In the high-stakes arena of family law, 2025 has proven to be a year of profound recalibration. For nearly a decade following the introduction of the Family Law Act, the legal community operated under a set of assumptions regarding “excluded property”, those assets brought into a relationship or inherited during it. The conventional wisdom was relatively straightforward: if you could prove you brought money in, you took out that nominal amount, regardless of what happened to the asset in the interim. However, as we approach the close of 2025, a series of appellate decisions has fundamentally altered the landscape, introducing a level of mathematical and equitable complexity that demands the immediate attention of high-net-worth individuals and property owners alike.
The most significant development of the year is undeniably the British Columbia Court of Appeal’s decision in Mills v. O’Connor. Released in February 2025, this judgment has reverberated through settlement negotiations and trial preparations for the last ten months, effectively rewriting the playbook on how we “trace” commingled assets. For clients holding significant pre-relationship assets or those who have received intergenerational wealth transfers, understanding the “Mills Shift” is no longer optional; it is a requisite for asset preservation.
The End of the “Dollar-for-Dollar” Guarantee
To understand the magnitude of the 2025 shift, one must first appreciate the foundational promise of the Family Law Act. Under section 85, property acquired before the relationship, or largely derived from gifts and inheritances, is “excluded property.” In theory, this value remains with the original owner upon separation, while only the increase in value (the gain) is divided as “family property.”
For years, the prevailing legal strategy relied on a rigid, transactional approach. If a spouse contributed $200,000 of inherited funds into a joint bank account, which was then used to purchase a family home, the legal exercise was simply to prove the deposit. The expectation was that the spouse would receive their $200,000 back off the top of any sale proceeds, with the remaining equity shared 50/50.
Mills has dismantled this simplistic view when assets are “commingled” or mixed. The Court of Appeal clarified that when excluded funds are mixed with family funds, essentially “scrambling the egg,” the rigid dollar-for-dollar retrieval method may be inappropriate. Instead, the Court endorsed a “pro rata” approach to tracing in complex commingling scenarios.
This means that the character of the funds shifts from a fixed nominal value to a proportionate share of the asset. If the excluded property constitutes 20 percent of the purchase price of an asset, the excluding spouse is entitled to a 20 percent interest in that asset, rather than a fixed dollar amount. While this sounds equitable, it introduces massive volatility. In a rising market, this benefits the exclusion holder. However, in a depreciating market, a reality some regions of British Columbia have faced in late 2024 and throughout 2025, this creates a vulnerability. If the asset loses value, the excluded portion shrinks proportionately. The “safety net” of the fixed exclusion has been effectively removed for commingled assets.
The Complexity of the “Lowest Intermediate Balance” Rule
The decision in Mills also addressed the arcane but critical accounting principle known as the Lowest Intermediate Balance Rule (LIBR). Historically, if excluded funds were deposited into a joint account that fluctuated wildly, dropping to $50 before bouncing back to $100,000, the law presumed the excluded money was “spent” first. The exclusion was capped at the lowest balance of the account during the period of commingling.
The 2025 jurisprudence has nuanced this approach, suggesting that the strict application of LIBR may yield to a more holistic “pro rata” analysis where the intent and the flow of funds suggest a continuous investment. For clients, this signals a move away from rigid accounting technicalities toward a broader analysis of financial intent. However, it also places a significantly higher burden on the party claiming the exclusion to provide a coherent, unbroken narrative of the funds. The days of presenting a ten-year-old bank statement and expecting a check are over. The onus under section 85(2) to exclude the property now requires a sophisticated forensic accounting of how those funds moved, morphed, and potentially diluted over time.
The “Significant Unfairness” Threshold Has Lowered
While Mills addressed the mechanics of tracing, the earlier 2024 decision of Healey v. Healey continues to cast a long shadow over 2025 negotiations regarding the division of those assets. Even if a spouse successfully traces their excluded property under the new Mills framework, they face a secondary hurdle: section 96 of the Family Law Act.
Section 96 allows the court to divide excluded property if failing to do so would be “significantly unfair.” Historically, “significantly unfair” was interpreted as a nearly impossible threshold to meet; a safety valve reserved for catastrophic disparities. Healey marked a turning point that has solidified in 2025 practice. In Healey, the Court of Appeal upheld a decision to divide the husband’s substantial excluded property, rather than retaining it all. At the same time, the wife was left with very little after a long marriage, which met the threshold of significant unfairness.
The lesson for 2025 is that “exclusion” is not “immunity.” The court is increasingly willing to look at the global economic reality of the spouses at the time of trial. If one party leaves the marriage with a portfolio of assets worth millions that have been excluded, and the other leaves with a nominal share of family property, the court may intervene. This “fairness override” creates significant uncertainty for high-net-worth individuals. It suggests that strict legal entitlement is now viewed through a lens of equitable outcome, forcing counsel to advise clients not just on what they can trace, but also on what a judge might consider fair to retain.
The “Bank of Mom and Dad”: Gifts vs. Loans in 2025
The economic reality of British Columbia’s housing market means that parental assistance remains a central feature of property acquisition. Consequently, the litigation regarding whether these transfers are gifts or loans has intensified. The distinction is critical: a loan is a debt (reducing family property), whereas a gift is either excluded property (if given to one spouse) or family property (if given to both).
Recent case law highlights the judiciary’s growing impatience with revisionist history. Courts are rigorously applying the “contemporaneous intention” test. A transfer of funds documented as a “gift” to a lender to secure a mortgage cannot be conveniently re-characterized as a “loan” when divorce proceedings commence five years later.
The “presumption of advancement”, the old rule that money from a parent to a child is presumed a gift, has been statutorily abolished between spouses, but the evidentiary gap remains. In 2025, we are seeing courts place a heavy weight on the absence of repayment schedules, interest payments, or security registrations. If the “Bank of Mom and Dad” did not act like a commercial bank during the marriage, the court will not treat it as one upon separation.
This trend is perilous for clients who rely on informal family arrangements. The court’s message is clear: if you intend a loan, you must paper it with the formality of a third-party transaction. Retroactive promissory notes signed on the eve of separation are increasingly being viewed as “shams” or litigation tactics, leading not only to the dismissal of the debt but potentially to adverse costs awards for litigation misconduct.
The Strategic Pivot: Cohabitation Agreements as the Only Certainty
Given the volatility introduced by Mills regarding tracing and the erosion of the exclusion shield under Healey, reliance on the default legislation is a precarious strategy. The Family Law Act in 2025 is a complex web of judicial discretion and shifting accounting tests.
For anyone entering a relationship with significant assets, or for parents transferring wealth to adult children, the only mechanism to bypass this uncertainty is a Cohabitation or Marriage Agreement. The Act explicitly allows spouses to opt out of the statutory regime. You can agree that the “pro rata” rule in Mills does not apply. You can agree that Section 96 “significant unfairness” will not be used to invade excluded property.
However, 2025 has also raised the bar for these agreements. “Kitchen table” contracts are being set aside with regularity. To withstand the scrutiny of the current court, an agreement must be procedurally fair, meaning full financial disclosure and independent legal advice are non-negotiable. The agreement must also be substantively fair at the time of signing and must not become unconscionable over time.
Contact the Vancouver Family Lawyers at Meridian Law Group for Comprehensive Family Law & Property Division Advice
If you are concerned about how the commingling of your pre-relationship assets or recent inheritances might be treated under tracing rules, contact our skilled family lawyers at Meridian Law Group in Vancouver today to review your current asset structure to identify potential “commingling risks” before they become irreversible.
For over three decades, our law firm has been a pillar of the Vancouver legal community. Our dedicated team of family lawyers is committed to achieving successful outcomes, offering expert assistance at every phase of your family law matter. Contact us today at (604) 687-2277 or connect with us online.
