If you are getting divorced, you may be aware that the growth in your and your spouse’s individual net worths beginning from the day you were married to the day you separated is measured, and the difference between those values equalized between spouses. This is referred to as equalization, and if you have a pension, it should be part of this calculation as it is considered property for family law purposes.
Types of Pension Plans
It is the after-tax value of a spouse’s pension plan which is included in the calculation of their net family property. However, the way a plan’s value is calculated can vary depending on the type of pension plan. The first type is a defined contribution plan, wherein employees and the employer are allowed to contribute to the plan which may then be invested in a variety of securities and assets. These tend to be treated like Registered Retirement Savings Plans for the purpose of valuation. The second type is a defined benefit plan which provides a measurable and predictable income upon retirement, and which is generally managed by a pension administrator. These administrators use a formula laid out in the regulations made under the Pension Act in order to determine a valuation for a pension. They may also refer to the Financial Services Regulatory Authority of Ontario (FSRA) to conduct a family law valuation of a pension. Both spouses would sign a form and provide identification to have this done.
Notional Disposition Costs
When a pension is valued as part of a spouse’s net family property, it should also include notional disposition costs, meaning the tax rates that will be applied to future payments of the pension when the pension becomes receivable. Per the Ontario Court of Appeal in Greenglass v. Greenglass 2010 ONCA 675, such contingent liabilities should be accounted for in the calculation of net family property where they are reasonably foreseeable. In the case of future tax rates applicable to pension payments, it is almost certain that tax will be applied, however the exact rates may not predictable. Calculating the notional disposition costs is therefore a matter of predicting the retirement date of the pension recipient and even seeking the opinion of an actuary on the tax rates to be applied.
Transferring a Lump Sum
Where the recipient of a pension does not want to use funds originating from other assets or resources to equalize the value of their pension, they may have the option of transferring a lump sum amount out of their pension. This is permitted pursuant to Section 10.1(3) of the Family Law Act wherein a Court can make an Order to that effect. Factors that a Court considers when deciding whether to make such an Order include:
- The nature of the assets available to each spouse at the time of the hearing;
- The proportion of each spouse’s net family property which consists of imputed value or their interest in the pension plan;
- The liquidity of the lump sum in the hands of the spouse to whom it would be transferred;
- Any contingent tax liabilities in respect of the lump sum that would be transferred; and,
- The resources available to each spouse to meet their needs in retirement and the desirability of maintaining those resources.
Application to Common Law Relationships
While pensions are presumptively included in the calculation of each party’s net family property, common law spouses are not insulated from claims on their pension just because they are not part of the equalization regime in Ontario. A common law spouse may make a Constructive Trust claim on the pension of the other spouse as part of a Joint Family Venture claim, pursuant to the Supreme Court of Canada case Kerr v. Baranow 2011 SCC 10. The claiming spouse would argue that the other spouse, in not sharing their pension, would be unjustly enriched. For example, a spouse who has been a stay-at-home mother for 30 years, enabling her spouse to maintain a high-earning job with a large pension, may have a claim on her spouse’s pension since it was partially due to her labor that the pension was obtained. Regardless of the particular facts of the case, it should still be noted that such Joint Family Venture claims are not easily made out, as they must meet the detailed test laid out in Kerr.
As always, we advise that you seek out the advice of a Family Law Practitioner if you are desiring to understand how your pension, or that of your spouse, may be treated in the event of relationship breakdown.