The excluded property regime in BC took effect in 2013 so it is nothing new. But how to calculate the value of excluded property specially when it is intermingled with family property remained an unanswered question until recently when our Court of Appeal finally decided on it in the case of O’Connor v. Mills .
What does O’Connor v. Mills say about tracing excluded property?
In the case of O’Connor v. Mills , the court tackled major questions around tracing excluded property in BC and dividing assets in a BC divorce, particularly when inherited property is mixed with family efforts. It also provides long-awaited guidance on how to trace excluded property under BC’s Family Law Act (FLA). Spoiler alert: the court ditches “first in, first out” and opts for fairness via a pro rata approach.
If you’re navigating a complex property division in BC and this seems overwhelming, book a consultation with our experienced family law lawyers to ensure your rights are protected and you get a fair outcome.
Background Facts in O’Connor
The Relationship
- Together for 23 years, married for over 20, and raised three children.
- Ms. O’Connor stayed home for much of the marriage to care for the children, returning to work later.
- Mr. Mills worked in construction but later shifted to developing family properties, largely using an inherited home.
The Dispute
The appeal and cross-appeal focused on:
- Division of family property vs. excluded property
Key Assets
- The Bellevue Property – inherited by Mr. Mills, later sold for ~$3.6M.
- The Monck Park Property – built using the proceeds of the Bellevue Property, went up in value and then later destroyed by fire.
- Insurance proceeds from the fire – netted ~$2.6M, which became the focal asset for division.
- RRSPs, cash inheritances, and personal property – less central but disputed.
Error at Trial
The trial judge concluded the insurance proceeds were entirely excluded property even though the couple lived in the second property and its value increased during their marriage. The judge failed to conduct a s. 95 unequal division analysis on family property. This was a fundamental mistake, as s. 84(2)(g) of the FLA makes clear that any increase in the value of excluded property becomes family property and is divisible.
Read our blog on Excluded Property here
Tracing Excluded Property in BC: A New Standard
The Court of Appeal clarified the proper approach to tracing excluded property in BC divorce cases:
What’s Out?
- “First-in, first-out” tracing (Clayton’s Rule) ? too arbitrary.
What’s In?
- Pro Rata Ex Post Facto Tracing ? calculate each spouse’s proportionate contribution to a pooled asset.
- Treat contributions equally unless the evidence clearly shows otherwise.
- Tracing must respect the equal partnership principle under s. 81 of the FLA.
The General Formula of Valuing Excluded Property – The Pro Rata Method:
Excluded Share = (Value of Excluded Property at Acquisition ÷ Total Value of All Contributions) × Value of Mixed Asset at Time of Separation
Where:
-
Value of Excluded Property at Acquisition
? the amount originally contributed from a source that qualifies as excluded property (e.g., inheritance, pre-relationship asset) -
Total Value of All Contributions
? the total amount used to acquire or improve the asset (including both excluded and family property contributions) -
Value of Mixed Asset at Time of Separation
? the fair market value of the asset at the relevant time (usually date of separation or trial), which may include growth, appreciation, or insurance proceeds
Practical Example from the Case:
Mr. Mills’ inherited Bellevue Property was valued at $1.85M. He sold it and used the proceeds to build Monck Park. Since Monck Park appreciated in value—and included both excluded and family inputs—the court traced his exclusion on a pro rata basis, concluding his claim to excluded property was only $1.15M, not $1.85M.
Step-by-Step Math:
Total value of Monck Park (before fire):
$4.21 million
Mr. Mills’ contribution (from inherited Bellevue property):
$1.85 million
Excluded Property Share Calculation:
Excluded Share = ($1.85M ÷ $4.21M) × $2.627M
Excluded Share ? 0.4394 × $2.627M
Excluded Share ? $1.154M
?? Result: Mr. Mills’ excluded property = $1.15 million
Balance for division:
$2.627M – $1.15M = $1.48 million (family property subject to division)
Unequal Division Under s. 95
After re-calculating the exclusion, the Court found that equal division of the remaining family property would leave:
- Mr. Mills: ~$2.1M
- Ms. O’Connor: ~$964K
This was significantly unfair due to the following:
- Mr. Mills was only able to develop the properties because Ms. O’Connor cared for the children.
- The long marriage.
- Ms. O’Connor’s career sacrifices.
- Her contributions to the home and family.
Result:
A 65/35 split of family property in Ms. O’Connor’s favour under s. 95 of the FLA. She received about $1.28M, while Mr. Mills retained $1.85M, giving him the benefit of a little over half his surviving exclusion.
Legal Takeaways
? For Lawyers:
- Use this case to challenge “first-in, first-out” tracing. Pro rata is now the gold standard in BC unless a compelling reason suggests otherwise.
- Even if excluded property is substantial, equal division of the rest may still be unfair. s. 95 is key when there’s a huge disparity.
- Spousal contributions to childcare and home can be grounds for unequal division, not just spousal support.
? For Clients:
- Just because your spouse inherited property doesn’t mean it’s all theirs after separation—especially if you both worked on it.
- If you sacrificed your career for the family, the law aims to ensure that sacrifice is recognized.
- Dividing assets in a BC divorce is complex. Tracing excluded property correctly can significantly impact your financial future.
Need Help Tracing Excluded Property in BC?
Understanding the nuances of property division in BC is crucial, especially when dealing with excluded assets and significant disparities. If you’re facing a divorce and need expert legal guidance, YLaw is here to help. Our experienced family lawyers can ensure you receive a fair outcome. Contact us today!
Author: Ari Wormeli is a partner and divorce lawyer at YLaw, and the writer of this article.
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