Stein v. Stein and the Apportionment of Tax Liability among Divcorced Partners, PART I

When a marriage ends in a divorce it is commonplace for assets to be split equally between spouses. According to a divided Supreme Court in Stein v. Stein 2008 SCC 35, the same 50/50 split that generally applies to the splitting of assets in divorce, also attaches to the apportionment of tax liability. Writing for the majority in Stein, Bastarache J. restored an order made by the trial judge to apportion Mr. and Ms. Stein’s tax liability alongside their assets. In a dissenting opinion, Abella J. charged the majority with ignoring some of the fundamental dynamics of spousal relationships. In her view, tax liability ought not to factor into the apportionment of the assets of divorced spouses. The difference in opinion between the majority and dissent implicate competing conceptions of ‘fairness’, (not surprisingly the mantra of both decisions). Each opinion, accordingly, warrants close consideration. In this post, I will take a look at Bastarache J.’s decision for the majority. Stay tuned for a forthcoming piece by Diana Younes which considers Abella J.’s dissent.

Facts and Procedural History

Mr. and Ms. Stein separated in 2003 after a 12 year marriage. During the course of their marriage, Ms. Stein remained at home, caring for the couple’s two children while Mr. Stein assumed the role of the primary breadwinner. At the time of the divorce, family assets, which totaled $1.7 million were divided equally. Ms. Stein was also awarded support based on her husband’s income, which exceeded $200 000 per annum. However, in addition to awarding assets to Ms. Stein, the trial judge ordered that Mr. Stein’s contingent tax liability with respect to his tax shelters should also be divided equally between spouses on an “if and when” basis. The basic logic behind apportioning not only Mr. Stein`s assets but also his liabilities is that in the course of their marriage, both Mr. and Ms. Stein benefited from the tax shelters, which formed the basis for the impugned tax liability. Therefore, in the trial judge’s view, it seemed only reasonable to divide the said liability in a manner akin to the division of the couple’s assets.

However, The British Columbia Court of Appeal disagreed and overturned the lower court’s decision on the grounds that the Family Relations Act RSBC 1996 (the “FRA“) does not permit freestanding orders apportioning debt between spouses. The B.C. Court of Appeal accordingly ordered that Mr. Stein be solely responsible for the contingent liability. Mr. Stein appealed and the matter proceeded to the Supreme Court.

The Majority Opinion

The main thrust of Bastarache J.’s decision for the majority was that “the Family Responsibility Act does not preclude an order dividing between spouses a contingent liability which cannot be valued at the time of trial, and this is not a case where the fact that both parties benefited from the tax shelters that could give rise to the contingent liabilities is outweighed by other factors.” To fortify this conclusion, Bastarache J. relied on the Supreme Court decision in Young v. Young, [1993] 4 S.C.R. 3, which expressly precluded indemnification of one spouse for the liability of the latter absent a contractual foundation.

Bastarache J. characterized the B.C. Court of Appeal’s invalidation of the trial judge’s order relating to the splitting of the tax liability between Mr. and Ms. Stein as a “barrier to the fair distribution of assets between spouses,” which was contrary to a “plain reading of the FRA.” “The very existence of the term “family debt”” he explained, “underlines the reality that in order to ensure fairness, both debts and assets must be considered after the breakdown of a marriage.”

Moreover, Bastarache J. pointed to s. 66(2)(c) of the FRA, which vests in the court the authority to “order a spouse to pay compensation to the other spouse … for the purpose of adjusting the division.” Bearing s. 66(2)(c) in mind, Bastarache J. concluded that considerations of fairness justified reapportioning the division of assets between Mr. and Ms. Stein’s assets to reflect the former’s tax liability.

Although the division of assets in a divorce is “presumptively equal,” s. 65(1) of the FRA, enumerates a number of factors that may justify varying the apportionment. Accordingly, Bastarache J. proceeded to consider whether or not the 50/50 split between assets (and liabilities) should be varied (in Ms. Stein’s favour) under s. 65(1) of the Act. “Although Mr. Stein does generate more income than Mrs. Stein,” he reasoned, “both spouses were found to be financially stable at the time of the division of assets and, in my view, this is not a case where an unfairness results from requiring both spouses to assume responsibility for contingent liabilities related to tax shelters from which they have each derived benefit.” Through this reasoning Bastarache J. concluded that “an equal division of … liability is the fair result.”

The Majority’s Conception of Fairness

As will be demonstrated in the forthcoming post on Stein, ‘fairness’ looms large not only in Bastarache J.’s decision for the majority, but in Abella J.’s dissent. Bastarache J.’s conception of what is fair in the context of the division of assets in respect of a divorce seems to be informed by a very literal reading of the FRA. Fairness, save in exceptional circumstances, will typically amount to an equal division of both assets and liabilities. Abella J.’s dissent, however, places the majority opinion in sharp relief.