Divorce, separation, and pensions in Ontario

What happens to a pension when a couple separates?

Pensions are a component of the property that married couples include in their equalization calculations when they decide to separate or get divorced. The value of the pension is considered an asset in the equalization process, and the equalization payment itself can sometimes be paid directly out of the member spouse’s pension plan.

Most pensions are provincially-regulated, but for pensions that are federally-regulated, the options available to the spouses and the court in terms of whether and how equalization can be funded directly from the pension are different.

For provincially-regulated pensions, the options include making a lump sum payment out of the member spouse’s plan if the pension if not already in pay (i.e. prior to retirement), or dividing the pension payments themselves if the pension has already started to provide payments. With a federally-regulated pension plan, the option to pay a lump some out also exists whether the plan is in pay or not, but there is no option to divide the payments at source.

Either way, dividing the pension at source with a lump sum is not automatic, and there is not automatic entitlement on the part of the non-member spouse to have a lump sum paid out. Section 10(4) of the Family Law Act sets out the criteria that a court will consider in deciding whether to order a lump sum payment:

• The nature of the 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, for family law purposes, of his or her 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.
• The resources available to each spouse to meet his or her needs in retirement and the desirability of maintaining those resources.

When a lump sum payment is ordered, it will be transferred by the pension administrator into another locked in retirement account or fund that will not usually be available as a liquid asset for the recipient spouse right away. So practically speaking, the court is looking at when the funds will be needed by the recipient, whether there any any other options for payment available to the payor and the impact that requiring payment out of other immediately-available assets would have on that spouse’s situation.

It is also important to consider the tax implications of a pension transfer. While pension payments being divided after retirement are taxed in the year they are paid out, a lump sum transfer is not taxed at the time of the transfer – again those funds would be taxed in the year they they are actually accessed. This means that when making a transfer to satisfy an equalization payment, it is also important to consider grossing the amount of the transfer up to compensate for the recipient spouse’s contingent tax liability in certain cases. Actuarial assistance or consultation with an accountant with expertise in this area is sometimes necessary to determine how much the gross-up should be.

A competent family lawyer can help guide you though this complex process and explain how the law applies to your particular situation, so that you can properly evaluate all of your options. Call Vallillee Family Lawyers at 519-488-5263 if you have a London, Middlesex, St. Thomas, or Elgin County family court matter involving a pension, and we would be happy to set up a consultation with you.