How are pensions treated when married spouses separate in Ontario?

This article was provided by Boulby Weinberg LLP.

This article will set out the treatment of pensions when married spouses separate in Ontario. This is important because a spouse’s pension is treated as an asset between spouses and is included in equalization, which requires spouses to share the net growth in value of their assets during the marriage upon marriage breakdown.

If one spouse has a pension when the relationship comes to an end, it’s value will be shared, or equalized, with the other spouse. However, courts may also order that the pension holder pays spousal support from the pension’s income stream. This creates what is known as a “double dip.”

It is important to note that the equalization of a pension can be avoided if both spouses agree to the limiting of support or splitting of assets through the signing of a domestic contract.

General overview of the legislative framework in Ontario

Each province has its own laws addressing what happens to family property upon the breakdown of a relationship. In Ontario, matrimonial property is governed by the Family Law Act.

The FLA states that separating spouses are required to share the growth in value of any assets obtained during their marriage. This can apply to the value of a home, the value of art, or as we will be discussing today, the value of a pension.

When a couple separates, they will be required to determine their Net Family Property, which is an accounting of any assets or money they have acquired since marriage. This helps determine how their property and assets will be divided. It is normally a straightforward accounting exercise and allows everyone involved to get a good idea of the value of their assets.

Not everything is included in Net Family Property calculations. The legislation provides for certain exclusions, such as:

• Property other than a matrimonial home acquired by gift or inheritance during the marriage
• Income from gifts or inheritances if the donor expressly stated that it was to be excluded
• Damages for personal injuries, nervous shock, mental distress or loss of care and companionship
• Proceeds of or the right to proceeds of a policy of life insurance
• Property other than a matrimonial home into which property referred to above can be traced.

The FLA contains a broad definition of property, and for the purpose of pensions, it includes any present or future interest, vested or contingent that a person has starting at the date of marriage and ending at the date of separation.

As we mentioned earlier, spouses can enter marriage contracts to opt out of all or part of the legislated equalization regime. This can be done before or during the marriage. If these contracts are put in place following a separation, they are referred to as separation agreements. Collectively these agreements are defined in the Family Law Act as domestic contracts.

Domestic contracts can address respective rights to ownership and division of property, support obligations, and the right to direct the education and moral training of their children (but not the right to custody and access).

It is also important to note that if parties’ contract to have the law of another jurisdiction apply to the determination of their property rights on separation, the Ontario court will apply that law as long as the contract itself is valid and enforceable under Ontario law.

Valuation

Pension interests, whether vested or non-vested, are included as property for equalization. In order to determine how a pension will be divided, we have to first understand what it is worth. A spouse’s interest in a pension is determined by the Pension Benefits Act. The value of the pension at the time of separation is prepared by the plan administrator for a fee and the process follows regulations outlined in the Act. Calculations are made to determine the portion of the pension that accrued during the marriage which becomes pension-holding spouse’s net family property for equalization purposes.

People involved in common law relationships do not have equalization rights. However, people involved in such relationships can still choose to equalize the value of the pension upon separation. A decision like this is normally established in a domestic agreement.

In either situation, the family law value of the pension will be the date that the parties separate with no prospect of resuming cohabitation

There are also tax considerations to consider. The contingent tax liability will need to be calculated separately and included in the members spouse’s net family property. Unlike the calculation of a pension’s value tax calculations are not done by the plan administrator. Instead, the pension member spouse will need to retain an appropriate expert to calculate the contingent taxes.

If a spouse has retired by the separation date, the non-member spouse will still have an interest in survivor benefits. The value of this interest is determined following a calculation of the pension-holding spouse’s Net Family Property.

The valuation differs based on the type of plan a member spouse owns. There are two main types of pensions a spouse can hold in Canada, Defined Benefit Plans and Defined Contribution Plans. Each are valued differently:

(1) Defined Benefits Plan

A defined benefit pension plan is one that guarantees the pension holder with a predefined amount of money each month regardless of whether the pension goes up or down in value as the market fluctuates. Often the amount is calculated using a formula taking an average of the pensioner’s highest earning years and the total years of service.

The regulations offer a standardized method to value the pension. This method considers almost all post separation events and assumes the pension-holder will continue to contribute to the plan, as well as mandatory indexing and early retirement benefits. This approach, however, does not consider salary increases or post-separation changes in career. For example, it does not consider whether the pension-holding spouse might change jobs and no longer have a pension to contribute to.

The regulations allow spouses to consider shortened life expectancy in a narrow range of cases. To qualify the member spouse must have made an application to the plan under the Pension Benefits Act before the family law valuation date based on shortened life expectancy. The application must be accompanied by a statement from a physician confirming that the member spouse has a health condition limiting life expectancy which existed at the time of separation. In these limited circumstances the administrator is directed to value the pension at a reduced value.

The regulations also allow consideration of a wind up of a plan so long as the effective date of wind up occurs on or before the date of separation. If that is the case, the preliminary value of the pension interest is the commuted value. The regulations, however, do not consider solvency issues in the plan. The plan administrator will also not consider the contingent taxes payable by the member on the pension interest. A member spouse must hire an expert to calculate contingent taxes based on their financial situation.

(2) Defined Contribution Plans

In this type of pension, there are no guarantees on what a pension will pay out. Instead, they are defined by how much the employee and the employer will each contribute to the pension, hence the term “defined contribution.” Often, the employee contributes a certain percentage to the plan which is matched by the employer. The amount received upon retirement is dependent on the market, and when the pension drops in value, the pension-holder may experience a decrease in pension payments. This is unlike a defined benefit plan which will continue to pay out a predetermined amount of money each month regardless of the market. There are no guarantees to what the pension holder will receive on a monthly basis following retirement.

The regulations prescribe that the preliminary value is the sum of the contributions and any interest on contributions as of the date of separation. If this information is not accessible on that date, the value is calculated as of the last day of the previous month. If the value of the contributions and any interest can be found as of the date of marriage, then that is treated as a deduction. Therefore, the imputed value of the pension interest is the difference between the value at the separation date and the start date. If the value is only determinable for a period from 45 days before the start date to 45 days after the start date, then this is the amount to be deducted from the preliminary value to determine the imputed value of the benefit. If this information is not available, then the interest will be calculated using the method of valuation for defined benefit plans.

(3) Pension interests not governed by the Pension Benefits Act

There are many pensions that are not regulated by the Pension Benefits Act, including federally regulated pensions, pensions regulated in other provinces, and foreign pensions. These pensions must be valued in a manner outlined by the regulations under the Pension Benefits Act in so far as possible. Practically, the administrators of such plans are not required to undertake the valuation and it will be necessary for the pension holder spouse to retain an independent expert to value the pension for equalization purposes.

Satisfying the equalization payment obligation

Once it is determined that the sharing of a pension is required, a spouse that owes an equalization payment can satisfy the obligation by paying the other spouse cash or transferring an asset. For example, the family home may be sold with the proceeds distributed in a way that satisfied the equitization requirement. When paying cash, the spouse with the pension may satisfy the payment obligation by transferring up to 50% of the imputed value of the pension to he non-pension holding spouse. This option is only available if the parties agree or a court or arbitrator orders the immediate transfer of a specified amount, which it has discretion to do.

Section. 10.1(4) of the Family Law Act provides an open-ended list of relevant considerations including:

1. The nature of the assets available to each spouse at the time of the hearing.
2. The proportion of the spouse’s net family property that consists of the imputed value for family law purposes of the pension interest.
3. The liquidity of the lump sum in the hands of the recipient spouse.
4. Any contingent tax liabilities related to the lump sum that would be transferred.
5. The resources each spouse must meet his or her needs in retirement and the desirability of maintaining those resources.

If the parties share the pension in kind, then the plan administrator may divide the pension in a way that the non-member spouse receives a lump sum payment from the pension to comprise part or all the equalization payment. The payment needs to be transferred into a prescribed retirement investment, a registered retirement income fund for the non-member spouse (as opposed to a cash payout). There is obviously a downside to the recipient spouse who would most likely prefer to receive as much of the equalization payment without restriction rather than having to wait to realize income from a registered retirement fund.

If the pension holder retired before the valuation date and is currently drawing income from the plan, then it cannot be divided and paid into a separate retirement investment account. When the pension is in pay at the date of separation, the plan administrator may divide the pension in kind such that the non-member spouse will receive a portion of the pension member’s monthly income benefit. The non-member spouse also has the survivor benefit if he or she survives the pension member.

Double recovery

“Double recovery” is where a pension is not only equalized in the property settlement but is also treated as income from which the pension-holding spouse must make spousal support payments. We referred to this earlier as “double dipping.” The Supreme Court of Canada addressed the issue of double recovery in Boston v Boston, 2001 SCC 43. The court determined that when a pension is divided for equalization, the payee spouse must make a reasonable attempt to create income with the assets received, at least by the time the payor spouse retires and starts to receive a pension. The court held that it was unfair for the payee spouse to be allowed to keep the pension asset receive upon equalization, instead of attempting to generate an income from it, while the rest of the pension kept by the payor spouse started to diminish upon retirement.

The court acknowledged that double dipping cannot be completely prevented and may even be reasonable sometimes, for example, “where the payor spouse has the ability to pay, where the payee spouse has made a reasonable effort to use the equalized assets in an income-producing way and, despite this, an economic hardship from the marriage or its breakdown persists.” Post Boston, courts have on many occasions allowed double dipping.

Foreign divorce and its effects on pension rights

If a foreign court is dealing with the rights of an Ontario pension member, it is advisable that the parties’ lawyer speaks to a lawyer in Ontario to understand what can and cannot be accomplished under Ontario’s regulations. The actual division of a pension is done by the plan administrator and is very technical. If the pension is in pay, there are limits on how much can be divided. It is recommended that the parties create a domestic contract to comply with the regulations for sharing the imputed value of the pension member’s pension. The agreement could be converted into a court order if necessary.

It will also be necessary to understand what options are available in the foreign jurisdiction as the non-member spouse cannot hold a registered retirement investment account in Ontario. The portion of the pension going to the non-pension member will need to be commuted to a pension in the foreign jurisdiction. There will be withholding taxes in Canada when paid to the non-pension member and likely taxes paid when taken into income in the foreign jurisdiction by the non-pension member. In short, tax considerations will have to be made before undertaking a pension split of an Ontario pension and understanding how it will be handled in the foreign jurisdiction.

Oren Weinberg is a Toronto family lawyer, mediator and arbitrator. He has practiced family law exclusively since 2005 and advocates for his clients when negotiating agreements, appearing before trial and appellate courts as well as in mediations and arbitrations. Oren handles all aspects of family law including property and support, custody and access.