In addition to the matrimonial home, a pension is often the most valuable and significant asset that most individuals will accumulate in their lifetime. Pensions are also one of the most contested, controversial, and complicated assets that must be dealt with during the course of a divorce.
Under the family law regime in Ontario, a pension is an asset like any other whose accumulated value during the course of the marriage must be included in the pension holder’s net family property and divided with their former spouse upon divorce (please see here for more information on the division of matrimonial property).
Because a pension is a complicated and illiquid asset that is managed by a third party, the process of obtaining its value for the purposes of family law (referred to as the family law value of the pension) has been standardized under the Ontario Family Law Act and Pension Benefits Act using forms that are administered by the Financial Services Regulatory Authority of Ontario (“FSRA”)—formerly known as the Financial Services Commission of Ontario (“FSCO”).
It is critical for both pension plan members and their spouses to understand the process of obtaining the family law value of a pension and how that value is treated in the calculation of the pension plan member’s net family property upon the breakdown of a marriage and divorce.
Obtaining the Family Law Value of a Pension
In order to obtain the family law value of a pension, the pension plan member or the pension plan member’s spouse must submit a properly completed Application for Family Law Value to the pension plan’s administrator.
The applicant must also submit an application fee to the pension plan administrator. The pension plan administrator sets the fee, but there is a maximum limit that they may charge an applicant. The maximum application fee varies according to the type of pension the plan member has:
1. Defined Contribution Pension Plan: $200.00
2. Defined Benefit Pension Plan: $400.00
3. Combined Defined Contribution and Defined Benefit Pension Plan: $800.00
If the parties agree on the date of separation or valuation date, they can submit a Joint Declaration of Period of Spousal Relationship confirming both their date of marriage and date of separation in order to obtain a single family law value for the pension in question and, importantly, pay a single maximum fee to the pension administrator. However, if the parties do not agree on the date of separation, they must also complete Appendix A – Request for Two Family Law Values of the Application for Family Law Value in order to receive an accurate family law value for each asserted date of separation. Notably, a request for two family law values will also result in two sets of fees payable to the pension plan administrator.
The applicant must also provide proof of the pension plan member’s date of birth and the pension plan member’s spouse’s date of birth, unless the pension plan administrator previously obtained this information (which is quite unlikely) and the date of marriage and date of separation. The respective dates of birth can be proven with a certified copy of each party’s birth certificate or passport. The date of marriage and date of separation can be proven with either a Joint Declaration of Period of Spousal Relationship or a certified copy of the parties’ marriage certificate and a certified copy of the court order, arbitration, or domestic contract (separation agreement) that states the date of separation. A family and divorce lawyer can produce the certified copies of all documents necessary to properly complete the application.
Once the completed application, certified documents, and fee(s) are submitted to the pension plan administrator, the administrator will produce the Statement of Family Law Value containing the family law value of the pension. The administrator will send one copy each to the pension plan member and the pension plan member’s spouse. The pension plan administrator typically requires a couple of months to complete the Statement of Family Law Value. Therefore, it is very important that the party applying to obtain the family law value of a pension do so as soon as possible to avoid any unnecessary delay in obtaining this crucial piece of financial disclosure necessary to complete their divorce.
Finally, many pension plan members or spouses of pension plan members wish to have their divorce lawyer deal with the process of obtaining the family law value of a pension. In order to do so, the applicant must complete a Contact Person Authorization so that their family and divorce lawyer is permitted to contact the pension plan administrator directly on their behalf if there are any errors or other issues that must be before the administrator releases the family law value of the pension.
Tax Treatment of Pensions in Family Law
The family law value provided by the pension administrator is a gross value and does not reflect the income taxes the pension plan member will almost certainly pay to the Canada Revenue Agency in the future once they begin receiving income from the pension. As a result, when the pension plan member is completing their financial statement and net family property statement in order to determine their divisible net family property, it is critically important to include a contingent tax on their pension as a liability that effectively decreases their net family property and any resulting equalization payment to their spouse. This contingent tax liability can be a source of contention between divorcing spouses, as both parties will surely want an accurate contingent tax liability included in the calculation of the pension plan member’s net family property and may disagree over the correct value of the tax liability. In such cases, a family and divorce lawyer may recommend that an accounting professional be consulted to determine an appropriate contingent tax liability for the pension plan member.
Using A Pension to Make an Equalization Payment
As noted above, a pension is an asset like any other, whose value is included in a divorcing pension plan member’s net family property. However, unlike other significant property like real estate and investments, pensions cannot be easily sold or liquidated if the pension plan member requires cash
to satisfy an equalization payment to their former spouse following a divorce. In such cases, the Pension Benefits Act contemplates several options where a pension plan member may use a portion of their pension (or divide their pension with their former spouse) to satisfy their equalization payment.
If a pension plan member has not retired yet, they can make a lump-sum transfer out of their pension to their former spouse to satisfy their equalization payment. Importantly, the value of the transfer cannot exceed 50% of the of the total value of the pension. Additionally, neither spouse has the power to unilaterally demand that the equalization payment is satisfied via transfer of pension assets; instead, the parties must agree to such a transfer or have it ordered by the court.
Under the Pension Benefits Act, the lump sum transfer out of the pension can be made into one of several locations:
1. Another pension plan registered in Canada;
2. Another prescribed retirement savings arrangement, such as a Locked-In Retirement Account (“LIRA”);
3. Another prescribed arrangement; or
4. If the pension plan administrator agrees, leaving it in the plan to the credit of the eligible spouse.
If a pension plan member has retired and has begun receiving payments, the regularly payable pension income can be divided and paid to their former spouse to satisfy their equalization payment.
Pensions, Spousal Support Payments, and “Double-Dipping”
When a pension plan member equalizes their pension, they typically expect that their former spouse will no longer receive any ongoing benefit from said pension. However, pension plan members are often required to make spousal support payments, too. In some cases, spousal support is awarded on a long-term or even indefinite basis and the support obligation continues past the pension plan member’s expected or real retirement date. In such cases, the pension plan member may ultimately be in a position where their pension is their most significant source of income and where they must apply some of their pension income toward their continuing spousal support obligation. This scenario is referred to as “double-dipping.”
While “double-dipping” is generally viewed as inappropriate by family courts, there is no absolute prohibition against it. Indeed, there have been cases where “double-dipping” has been permitted and rejected. As with almost all divorce matters, the appropriateness of double-dipping is circumstance-specific and each case is determined according to its own merits. Therefore, it is critical that both pension plan members and their spousal support recipient former spouses be cognizant of this possible outcome when pursuing divorce, even if retirement is a distant consideration. Otherwise, a pension plan member who expects to retire with full pension income may be forced to share a portion of that income with their former spouse due to their ongoing spousal support obligations. Or, conversely, the former spouse of a pension plan member who
expects to receive spousal support payments well into their former spouse’s retirement may have their spousal support varied and reduced or terminated altogether.
Pensions and Common Law Spouses
Unlike divorcing spouses, common law spouses are not automatically entitled to an equalization payment upon the breakdown of a relationship and, as a result, do not necessarily receive a benefit from their former spouse’s pension regardless of the duration or significance of their spousal relationship.
In certain limited cases, common law spouses have successfully argued that they were entitled to a portion of their former spouse’s pension value by virtue of the existence of a joint family venture between the former common law spouses. However, the success of these arguments is very rare and most cases involving common law partners pursuing the division of their former spouse’s pension have failed.
Canada Pension Plan and Divorce and Separation
The Canada Pension Plan (“CPP”) is mandatory government social programme and is not subject to the same family law treatment that other pensions receive. Importantly, both married and common law couples are automatically eligible for the division of CPP credits and this right cannot be waived in a domestic contract.
If a married or common law couple lived together for one year or longer, either former spouse may apply to have the CPP credits that each individual accumulated during their period of cohabitation added together and divided evenly between the parties. In order to divide CPP credits, the former spouses must have been living separate and apart for a minimum period of 12 consecutive months.
Importantly, common law spouses must apply to have CPP credits divided within 48 months after of the date they began living separate and apart. While there is no similar deadline for married spouses to apply, if their former spouse dies, then they must apply for the division of CPP credits within 36 months of their former spouse’s death.
Contact an Experienced Mississauga Divorce Lawyer
Amiri Family Law has represented many pension plan members and the spouses of pension plan members in divorce negotiation and litigation in Mississauga, Oakville, Burlington, Milton, and the Greater Toronto Area.
Call or email us to schedule a free consultation with a family and divorce lawyer in Mississauga. We have a full-service, conveniently located office devoted to clients in Oakville, Burlington, and Milton.
We will guide you through the pension valuation and equalization process with the advice, support, and guidance you need to reach a settlement that works for you and your ongoing needs.
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