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May 2017
PFD | Family

How a spouse's bankruptcy impacts the division of family patrimony

By Amélie Dupras Lawyer

On March 6, 2017, the Court of Appeal of Québec assessed the impacts of a spouse's bankruptcy on the division of family patrimony in Syndic de R.T. (2017 QCCA 362). More specifically, the Court examined whether a debt stemming from a division of family patrimony arising from a judgment of divorce constitutes a provable debt within the meaning of the Bankruptcy and Insolvency Act. The facts in this case are described here.

The parties were married in August 1995 and ceased living together in April 2013. On July 9, 2014, the Honourable Carl Lachance of the Superior Court of Québec granted a judgment of divorce between the parties and ordered the division of the property that made up the family patrimony. The following month, the appellant (the former husband) chose to make an assignment of his property and asked the trustee to stay the division of the family patrimony. The trustee denied his request. The Court of Appeal was then tasked with considering the grounds for the refusal.

The appellant claimed that he could lawfully recover his RRSP on the mere fact that he had declared bankruptcy since the RRSP is exempt from seizure under section 67(1)b.3) of the Bankruptcy and Insolvency Act. His former wife, the respondent in the case, would then hold a simple provable debt in his bankruptcy, which would force her to present a claim to the trustee for the debt arising from the division of the family patrimony.

For the majority reasons per the Honourable Guy Gagnon, the Court of Appeal confirmed the prior ruling, which had dismissed the former husband's claims.

Justice Gagnon first affirmed that the Québec regime that governs the partition of family patrimony is a hybrid one that is complete within itself, as set out in the Civil Code of Québec. With regard to the notion of a provable claim under the Bankruptcy and Insolvency Act, it implies that a debt must exist.

According to caselaw and doctrine, a judgment of divorce that calls for the partition of a pension plan confers property rights for the part of the plan that is divided. In other words, the accrued rights in a pension plan are transferred on the day the judgment of divorce is granted to the extent provided in the division. Therefore, because there is no debt, there is no provable claim.

In this respect, Justice Gagnon underscored the importance of taking care not to confuse a person's rights in relation to his/her spouse's pension plan and the consequent formalities pertaining to the tax vehicle used to transfer the property.

[20] [...] Résumée à sa plus simple expression, l'attribution d'un REER à la mise en cause consistait à la concrétisation de son droit dans ce bien du patrimoine familial au moment du prononcé du jugement qui a mis fin au mariage. [In essence, the attribution of an RRSP to the respondent realized her right to this property in the family patrimony when the judgment to end the marriage was rendered.]
[21] Or, les modalités de transfert d'un REER ne permettent pas de définir autrement le droit attribué à la mise en cause ni d'en changer la nature véritable. [And the conditions of RRSP transfer do not allow for any other means to define the right of the respondent or change their true nature.]

The Court of Appeal therefore concluded that the former wife had no claim to enforce in the appellant's bankruptcy with regard to the division of his RRSP.

The Court also ruled that the appellant's bankruptcy did not counter the impacts of the division of the family patrimony with regard to the former spouses' furniture and vehicles, the earnings arising from the application of the provincial pension plan or the benefits accrued in the employer's pension plan.

In sum, Syndic de R.T. teaches us that the portion of RRSP attributed to a spouse in a divorce settlement prior to the bankruptcy of the debtor spouse cannot become a provable claim under the Bankruptcy and Insolvency Act. Sharing the assets of a pension plan therefore does not create a debtor/creditor relationship between the spouses.

However, it is important to note that a judgment of divorce that determines the division of a family patrimony does not automatically entitle ownership to the other spouse's property since the sharing of a debt may also be carried out in cash. The terms of the sharing therefore have a major impact should a spouse declare bankruptcy. In order to determine the spouses' respective rights in such matters, the provisions of the divorce settlement must be carefully considered.

In addition, the impacts of a spouse's bankruptcy on the division of a family patrimony differ when the bankruptcy occurs before the divorce is pronounced. In such cases, the spouse who receives support must turn to the Court to ask for the suspension of the legal proceedings to be lifted in order to undertake and ensure the division of the family patrimony.

For more information on the topic, do not hesitate to contact a family law expert at PFD Lawyers.