Issue
How are retirement savings plans, pension benefits, and investment assets equalized when married spouses separate in Ontario?
Applicable Legislation
Under Ontario’s Family Law Act, when spouses separate with no reasonable prospect of reconciliation, the spouse whose net family property is lower is entitled to half the difference between the parties’ net family properties. Net family property is calculated by determining the value of all property owned by each spouse on the valuation date (with certain exclusions), subtracting debts and liabilities on that date, and deducting the net value of property owned at the date of marriage. The valuation date is typically the date on which the spouses separated with no reasonable prospect of reconciliation. This date is important because it determines when assets are valued for equalization purposes. While this is a quick summary of how equalization operates, we recommend visiting our comprehensive guide on how equalization works.
Analysis
- Treatment of Pension Benefits
Section 67.2 of the Pensions Benefits Act illustrates that the pension itself is valued as of the separation date, and this value is included in the pension holder’s net family property. The pension is not automatically divided or split. Instead, its value contributes to the overall equalization calculation. If the pension holder has the higher net family property, they may owe an equalization payment to the other spouse. This payment can be satisfied through various means, including cash payment, transfer of other assets, or a direct transfer from the pension plan itself.
Section 67.3 of this act permit up to 50% of the pension’s family law value to be transferred directly from the pension plan to a locked in retirement account for the non-member spouse. This transfer mechanism allows the equalization payment to be satisfied without requiring the pension holder to liquidate other assets. Different rules apply for retired members already receiving pension income. Sections 67.3 to 67.8 permit the non-member spouse to apply for division of the income stream itself, with payments made directly from the plan to the spouse as each instalment becomes due. This requires that the first pension instalment was due on or before the family law valuation date, and the division must be authorized by court order, arbitration award, or domestic contract.
- Division of RRSPs
The value of a RRSP is included in each spouse’s net family property calculation and may be subject to equalization.
Ordinarily, withdrawing funds from an RRSP triggers immediate tax consequences. However, when the transfer is made pursuant to a written separation agreement or court order and relates to property division on marriage breakdown, section 73(1) of the Income Tax Act may permit the transfer to occur on a tax deferred basis.
- Investment Assets
As per section 4 and 5 of the Family Law Act, non-registered investment assets such as stocks, bonds, GICs, and other securities are treated as ordinary property for family law purposes. Their fair market value on the valuation date is included in the owner’s net family property.
Under 73 (1) (a) of the Income Tax Act, transfers of non-registered investment assets between spouses can occur at the original cost base, allowing for the deferment of tax liability. This means that the transferring spouse does not immediately realize any capital gains or losses on the transfer. Instead, the recipient spouse assumes the original cost base of the transferred assets and will be responsible for any capital gains or losses when the assets are eventually sold or disposed of.
Conclusion
Under Ontario’s Family Law Act, RRSPs, pensions, and investments form part of each spouse’s net family property and are subject to equalization upon separation. The spouse with the lower net family property is entitled to an equalization payment equal to half the difference between the parties’ net family properties, calculated as of the valuation date (typically the date of separation). Statutory mechanisms permit transfers of up to 50% of a pension’s family law value to a locked-in account for the non-member spouse. RRSPs may be transferred on a tax-deferred basis pursuant to a separation agreement or court order.
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Categories: Divorce, Child Support, Spousal Support, RRSP, Pension, Equalization.