Individuals and families have several options for protecting family wealth in the event of a breakdown in a spousal relationship. One key tool is a family law agreement, which allows spouses to dictate certain obligations as to spousal support and division of family property and debt upon separation.

However, the basis for entitlement to support differs substantively from a spouse’s entitlement to property division under the law, which can affect one spouse’s ability to recover certain costs resulting from the relationship. In a recent case heard by the Supreme Court of British Columbia, the court was asked to determine whether a debt owed by one spouse to the other could be recharacterized as lump sum spousal support.

When Might BC Courts Assign Debt As Spousal Support: What The Davidson Case Means For Separating Partners

In Davidson v. Davidson, 2024 BCSC 331, Ms. Davidson and Mr. Davidson were married for 4 years before separating in July 2017. At the time the case was heard, the parties had not formally divorced but had agreed to a consent order which allowed Mr. Davidson the option to purchase the family home. Otherwise, the home was to be put up for sale, and Mr. Davidson would bear the costs of selling the property.

When Mr. Davidson was unable to purchase the home, the property was listed for sale, and Ms. Davidson assumed the conduct of the sale. Ms. Davidson incurred approximately $29,000 in costs trying to sell the property that were meant to be Mr. Davidson’s responsibility.

When Mr. Davidson did not reimburse Ms. Davidson as required, Ms. Davidson obtained a court order directing Mr. Davidson to pay her these amounts. However, enforcement of the order was subsequently stayed because Mr. Davidson was assigned into bankruptcy. Ms. Davidson then sought to recharacterize the amount owing under the order as lump sum spousal support, allowing the debt to survive Mr. Davidson’s bankruptcy.

The court made two interesting conclusions with respect to the costs owing to Ms. Davidson in this case.

Firstly, the court determined that it was in a position to grant an order for spousal support despite a term in the consent order that dismissed the parties’ claims for prospective and retroactive spousal support.

The court relied on the reasoning of the British Columbia Court of Appeal case Sandy v. Sandy, 2018 BCCA 182, to find that claims for spousal support “may never be truly closed, assuming that some entitlement has been established”, but noted a passage from the Sandy decision indicating that parties wishing to achieve finality should clearly identify in any order or agreement the changes they agree will, or will not, warrant reconsideration of the terms of their respective support obligations.[1]

Since the consent order in the Davidson case did not contain any specific reference to bankruptcy or other scenarios, the court was open to making an order regarding spousal support despite the general terms of the consent order.

Secondly, although the court held that it could make an order as to spousal support, it found that the money owed to Ms. Davidson was essentially a “contractual debt”, and that recharacterizing this debt as compensatory spousal support was inappropriate when the preconditions for a valid spousal support claim were absent.

With respect to this second finding, the court was concerned that Ms. Davidson did not meet the threshold for entitlement to spousal support, given that she did not suffer any economic disadvantage arising from the marriage or its breakdown. While the costs of selling the house would not have been incurred had the parties not separated, the economic hardship stemmed from her inability to collect on the debt rather than from the relationship itself.

In fact, after the marriage, Ms. Davidson was in a much better financial position than Mr. Davidson, running a successful business and earning a comfortable salary while Mr. Davidson was mired in bankruptcy. The court determined that Ms. Davidson was effectively a creditor of Mr. Davidson and that she should not be given special status to circumvent bankruptcy protections simply because they were married.

The Outcome

The court ultimately rejected Ms. Davidson’s application to treat the debt as lump sum spousal support. This meant that Ms. Davidson was unable to recoup the costs she incurred selling the house despite both parties having agreed under the consent order that these costs were to be the responsibility of Mr. Davidson. Although it was open to the court to find that Mr. Davidson owed the money to Ms. Davidson as spousal support, the court declined to make that finding as there was no basis for Ms. Davidson to receive spousal support under the circumstances.

Next Steps

The Davidson case carries potential implications for individuals and families whose members have significantly greater assets or income than their spouses (or future spouses). Particularly, even if a spouse generally agrees not to claim spousal support if the parties separate, the absence of a detailed agreement regarding spousal support obligations could result in a spouse being able to advance a claim for support if their economic circumstances change in the future.

Additionally, debt incurred by one spouse on behalf of the other does not automatically equate to an economic hardship suffered because of the marriage or its breakdown. This could be potentially significant for individuals who, like Ms. Davidson, incur costs with respect to a division of family property or other joint debts but who are financially better off than their spouses. If the spouse is later assigned into bankruptcy, the individual who incurred the debt may have difficulties in recouping the amount they spent.

Wealth and succession planning is a changing landscape that requires an understanding of many facets of the law. The members of our Family Office group offer a wide range of expertise to help you navigate the intricacies of protecting and transferring both individual and family wealth. If you or someone you know need assistance with immediate or long-term planning goals, please contact any member of the Family Office group for more information on your particular situation. We are here to help.

 

[1] 2024 BCSC 331 at para. 24, citing 2018 BCCA 182 at para. 71.