The LCO has assumed, for purposes of this report, continuation of the main features of the family property provisions of the FLA, including their inapplicability to persons in common law relationships and adherence to the principles that the former spouses share equally in the value of net family property (as opposed to each having a half interest in all items of family property) and that debt cannot reduce a spouse’s net family property below zero. Whether these aspects of family property law should be changed is an issue with implications far beyond pensions and it would be inappropriate to address that issue in the context of this project, which is limited to pensions. Thus, we have looked into the question of whether pensions should continue to be subject to the FLA equalization regime based on the current generic features of that regime.
1. Should Pensions Be Taken Out of the Equalization Regime?
In the LCO’s view, removing pensions from the equalization regime could lead to unfairness between spouses who are in the same net asset position. Consider a pension plan member who has debts of $200,000, a pension valued at $150,000 and other assets valued at $50,000 and whose spouse has assets of $10,000 and debts totaling $10,000. If the pension is divided outside the equalization regime, the member would lose half the value of his or her pension to the non-member spouse, even though both parties are in the same position so far as net family property is concerned, whereas if the pension rights are included in the equalization process, he or she would retain the entire pension because his or her net family property would be zero.[62] (This is not to suggest that the non-member spouse, depending on his or her circumstances, may not have a valid claim for support. However, the purpose of Part I of the FLA is to put the spouses in an equal position with respect to family property, not to address support needs. Support is dealt with in Part III of the FLA.)
The LCO also notes that dividing a pension outside the equalization regime may result in the parties having less flexibility in relation to other family property. For example, it is not unusual for a couple to have only two substantial assets, an interest under a pension plan on the part of one spouse and a matrimonial home owned jointly. In such a situation, dividing the pension outside the equalization regime would likely necessitate sale of the matrimonial home, whereas dealing with all family property under the equalization regime may make it more likely that the non-member spouse can keep the matrimonial home if he or she feels that that is preferable to selling it and dividing the proceeds. Finally, the LCO observes that it is difficult to see a policy justification for excluding pensions from the equalization regime when other retirement vehicle assets, such as RRSP’s, are not excluded.
Accordingly, the LCO recommends as follows:
A.1. The interest of a pension plan member whose rights have vested continue to be considered “family property” for purposes of the Family Law Act (FLA) and therefore subject to the FLA equalization regime.
2. Should Rights That Have Not Vested Be Treated as Property?
For purposes of calculating a spouse’s “net family property”, the FLA defines “property” as including
…in the case of a spouse’s rights under a pension plan that have vested, the spouse’s interest in the plan….
While some might infer that the reference to vesting means that a right to a pension that has not yet vested is not taken into account in determining the pension plan member’s net family property, the courts have in fact held that the value of such rights is included. Although that may not have been the original intention, the LCO sees no reason not to include unvested rights under a pension plan as “property” for purposes of the equalization regime; while such rights may be contingent, that is not to say that they do not have value.[63] An amendment to the FLA definition to eliminate any implication that rights that have not vested are not included (which could be achieved simply by deleting the words “that have vested”) would be desirable, as it would make the text of the Act consonant with the actual state of the law.
Accordingly, the LCO recommends as follows:
A.2. The FLA be amended to indicate that rights under a pension plan that have not vested are also “family property”.
B. Valuation of Rights Under a Defined Benefit Pension Plan
As was discussed above, there are three main methods of pension valuation for family law purposes: the termination method; the retirement method; and the hybrid termination-retirement method (hereinafter referred to as the “hybrid method”). The termination method and the hybrid method both take as a starting point the dollar amount of the pension accrued to the valuation date (generally, the date of separation), that is, without assuming further service and without projection for future salary increases (except in some cases for inflation). However, the hybrid method, unlike the termination method, assumes future service for purposes for rights to ancillary benefits that have not vested at the time of separation because the member has not accrued sufficient service, but that will vest eventually if the member continues in employment. (An example would be a right to take early retirement on an unreduced pension if the member meets a “Factor Ninety” qualification where, at the time of separation, the member’s age and service credits do not yet add up to ninety.) The retirement approach assumes future service for purposes of these rights, but also projects future salary increases, including those not related to inflation, such as those stemming from promotion. The approach in Ontario seems generally to favour the hybrid method (notwithstanding some inconsistency in the terminology used in many of the decisions), but as a matter of law the question cannot be regarded as entirely settled.
The LCO recommends that the FLA be amended to provide that the hybrid method be used in valuing rights under a pension plan for family law purposes. Although some might object that in considering future service for purposes of rights to ancillary benefits such as an unreduced early retirement pension, the hybrid method effectively gives the non-member spouse a share in post-separation increases in the value of the member’s pension, the LCO notes that the accumulation of sufficient service credits to result in the vesting of such rights is in part the result of service credits that were earned during the period of marriage.[64] On the other hand, the retirement method plainly could result in the non-member spouse inappropriately sharing in post-separation increases in value, as is most obvious where the member achieves significant promotions subsequent to the marriage breakdown. While the LCO acknowledges the argument that post-separation career successes may, to some extent at least, have their genesis in decisions taken and roles assumed during the marriage, the retirement method makes no distinctions in that regard, and, moreover, it is far more speculative than either of the other two methods. On balance, the LCO believes that the hybrid approach strikes the fairest balance as between the parties.
Accordingly, the LCO recommends as follows:
B. The FLA be amended to provide that for purposes of valuation, rights under a defined benefit pension plan should be assessed using the hybrid termination-retirement method.
C. Settlement: Defined Benefit Pension Not Yet in Pay
Among the Canadian jurisdictions that have enacted legislation to divide pensions upon marriage breakdown, a majority have favoured an approach that is usually called the “Immediate Settlement Method” (ISM),[65] whereby there is (loosely speaking) an immediate determination of the non-member spouse’s share of the value of the member’s pension and an immediate transfer of an amount out of the fund of the member’s pension to the benefit of the non-member spouse. Three provinces have adopted an alternative approach, the Deferred Settlement Method (DSM),[66] whereby the formula for division of the pension is determined immediately but division is postponed until some future point.
1. ISM versus DSM
Among the reasons offered in support of adopting the ISM approach are the following:
On the other hand, those who favour the DSM argue that
In the LCO’s view, many of the arguments made in support of the ISM or DSM overstate the case.
There is no doubt that the ISM provides a “clean break”, but the DSM does not require the former spouses to continue to have dealings with each other. (Rather, communication would be with the plan administrator, not with each other, although obviously there would continue to be a financial link between the spouses, in that the amount of the non-member’s pension would be a function of the value of the member’s pension when it came into pay.)
The arguments about post-separation increases in pension value are also overstated, on both sides. Proponents of the DSM who argue that the value of a pension is paid for disproportionately through contributions made in the early part of the member’s career may be correct in that assertion, but this ignores the point that for family law purposes the value of a defined benefit plan pension (unlike that of a defined contribution plan pension) is not a matter of the amount of contributions and the yield on their investment. On the other hand, it is surely incorrect to assert that no part of a member’s post-separation success (and thus the increase in the value of his or her pension) can ever be attributed to what happened during the marriage.
With respect to the argument that adoption of a DSM approach means that determination of the pension’s present value is rendered unnecessary, the LCO acknowledges that the assumptions used in determining present value will usually mean that the pension will turn out to have been undervalued or overvalued in comparison with what is ultimately paid out. However, we also believe that this ignores the fact that the value of virtually any property, as determined at the separation date, might turn out to be considerably more or less than its value at some future point. While this may cause resentment on the part of one or the other spouse, the risk of its happening is inherent in a regime that requires family property to be valued for equalization purposes.
The LCO does agree with critics of the ISM that, as implemented in other Canadian jurisdictions, it tends to produce a low value for the pension and is thus unfair to the non-member spouse. It also agrees with critics of the DSM that the DSM is complicated by comparison with the ISM and imposes burdens on pension plan administrators that the ISM does not. This has led us to make a twofold recommendation:
· the ISM should be the main pension division option, available in all cases of marriage breakdown, but with a proviso that the member’s equalization debt is satisfied only to the extent of the value transferred out of the plan to the benefit of the non-member spouse; and
· a DSM option should be available on a strictly limited basis, namely,
o where the member is within ten years of the normal retirement date in the plan and both the member and the non-member spouse agree. The DSM, which produces a financial result that is likely to be more in keeping with the expectations of both parties had they not separated, is thus something that may be more appropriate (despite the additional burdens it would impose on plan administrators) only when retirement is relatively close at hand, when those expectations would be at their most definite and most pronounced; or
o where the member is not within ten years of the normal retirement date, but the parties and the pension plan administrator agree to apply the DSM.
a) Some Other ISM Possibilities
The reason that critics of the ISM argue that it is unfair to the non-member spouse is because it generally[67] uses the commuted value approach to value the member’s pension, and thus the transfer-out for the benefit of the non-member spouse. The commuted value approach, in assuming immediate termination of plan membership, attributes no value to unvested ancillary rights benefits, such as a right to take an unreduced early retirement pension where the eligibility requirements have not yet been met; this may produce a lower value – and thus a lower transfer amount for the benefit of the non-member spouse – than a valuation done on some other method, such as the hybrid method discussed above (in section VI.B). In that regard, the LCO did consider whether an ISM using the hybrid method of valuation rather than the commuted value method would be feasible. However, such an approach could result in plans paying out more by way of transfer for the benefit of the non-member spouse than would be justified by the value that the member’s pension ultimately achieves (as where the member terminates employment shortly after separation without ever having qualified for an unreduced early retirement pension); the shortfall would either have to be absorbed by the plan or recovered from the member’s already diminished pension.
The LCO also considered whether it would be practical to require a second commuted value calculation performed at the time that the member reaches a “trigger date” (retirement or pre-retirement death or termination of employment), with the aim of supplementing the amount originally transferred to the benefit of the non-member spouse based on any subsequent increase in value. However, we concluded that this approach would be overly complex and produce burdens for plan administrators, particularly in the case of members who ended up having more than one former spouse.
On balance, the LCO believes that the ISM with a transfer based on commuted value is the most appropriate solution. We also note that the commuted value does not always produce a lower value than the hybrid method, and we would point out that in any case under the LCO’s proposal the member would remain liable for any difference between the amount transferred from the fund of the plan to the benefit of the non-member spouse and his or her equalization debt. Finally, we believe that our proposal that a DSM option be available on a limited basis may provide an appropriate solution for parties who do not experience marriage breakdown until very late in the member’s career or where the pension plan administrator agrees.
b) Transfer Destinations
The PBA gives a plan member who terminates employment and who is entitled to a deferred pension, but who wishes to transfer his or her rights out of the plan three options: transfer to another pension plan (if the other plan is willing to accept the transfer); transfer to a “a prescribed retirement savings arrangement”[68] of the type prescribed for purposes of clause 42(1)(b) of the Pension Benefits Act” (essentially, a “locked-in” retirement vehicle); or purchase of a deferred annuity. The LCO believes that options corresponding to the first two of these options should be available to the non-member spouse in the case of an ISM resolution. (The third option, purchase of a deferred annuity for someone who is not a pension plan member, may raise problems under section 147.4 of the Income Tax Act.[69])
Transfer to a locked-in retirement vehicle may make sense for some non-member spouses who feel they have the expertise to manage their own investments or who feel that they can readily access such expertise from other sources. However, many non-member spouses who do not have their own pension plans may be lacking in the investment knowledge and experience that is required to self-administer an RRSP or choose someone else appropriately skilled to administer it for them. Creation of a new public fund into which transfer moneys could be paid might provide a good alternative for non-member spouses in that position, in that it would give them some advantages comparable to those enjoyed through membership in a large pension plan, namely, the pooling of resources and investment risk, the power of substantial investment capital and professional, expert fund management and administration.
Generally speaking, it seems unlikely that pension plan administrators would favour establishing a credit in the member’s pension plan for the non-member spouse, essentially making him or her a member. However, there may be cases where the plan administrator is willing to do this, and there is no reason not to allow it where that is the case.
Accordingly, the LCO recommends as follows:
C.1. Subject to the other recommendations in this section, where a member of a defined benefit pension plan is an equalization debtor to his or her spouse and wishes to satisfy the equalization debt through resort to his or her interest in the pension plan, legislation provide that the immediate settlement method of division applies, under which the member could require the plan administrator to transfer a pro rata share of the commuted value of the member’s pension as of the separation date from the fund of the member’s plan to
(a) the fund of a plan of which the non-member spouse is a member, if the administrator of that plan agrees;
(b) a retirement savings arrangement of the type prescribed for purposes of clause 42(1)(b) of the Pension Benefits Act;
(c) the fund of the member’s plan, if the administrator of the member’s plan agrees;[70] or
(d) if the government considers it appropriate to establish a provincial retirement fund that fund (see Section E, below).
Where the amount that would otherwise be transferred exceeds the member’s equalization debt, that amount to be transferred shall be reduced to the amount of the equalization debt. If the amount that is transferred is less than the member’s equalization debt, the member remains liable for the difference.
Under specified circumstances, the DSM would be available, as set out in Recommendations C.3 and C.4.
C.2. Where the immediate settlement method applies, the non-member spouse’s pro rata share shall be based on the formula
½ X A/B X CV
where A is the pensionable service accrued while the parties were married, B is the member’s pensionable service and CV is the commuted value as of the separation date.
2. Limited Availability DSM Option
Because it poses greater burdens on pension plan administrators than the ISM by effectively creating two pensions to be administered, the LCO does not believe that a DSM solution should generally be available to the parties as of right. However, where the marriage breakdown occurs at a point when the member’s retirement is likely to be imminent, the LCO believes that the parties should have the option of sharing the pension when it comes into pay, as it is much more likely in that case that both parties had formed assumptions about their financial future that were predicated very firmly and specifically on receipt of income from the member’s pension. (The DSM would also be available if the pension administrator agrees.)
Strictly limiting the availability of this option would ensure that the imposition on plan administrators of the burden associated with having effectively to treat the non-member spouse as a member will be a relatively infrequent occurrence, unless the pension administrator agrees. (We note that some administrators may prefer taking on such a burden rather than having to transfer amounts out of the plan fund at a relatively late point in the member’s working life.[71]) The administrative burden can also be minimized by requiring the election of this option to be made using forms prescribed by regulation (or at any rate, provided by government) so that plan administrators would not have to bear the burden of and risk involved in interpreting documents written in a wide variety of styles with a wide range of drafting skill. Administrators who acted in good faith in carrying out the direction given in the form could not be held liable for any resulting loss. Further, administrators would be allowed to charge a fee to the member and non-member spouse to offset the extra costs incurred as a result of the selection of the DSM option.
Where the DSM option is available selected, no survivor benefits should attach to the non-member’s entitlement unless the plan chooses to offer such benefits; in other words, the non-member’s “pension” would be a single life pension rather than a joint and survivor pension.
Generally, the non-member spouse’s pension would commence when the member retires and takes his or her pension; the non-member spouse should not have a right to have the pension begin at any time, as this could be burdensome for the plan administrator. However, the LCO has a concern that in some cases the member (whether out of spite or out of perceived need) may delay retirement unduly, and so we believe that the non-member should be able to require that his or her pension begin when the member is at normal retirement date, even if the member continues working.
The division of the pension would be according to a simple formula based on the ratio of the period of marriage to the period of pensionable service. More complicated methods of division, such as payment of an amount to the non-member spouse until the an amount equal to the equalization debt has been met, pose burdens on the administrator; therefore, the member should not be able to insist on such other methods of division unless the administrator agrees.
Where the DSM option is elected, the sharing between the former spouses of the member’s pension should be seen as having taken the place of the equalization debt. There is an inherent risk in this form of division that the total amount paid to the non-member spouse will prove either to be less than or to be in excess of what is owed to him or her as a result of the equalization obligation, and both parties will bear that risk equally.
Accordingly, the LCO recommends as follows:
C.3. If on the date of separation the member spouse is within ten years of the normal retirement date established under the plan, the parties may agree, as an alternative to settlement using the ISM, to have the member’s pension entitlements divided between the member and the non-member spouse so that each is entitled to receive a separate pension. The non-member spouse would become a quasi-member of the plan, with an ability to enforce his or her entitlements under the plan and a right to receive from the plan administrator information concerning the member’s pension and his or her share.
Generally, the non-member spouse would begin receiving a pension when the member retired and began receiving his or her pension, but where the member did not retire by the normal retirement date established under the plan, the non-member spouse would have the option of having his or her pension commence on the member’s normal retirement date.
Where the non-member spouse will be commencing his or her pension at the same time as the member, the member’s service credits shall be divided according to the formula
½ X A/B
where A is the pensionable service accrued while the parties were married and B is the member’s total pensionable service at retirement. The member’s pension would be calculated using the benefit formula provided by the plan and his or her service credits as reduced. To determine the amount of the non-member spouse’s pension, there would be an initial calculation using the benefit formula provided by the plan and the service credits transferred to him or her; that amount would then be adjusted to ensure that the actuarial present value of his or her pension, when added to the actuarial present value of the member’s pension, equals the actuarial present value of the member’s total pension before adjustment.
Where the member does not retire or otherwise begin receiving his or her pension by the normal retirement date established under the plan and the non-member spouse elects to have his or her pension commence, the non-member spouse’s pension shall be based on the accrued amount of pension computed as at the normal retirement date, using the formula
½ X A/C
where A is the pensionable service accrued while the parties were married and C is the member’s pensionable service as of the normal retirement date. There could be an actuarial adjustment for the non-member’s age.
When the member retires, he or she will receive a pension based on the plan’s benefit formula calculated at the actual retirement date less the dollar amount of the pension payable to the non-member spouse. [72]
Where the DSM option is selected, no survivor pension shall attach to the non-member spouse’s pension.
The election of the DSM option (and any election by the non-member spouse to commence his or her pension before the member retires) shall be accomplished using forms prescribed in regulation or otherwise authorized by government. Plan administrators could not be held liable for any loss resulting from an action taken by them in good faith in reliance on a form submitted to them. They would also be allowed to charge a fee to offset the initial and ongoing costs incurred by them as a result of the election of these options.
Legislation would provide that where this option is selected, the member’s equalization obligation, to the extent that it was based on the value of the pension, is deemed to have been satisfied (i.e., even if the total amount that is ultimately paid out to the non-member spouse is less than the member’s equalization debt). It should also provide that the non-member spouse’s estate will owe nothing to the member or his or her estate if the total amount ultimately paid out to the non-member spouse exceeds the member’s equalization debt.
3. Where Plan Administrator Agrees to a Not-Otherwise Available DSM
As was stated previously, the LCO is of the view that, because of the burdens that a DSM approach would impose on pension plan administrators, it should not be available as of right “across the board”, but rather, only where the member is within ten years of the normal retirement date in the plan. However, where otherwise ineligible parties wish to elect the DSM approach and the plan administrator agrees, there would seem to be no good reason not to allow it.
Accordingly, the LCO recommends as follows:
C.4. Where the member is not yet within ten years of the normal retirement date, the parties may elect the DSM option if the plan administrator agrees.
4. Defined Benefit Plan Coverage
The above recommendations regarding settlement are intended to apply only to defined benefit plans. The LCO notes, however, there may be some atypical types of defined benefit plans in respect of which the settlement options being recommended may not be appropriate. Accordingly, legislation to implement the recommended settlement regime should authorize the making of regulations that can exempt defined benefit plans having certain specified characteristics where the government is of the view that such an exemption would be appropriate. In a similar vein, there should also be regulation-making authority to deal with so-called “hybrid plans”, i.e., plans that combine features of defined benefit plans with features of defined contribution plans; the authority should make it clear that the rules that would otherwise apply in the case of a plan that is subject to the settlement regime can be varied.
Subject to some exceptions, the LCO recommends that the settlement options apply only in respect of plans that are registered under the PBA. However, they should be available as well in the case of private sector plans in the federal employment law jurisdiction, as the federal Pension Benefits Standards Act,[73] which applies to such plans, makes provincial family property law apply in respect of the division of pensions on marriage breakdown. (Federal public sector plans are governed by the Pension Benefits Division Act,[74] which has its own pension division scheme.) As well, some Ontario employees will be members of a plan established by an employer who operates in more than one province and who has registered the plan under the statute of a province other than Ontario; in that case, while the registration requirements of the PBA would not apply, the substantive provisions of Ontario pension legislation would, and the settlement options being recommended here should be available.
While generally the LCO does not regard it as feasible to make the settlement regime being recommended here apply to supplementary employment retirement plans, we see no reason not to cover such plans where they simply mirror a plan that is registered under the PBA (differing only in providing for benefits or permitting contributions in excess of the Income Tax Act limits) and where the plan would, if the PBA applied to it, not be ineligible for registration because of the manner in which benefits accrued or because the employer had a discretion to vary the pension benefits or the formula governing employer contributions.
Finally, the LCO recognizes that the possibility that there may be plans that are not caught within the descriptions set out in clauses (c) through (f) below where the settlement options being recommended would not be inappropriate. Where the existence of such a plan comes to the attention of government, it should be possible to extend the application of the settlement regime to that plan by regulation.
Accordingly, the LCO recommends as follows:
C.5. Recommendations C.1 to C.4 apply to
(a) a defined benefit pension plan, other than any class of defined benefit plan that is prescribed by regulation;
(b) subject to the regulations, a hybrid plan, insofar as it provides a defined benefit;
if the pension is not in pay and
(c) the plan is registered under the Pension Benefits Act or the substantive provisions of that Act apply to it;
(d) the plan is registered under the federal Pension Benefits Standards Act;
(e) the plan is not registered under the Pension Benefits Act but it is supplemental to a plan that is so registered and
(i) it provides for the accrual of pension benefits in a gradual and uniform manner, and
(ii) neither the formula for the employer’s contributions to the plan fund nor the pension benefit provided is at the discretion of the employer; or
(f) the plan is a member of such other class of defined benefit plan as is prescribed.
D. Settlement Options and Defined Contribution Plans
While valuation of a member’s interest in a defined contribution plan generally does not raise problems, some stakeholders suggested that Ontario law should provide for immediate division as a settlement option regardless of whether the pension plan is a defined benefit plan or a defined contribution plan, and the LCO sees no reason why the ISM option it is recommending should not be available in the case of both types of plans. However, there would seem to be no advantages for either party in the non-member spouse becoming a quasi-member of his or her spouse’s defined contribution plan; given this, and the fact that a DSM approach does inevitably impose some burdens on plan administrators, the LCO is not recommending that the DSM option described in Recommendation C.3 be available in the case of defined contribution plans.
Accordingly, the LCO recommends as follows:
D. The ISM option discussed in Recommendations C.1 and C.2 also be available where a spouse is a member of a defined contribution plan, but the DSM option should not be available.
E. A New Provincial Retirement Fund?
As discussed in section C, the LCO is recommending three transfer options for non-member spouses who become entitled to a transfer following pension division, with a fourth possible option: transfer to a provincial retirement fund, if the government decides to establish such a fund. Where the non-member spouse has his or her own plan, or where the administrator of the member’s plan is willing to establish a pension account in that plan for the non-member spouse, a transfer to the plan will likely be the preferred option. For those who do not have their own plan, however, transfer into an RRSP may not be attractive, particularly for those who are unsophisticated or inexperienced in investment matters. For these persons, transfer to a large fund offering the pooling of investment risk, the investment power of large amounts of capital and expert management may be preferable.
The LCO suggests that the government may wish to consider establishing a provincial retirement fund to receive transfers on behalf of non-member spouses who choose that option if it is made available. The government would appoint the staff to administer the fund and make investments on behalf of fund members. Establishment of such a fund would also provide an opportunity to lessen burdens on pension plan administrators, in that the fund could also receive transfers in respect of “lost members” from other pension plans where the administrators wish to divest themselves of continuing responsibility for members with whom they have had no contact for some specified period despite reasonable efforts on their part to make contact. The government could charge administrative fees to the accounts of fund members (including transferred lost members). However, the LCO recognizes that even if fees are charged, establishment of a provincial retirement fund could be costly and may not be seen as a prudent measure at a time of economic uncertainty.
Accordingly, while the LCO makes no definitive recommendation, it suggests that:
E. Ontario may wish to consider establishing a retirement fund into which non-member spouses who are entitled to a transfer pursuant to a pension division (see Recommendation C.1, above) may place the transferred amount. The plan could also receive transfers from pension plans that wish to divest themselves of their “lost members”. The plan would be a capital accumulation fund, i.e., the benefit ultimately paid out to the individual would be based on the amount originally paid into the fund plus the yield on the fund’s investment of that amount.
F. The Fifty Per Cent Rule
The LCO acknowledges that the fifty per cent rule reflects a legitimate pension plan (and indeed, societal) objective, namely, to enhance the likelihood that plan members will have a reasonable income for retirement (although we note that the rule can be somewhat undermined by support orders that attach pension income, since the rule applies in respect of family property settlement but not to support). While we are not recommending abolition of the rule, we are concerned about the possibility that its unqualified application could in some cases prevent implementation of one or the other of the settlement options being recommended in Section C, even though (if the recommendations are adopted) the approach taken was in accordance with options specifically made available by legislation. As the LCO believes that its recommendations concerning settlement will provide a fair method of dividing the pension asset where equalization cannot be achieved without resort to the pension, we believe that a settlement that is in accord with the ISM or DSM settlement regime should be deemed to be in compliance with the fifty per cent rule.
Accordingly, the LCO recommends as follows:
F. A settlement that is in accord with the ISM or DSM settlement regime be deemed to comply with the fifty per cent rule.
G. Canada Pension Plan Credits
There is little doubt that, as a matter of law, CPP credits constitute “family property” under the FLA, although it seems that the point is often ignored in practice. While some stakeholders suggested that the definition of “family property” should accordingly be amended so as to exclude CPP credits, the LCO can see no justification in principle for holding that rights under an occupational pension plan are “family property” while CPP credits are not. However, the LCO is of the view that parties should be able to waive the right to a split of such credits. The CPP, which is federal legislation, permits the provinces to enact legislation allowing such a waiver, but while several provinces have done so, Ontario has not. The LCO has heard anecdotally that on some occasions a party agreed under an equalization settlement not to apply for a credit split, only to make such an application at a later date. In the absence of Ontario legislation permitting a waiver, the federal authorities have no choice but to carry out the split. Ontario should eliminate this avenue for unethical behaviour.
Accordingly, the LCO recommends as follows:
G. Ontario enact legislation permitting parties to waive the right to a split of CPP credits.
H. “Double Dipping”
“Double dipping” occurs where, as part of the equalization process, a spouse who is a member of a pension plan transferred cash or other assets to the non-member spouse in order to meet his or her equalization obligation without resorting to pension division, only to find at a later point that the non-member spouse is applying for a support order based on the member’s pension income.[75] The member is understandably resentful, feeling that the pension was already taken into account in the property settlement and should not be taken into account as income for support purposes.
As was noted above, the Supreme Court of Canada held in Boston v. Boston that double dipping was generally inappropriate, although it accepted that in some circumstances it was permissible, as where a support order is based on need rather than compensation or where, despite the fact that the order is compensatory, the non-member spouse has made reasonable efforts to use the assets transferred to him or her in the equalization process to produce an income but still suffers from economic hardship. While the Court may have felt that it was pronouncing a quite limited exception to the general rule that double dipping was inappropriate, one commentator has observed that the exception was “wide enough to almost eat the rule itself”.[76]
In any event, the court’s assertion that double dipping in respect of a pension, as opposed to other income-producing assets, should generally be avoided was based on its view that a pension is different from other assets, such as investments, because a pension, once it is in pay, is being “liquidated”,[77] whereas an investment can pay out income without thereby causing depletion of the asset itself.
The LCO respectfully suggests that the rationale offered by the Supreme Court of Canada for treating pensions differently from other assets is flawed. From an actuarial perspective it is true that a pension that is in pay is losing value, because at each payment the member is closer to death and so the present value of the pension is smaller. However, from the member’s perspective, the pension is not being liquidated because he or she will continue receiving the pension payments until he or she dies – the declining actuarial value has no impact on its real value to him or her.[78] To say that the pension is being liquidated implies a finite amount of capital which is getting smaller with every payment that is made, and that is simply not the case.
With respect to the double dipping issue, it is the LCO’s view that there is no difference in principle between a member spouse giving cash to meet an equalization debt in hopes of keeping his or her pension income intact and a shareholder spouse giving cash to meet an equalization debt in hopes of keeping his or her dividend income intact. In our view, the issue of double dipping is not unique to pensions; it is relevant in the case of any income-producing asset that is taken into account in the equalization process. If double dipping is to be prohibited or the exceptions to the “rule” against double dipping are to be narrowed, that is a matter for a project looking at generic family property law, and not one limited to pensions.
H. Accordingly, for the reasons given, the LCO makes no recommendation at this time on the subject of double dipping.
I. Common Law Relationships
The LCO has assumed, for purposes of this report, that the family property provisions of the FLA will generally continue not to apply common law relationships. In doing so, we offer no opinion as to whether the exclusion of such relationships should continue. The question of whether the family property provisions should apply to common law relationships is one that extends well beyond pension interests, and generally speaking the LCO believes that it would be inappropriate to address it in the context of a project that is limited to pensions. However, the LCO is of the view that the pension division options available to formerly-married spouses should be available to common law spouses who separate where they agree that a pension belonging to one or the other should be divided as part of a settlement of their affairs.
I. Where a common law relationship ends and one or both spouses is a member of a defined benefit pension plan, they may agree to have one or both pensions divided in accordance with the regime described in section C.
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