April 8, 2026 – Everything You Need to Know About Tracing

“Both parties claim exclusions to the values of certain assets in calculating their net family property. The wife claims an exclusion of $133,324.50 and the husband claims an exclusion of $1,419,199.88. Each has the onus of proving their entitlement to the exclusion, in other words “tracing” the value of exclusion. As noted by Perkins J. in Goodyer v. Goodyer, (1999), 1999 CanLII 20759 (ON SCDC), 168 D.L.R. (4^th) 453 (Ont. Gen. Div.):

Tracing is a fault-based concept applied after the fact in family law to a series of transactions that were never wrongful and have not become so by reason of the separation of the spouses. The tracing concept was adopted because the Family Law Act property scheme has a bias in favour of sharing the value of assets in existence at the separation date and a bias against the exclusion of assets from the equalization calculation. Hence the onus on the spouse seeking to exclude assets, and hence the requirement that the spouse seeking to exclude a gift received during the marriage be able to trace it from its original form into assets in existence at the separation.

Tracing is a prospective rather than a retrospective tool; that is, the nature of the transaction by which the asset is acquired determines, at least initially, its exclusionary treatment: Rosenthal v. Rosenthal (1986), 1986 CanLII 6320 (ON SC), 3 R.F.L. (3d) 126 (Ont. H.C.), at para.133. Challenges may arise where, as in this case, the evidence may be unclear about the nature of the transaction giving rise to the asset or where, also as in this case, the asset has changed or been commingled with other assets. Documentary evidence and credibility are critical to the former concern: as for the latter, an exclusion should not be denied if the asset changes form over time. In Ludmer v. Ludmer, 2013 ONSC 784, at paras. 86-87, aff’d 2014 ONCA 827 (except for variation of s. 7 expense calculation). Penny J. observed:

1. 1. 1. 1. 86.    Thus, it is not the transformation of the asset that brings tracing to an end. Rather, it is the inability of the beneficiary to prove the necessary connection or nexus between the trust property and the subsequently acquired asset. For example, tracing may reach its limit when an asset is spent or dissipated or where it is used to pay down debt or otherwise becomes comingled with other assets such that the original trust property can no longer be discerned.

1. 1. 1. 1. 87.      I have found no case which suggests that the excluded nature of property begins to “peter out” merely because it is exchanged for equally identifiable property or through the effluxion of time. Where there is clear documentary evidence of the transformation of an excluded asset into other identifiable property, the exclusion is preserved.

There are three accepted approaches (or methodologies) to tracing, the “first in, first out rule”, the “pro rata” approach” and the “common sense/sufficient link” approach. Of these approaches, the “first in, first out rule”, commonly called the rule in Clayton’s Case”, Devayne v. Noble, 35 E.R. 781, (1816) 1 Mer. 572, is generally disfavoured as being arbitrary and unfair and has been either rejected or narrowed in favour of a more flexible and equitable approach. In Goodyer Perkins J. accepted the “pro rata” approach as more sensible and just in family law cases. That case involved a claim by the husband to exclude several assets from his net family property, including part of a joint investment account set up and totally funded by his late father. After his father died, the husband deposited the funds into a joint account with his wife. Perkins J. pro-rated the value of the exclusion to account for the subsequent transactional changes in the account. In Farmer v. Farmer, 2021 ONSC 5913, at paras 71-73, Finlayson J. described the tracing approach adopted by Metivier J. in Bennett v. Bennett (1997), 1997 CanLII 12388 (ON SC), 34 R.F.L. (4^th) 290 (Ont. Gen. Div.), aff’d 1999 CanLII 2583 (ON CA), [1999] O.J. No. 2631 (Ont.C.A.) as reflecting the “common sense” or “sufficient link” approach.  In Bennett the husband had inherited some money from his mother but apart from the proximity in time between funds being withdrawn from the account holding the inherited funds and the later purchase of a property there was no evidence where the funds went between their advancement and the purchase date. In granting the exclusion, Metivier J. applied what he described was a “common sense and reasonable view” to how the property could have been acquired but for the inheritance. In Henderson v. Casson, 2014 ONSC 720, 42 R.F.L. (7^th) 357, at para. 91, the proximity in time between inherited money and a loan was sufficient to prove the exclusion of the loan.

The choice of tracing approach is discretionary and driven by the evidence: Farmer, at para. 81. The application of any approach, with or without combining elements of the other approaches, will depend on several factors such as the nature of a presumptively excluded asset, whether it changed form and value over time or was commingled with other non-excluded assets. Documentary evidence may be absent or inconclusive resulting in a “but for” linkage based on proximity in time or the history and continuity of the asset’s ownership for which viva voce evidence and the claimant’s credibility are critical. The list is not exhaustive.  A flexible but principled and non-formulistic, equitable approach is warranted. In this case, all three approaches are engaged.”

          Najm v. Najm, 2024 ONSC 2053 (CanLII) at 55-58