Are Settlement Proceeds Exempt From Family Property Division?

One of the key issues that parties face in a divorce is how to divide property. Generally, any property held by one or more parties is considered family property to be divided equally between the parties. Notably, this means that even if the property is held solely by one party, it could still be considered family property to be divided equally. The court will also consider whether there are any agreements between the parties to divide the property in another way, as well as whether these agreements are valid or if they should hold any weight. Certain categories of property may be exempt from being family property. If the property is exempt, it is not subject to division between the parties, and the party that holds the property will be able to keep it.

This post will discuss which property types are exempt from family property division. In particular, we will examine whether settlement proceeds are exempt from family property division. To illustrate the legal analysis involved, we will discuss a case example, Pederson v Pederson, 2024 ABKB 360, in which the court found that part of the wife’s settlement proceeds from a motor vehicle accident were subject to family property division, despite being a category of exempt property. This post will provide important takeaways for parties seeking to understand their property division rights, especially when an exempted property may be involved.

What is exempt from family property division?

Under the Alberta Family Property Act, certain property is considered exempt from family property division, even if it is held by one or more parties. The following categories are exempt from family property division:

1.     Gifts from a third party;

2.     Inherited property or funds;

3.     Property acquired by a party before the marriage or before the beginning of an interdependent relationship;

4.     An award or settlement for tort damages in favour of a party, unless the award or settlement is compensation for a loss to both parties;

5.     Insurance policy proceeds unless proceeds are compensation for a loss to both parties.

A common example of gifts from a third party would be a gift from a family member, including a valuable item or funds. This property would not be included in the overall pool of family property, which would be divided equally between the parties. It is important to note that the exemption would only apply to gifts to one party. If the gift was for both parties, it would not be exempt and would be part of the family property to be divided. It may be helpful for the party seeking the exemption to have evidence showing that the gift was intended only for them and not the parties overall. For gifts involving funds, the party seeking the exemption will need to show that they kept the funds separate from family assets. Otherwise, the funds will become part of the family property to be divided.

Inheritances also need to remain separate and not be used to acquire family property to maintain their exempt status.

Settlements and awards from legal action can also be exempt if they are meant to compensate one of the parties and not both. Similarly, they may lose their exempt status if these funds become involved in family assets. It is possible for only part of the settlement funds to be no longer exempt if they are used to acquire family assets, as was the case in Pederson.

What happens when exempted property is used to acquire family property?

In summary, exempted property may become family property when used to acquire family property. This could be especially important if the exempted property included funds, such as from a gift, inheritance, or settlement proceeds, as was the case in Pederson. If a party intends to keep the property exempted, it is important to keep it separate and have evidence that it was only acquired by one spouse and not both.  

If a property is being sold, for example, a house, the proceeds must remain separate to maintain its exempt status. If the proceeds are used to purchase family property, including property that is in the name of one of the spouses only during the marriage, it can lose its status as exempted property. Parties may consider keeping the funds in a separate account throughout the marriage if the intent is to maintain exempted status.  

Part of Settlement Proceeds from Motor Vehicle Accident Deemed Family Property in Recent Alberta Case

In the Pederson case, the parties began cohabiting in 1999 and married in 2001. They separated in 2018 after 17 years of marriage. The parties bought a home together in 2002. Then, in 2003, the wife suffered significant injuries from a motor vehicle accident, which left her unable to work and disabled.

The wife also made claims against her insurance provider, which had terminated her disability benefits after the accident. Some of these proceeds were used to purchase a home in both parties’ names, so they lost their exempt status. The funds were available for equal division between the parties as family property. Any increases to the value of the funds would be divisible.

For the motor vehicle accident proceeds, approximately 40% of the funds were non-exempt and subject to family property division. This was because the court determined that certain categories arising from the proceeds were non-exempt.

The exempt categories arising from the motor vehicle accident proceeds included the following costs:

1. Pain and suffering;
2. Interest on pain and suffering;
3. Lost future wages;
4. Future housekeeping and care as a result of disabilities.

The non-exempt categories are as follows, which were to be included as family property:

1. Out-of-pocket expenses;
2. A portion of lost wages;
3. Past housekeeping;
4. Past loss of childcare;
5. Mileage.

Based on these categories, the non-exempt categories comprised approximately 40% of the motor vehicle accident proceeds and were subject to property division.

Key Takeaways

Even if property such as settlement proceeds are potentially exempt from being family property, some parts of the proceeds may be non-exempt and, therefore, subject to division between the parties upon separation.

Mincher Koeman Lawyers Can Assist with Family Property Division

Property claims can become complex for parties if an exempted property is involved. Given that these findings depend on the case’s unique circumstances, you should contact one of our family law lawyers at Mincher Koeman, who are experienced in assisting parties with property division. Our Calgary family law lawyers are dedicated to finding the best resolution for you.

To book a consultation, please contact us online, or by phone at 403-910-3000.