One of the most contentious aspects of separation is the division of assets. While much attention is often placed on the matrimonial home and shared debts, pensions are frequently one of the most valuable yet overlooked assets in a divorce. Understanding how a pension after separation is divided is crucial. Unlike cash savings or real estate, pensions are tied to long-term financial security and can significantly impact a person’s financial future, especially in retirement.
In Ontario, pensions are considered property and are subject to division under the Family Law Act. However, determining how to divide a pension after separation is not always straightforward. Factors such as the pension’s value at the date of marriage and the date of separation, as well as the method of division chosen, can all influence the final outcome. Many individuals are unsure of their rights and obligations when it comes to pensions in a divorce, which can lead to confusion or financial disadvantage.
In this article, I will outline how pensions are valued and divided under Ontario family law, the options available to spouses, and key considerations to ensure a fair and equitable distribution. Whether you are the pension holder or the spouse seeking a share, understanding how the law applies to pensions can help you navigate the process with confidence.
Common Law: Unlike married couples, common-law partners in Ontario are not automatically entitled to an equalization payment upon separation. Similar to how the family home is treated, Ontario family law will allocate an interest in a common law spouse’s pension plan where the non-member spouse can demonstrate a constructive or resulting trust. These claims are complex and require substantial evidence and disclosure, making legal counsel essentially a necessity in such circumstances when dealing with a pension after separation.
Step 1: Valuing the Pension
The first step in dividing a pension is determining its value, something easier said than done. Pensions are complex investments, so it can often be difficult to determine its value at a given point of time. This is why, in Ontario, the process of determining a pension’s value has been laid out by the Pension Benefits Act[1] and the Family Law Act.[2]
The legislation states that either spouse must submit a completed Application for Family Law Value to the plan administrator, accompanied by the required fee. This fee varies between $200-$800 depending on the type of pension plan. This application is an important step for resolving pension issues after a separation.
A key aspect of asset division is the determination of the date of separation, which is especially critical when pensions are involved. If both parties agree on the separation date, they can file a Joint Declaration of Period of Spousal Relationship, resulting in a single valuation and fee. However, disagreements on the separation date necessitate additional documentation and fees for multiple valuations.
Step 2: Consider Tax Consequences
The valuation provided by the pension administrator reflects the gross value of the pension and notably does not include potential income taxes payable upon withdrawal. It’s essential to account for this contingent tax liability when calculating net family property to ensure an equitable division. Consulting with a financial professional can help accurately assess this liability and its impact on the equalization payment after separation.
Step 3: Determine method of Division
Ontario law offers two main avenues for dividing pension assets:
- Immediate Settlement: Before retirement, a lump-sum transfer of up to 50% of the pension’s value can be made to the non-member spouse’s retirement savings plan, such as a Locked-In Retirement Account (LIRA). This requires mutual consent or a court order.
- Deferred Settlement: If the pension member is already receiving payments, the pension income can be split to fulfill the equalization payment.
Alternatively, spouses may negotiate a separation agreement that allocates other assets to the non-member spouse in exchange for their interest in the plan, allowing the pension holder to retain full pension benefits. This approach requires careful consideration to ensure fairness, which means that each party must at least consult with their own lawyer before finalizing the agreement and that each party must provide full and frank financial disclosure.
Step 4: Divide
When determining whether a lump-sum transfer from a pension is appropriate, the court considers several factors under s. 10(4) of the Family Law Act, including:
- The nature of assets available to each spouse at the time of the hearing.
- The proportion of a spouse’s net family property that consists of the imputed value of the pension.
- The liquidity of the lump sum in the hands of the recipient spouse.
- Any contingent tax liabilities in respect of the lump sum transferred.
- The resources available to each spouse for retirement and the desirability of maintaining those resources.
If a spouse will receive the first installment of a pension on or before the valuation date, courts also have the power to order that payment to be divided. This consideration is crucial for a fair distribution of a pension after separation.
NOTE: CPP Credits
In addition to private or workplace pensions, contributions to the Canada Pension Plan (CPP) can also be divided upon separation. The CPP tracks each individual’s pensionable earnings and contributions throughout their working life. The higher a person’s total contributions, the greater their CPP benefits will be upon retirement.
These contributions, known as “credits,” accumulate over time. When spouses divorce or separate, the credits earned during the marriage can be divided equally in a process called “credit splitting.” If both spouses had similar earnings, there may be little or no impact. However, in cases where one spouse earned significantly more than the other over the course of the marriage, the lower-earning spouse may receive a portion of the other’s contributions. The longer the marriage and the greater the income disparity, the more substantial the adjustment.
For legally married spouses, CPP credit splitting is automatic unless a separation agreement explicitly states otherwise. Common-law partners, however, must actively apply for the division of credits. This application is only available after a full year of separation and must be submitted within four years of the separation date.
Conclusion
Dividing pensions during a divorce in Ontario involves navigating complex legal and financial landscapes. Both parties should seek comprehensive legal and financial advice to understand their rights and obligations fully. Early engagement with professionals can facilitate a smoother division process, ensuring that both parties’ long-term financial interests are protected after separation.
[1] Pension Benefits Act, R.S.O. 1990, c. P.8.
[2] Family Law Act, R.S.O. 1990, c. F.3.
Written by Caidan Ubell
Frequently Asked Questions About Pension Division After Separation
In Ontario, pensions are considered property under the Family Law Act and are subject to division upon separation. The value of the pension at the date of marriage and the date of separation is used to determine the equalization payment. Depending on the circumstances, a pension can be split through an immediate lump-sum transfer or a deferred settlement.
The value of a pension is determined by submitting an Application for Family Law Value to the pension plan administrator. This process, governed by the Pension Benefits Act, requires both spouses to agree on a separation date, as this date impacts the pension valuation.
Not necessarily. While up to 50% of the pension’s value accrued during the marriage can be transferred to the non-member spouse’s retirement account, this is not automatic. Other assets can be negotiated in exchange for pension rights, allowing one spouse to retain their full pension benefits.
There are two primary options:
Immediate Settlement: A lump-sum transfer of up to 50% of the pension’s value to the non-member spouse’s Locked-In Retirement Account (LIRA) or similar savings plan.
Deferred Settlement: If the pension holder has retired, the pension income can be split to meet the equalization requirement.
Common-law partners in Ontario are not automatically entitled to a share of their partner’s pension. However, if a common-law spouse can prove a constructive or resulting trust, they may be able to claim a portion of the pension. These cases require legal counsel and substantial evidence.
The valuation provided by a pension administrator does not account for income tax. Since pension withdrawals are taxable, it’s important to calculate the net value of the pension before agreeing on a division. Consulting a financial professional ensures tax liabilities are accurately considered.
Yes. Canada Pension Plan (CPP) credits earned during the marriage can be split equally between spouses. For legally married couples, this process is automatic unless a separation agreement states otherwise. Common-law partners must apply for CPP credit splitting within four years of separation.
While not legally required, hiring a family lawyer is highly recommended. Pension division is complex, involving legal, financial, and tax considerations. A lawyer ensures your rights are protected and that the final agreement is fair and legally sound.
If spouses cannot agree on the separation date, they will need to provide additional documentation, and multiple pension valuations may be required. This can increase administrative fees and complicate the division process.
Yes. Instead of splitting the pension, spouses can negotiate a trade-off where the non-member spouse receives other assets (e.g., real estate, investments) in exchange for their pension interest. This must be outlined in a separation agreement and backed by full financial disclosure.
Disclaimer
This article is for informational purposes only and does not constitute legal advice. The division of pensions and other assets in a separation or divorce can be complex and varies based on individual circumstances. For personalized legal guidance, please contact Progressive Legal Solutions to consult with an experienced family law lawyer.