must be accounted for before the balance of the matrimonial property is distributed.^[3]

There are instances where the value of exempt property may have decreased (i.e. the value of a home). In these cases, does the decrease in value become a shared liability? Section 7(3) of the FPA provides that the decrease or “difference” in the value of exemptions is analyzed and “distributed” in a just and equitable way giving consideration to section 8 factors. However, In Harrower, the Court holds that a decrease in the value of an exemption does not create a shareable deficit:

… A deficit does not appear to me to be a proper subject of distribution in the property-oriented scheme of s. 7. As one of my colleagues observed we would not think of a one-legged person as having a ‘difference’ in leg lengths. If there is an increment there is property to be distributed. If there is a decrease in value the exempted property remains exempt but the deficit does not represent a liability. There is, of course, a right under s.8 to take debts into consideration, but I would not characterize that process as being the distribution of a liability, let alone read the Act as contemplating the distribution of a capital deficit. The circumstances which created such a ‘deficit’, and its existence might, of course, be factors which a court is persuaded to take into consideration in providing for an unequal distribution.^[4]

The Court in Lovich v Lovich considered principles to apply where the exempt property is consumable or depreciable and noted the following:

1. the initial exempt value is the fair market value of the depreciable property on the date of the marriage, or the date of the gift.
2. the exemption can be carried forward if the property is traded in, or if the property is sold and replaced. The exempt value can be traced forward into new property so long as there is a reasonable nexus between the exempt property and the replacement property. No precise and exact tracing is required, and de minimus breaks in the chain of exempt property can be tolerated.
3. the amount of the exemption is lost as the property is consumed up or depreciated. If, by the time of trial, the property has been totally consumed and depreciated, there is no remaining exempt value.
4. if the property is partly consumed and depreciated, and then traded for other property, the value at the date of the trade-in is carried forward into the new property. If that new property is then consumed or depreciated, the exempt portion is deemed to be consumed pro rata with the non-exempt portion.^[5]

In Lovich, these principles were applied to an exempt 1979 Trans Am valued at $12,000. The Court traced the proceeds of the exempt property through three vehicles the parties purchased during the marriage to a 2001 Ford Truck owned at the date of separation. Based on the depreciation of the vehicles, the remaining exemption was $510.

Exemptions can prove to be a complicated factor in determining a fair and equitable division of property. The experienced family lawyers at Vogel LLP can answer any questions that you may have regarding exemptions and work with you to resolve your property division.

[1] Harrower v Harrower (1989), 68 Alta L.R. 92d0 97, 21 R.F.L. (3d) 369

[2] Jackson v Jackson (1989), 68 Alta. L.R. (2d) 118 (C.A.)

[3] Lovich v Lovich 2006 ABQB 736 at para 38.

[4] Harrower, at para 16.

[5] Lovich, at para 46