According to the Family Law Act in Ontario, a husband and wife are entitled to a claim to half of the increase in their spouse’s property accumulated during the marriage (between the date of marriage and date of separation). This is true whether the property is owned jointly or whether it is held solely by one spouse. Where not owned by the spouses together, there is no compensation in the legislation to any increase in value of that property between the date of separation and trial (i.e. the non-owner spouse presumptively loses out on the increase). But not in all cases is the owner spouse entitled to this windfall. In some cases, despite ownership as registered on title or despite a shareholder agreement in a business, the courts can award an ownership interest to the non-owner spouse by way of “constructive trust”.

A constructive trust is an equitable remedy (based on fairness) in which the court “constructs a trust” in favour of the non-owner spouse.

In Rawluk v. Rawluk, a 1990 Supreme Court of Canada decision, the Rawluks were married and had lived and worked together for 29 years. They had a farm and a farm equipment sales and service business. The wife had assumed a large role in the operation of the farm and business. On the date of separation the couple had a number of properties, which were mostly registered in the name of the husband. In the time between separation and trial the value of the properties had risen dramatically.

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The trial judge, the Court of Appeal and the majority of judges in the Supreme Court of Canada held that the property in question was impressed with a constructive trust, which entitled the wife to participate as an owner in the increase in the property after separation.

These constructive trust principles are applicable in cases where a non-owner spouse has made contributions to a family business or to property owned on title by the other spouse (whether for convenience, tax reasons or otherwise)

It is particularly applicable where a spouse has provided services, without compensation or at undervalue to a property (financial, labour, etc.) or in a business (akin to an employee). The courts do not distinguish domestic services from other contributions made by a spouse to the business.

The court’s finding of constructive trust requires the claimant to prove three elements:

1. An enrichment (to the owner spouse);
2. A corresponding deprivation (to the non-owner spouse); and,
3. No juristic reason for the enrichment (an exception for which the courts do not feel the enrichment should be returned, such as where the enrichment was a gift).

With respect to the third element, the Honourable Justice Dickson (as he then was) noted in the Supreme Court decision of Becker v. Pettkus, 1980 CanLII 22 (S.C.C.):

I hold that where one person in a relationship tantamount to spousal prejudices herself in the reasonable expectation of receiving an interest in property and the other person in the relationship freely accepts benefits conferred by the first person in circumstances where he knows or ought to have known of that reasonable expectation, it would be unjust to allow the recipient of the benefit to retain it.

Once the court finds unjust enrichment it must decide if a constructive trust or monetary damages are appropriate. The starting point is monetary damages. Where it is not possible to adequately compensate the spouse by way of monetary damages, the court will impose a constructive trust (i.e. interest) in the property/business, diluting ownership of that asset.

In order to award a constructive trust, it is necessary to find a nexus between the contribution of the non-owner spouse and the property which is to be the subject of the constructive trust. For example, the court would not impose an interest by constructive trust in a business or property that the person did not contribute to (i.e. where their contributions were to a different business or property).

We can see these principles applied in the case of Tracey v. Tracey, 1998 CanLII 14893 (Ont. S.C.), in which the wife contributed to the running of the family business (a dairy) for a decade without compensation, or minimal in the form of income splitting. The court concluded:

[14]           From the evidence at trial which I accept, I am also satisfied that Betty Tracey made a significant personal contribution to its success. In 1980, she mortgaged her interest in the matrimonial home to secure bank financing for Ken’s acquisition of the business in the amount of $52,500.

 

[15]           She also made day to day contributions to the work of the business. She made aprons and kerchiefs for the staff. She made drapes for the dairy bar. She cleaned the floors and the rest of the dairy bar prior to government inspections. She assisted in staff training. She worked on the production line as needed. She packed ice cubes when required. She assisted in the office work – collecting retail accounts receivable and cash, maintaining ledgers, filing payroll. She made meals for the staff.

 

[16]           She held no management position in the business. However, there was evidence that she participated with Ken in an important meeting with a creditor (Brum’s Dairy) and that they discussed business plans and events until the late 1980’s. As the business grew, the need for her personal participation on a day-to-day basis lessened. In my view, however, her overall direct contribution to Centreside Dairy 80 during the decade leading up to her separation from Ken in June 1990 was both solid and substantial in the context of this family business. Essentially, she received no compensation for her services to the business, except amounts received as part of an income splitting scheme devised by Ken on the advice of his tax accountants. These amounts were no measure of her contributions.

 

[17]           Although she held no management position in the business, it is clear from the evidence that she held a senior management position in the family as spouse to Ken and mother to 11 children. She carried the major burden of managing the household throughout the marriage.

 

[18]           In these circumstances, I am satisfied that Ken’s interest in the corporation has been enriched and Betty correspondingly deprived of an interest in the corporation without juristic reason. I am satisfied that Betty aided her husband in the manner I have outlined in the reasonable expectation of receiving an interest in the business and that Ken was aware of her expectations. His manoeuvres to divest himself of legal ownership of most common shares of the corporation on August 1, 1990, less than two months after their separation, is evidence of that.

 

 [19]           The doctrine of constructive trust may be applied to determine ownership of property of married spouses under the Family Law Act. In my view, this is an appropriate case to impose a constructive trust. When the parties separated in June 1990, Ken owned 100% of the common shares of the corporation. A constructive trust is imposed on 25% of the common shares of the corporation in favour of Betty. If, as I understand, there are now 100 common shares issued and outstanding, then 25 of them are declared to be the property of Betty Tracey.

These situations are important to consider as they may result in intended consequences to spouses on separation in spite of ownership, shareholder agreements, etc. The law with respect to constructive trusts can be contracted out of by way of cohabitation agreement or marriage contract.

These cases demonstrate the importance of these agreements to guard against constructive trust claims preserving a person’s interest in their property or business (for themselves and shareholders). They are a good idea even if a non-owner spouse has not or is not currently contributing to property, as the contracting out of these rights is easier to negotiate before these contributions are made.