Canadian provinces have a hodgepodge of rules dealing with pension entitlements when a marriage dissolves, leaving a long list of possible issues for lawyers, courts and financial advisors, lawyers told a recent seminar.
“Because there is no federal legislation that covers all pensions there is the potential for conflict,” Diana Woodhead, principal with Mercer, told a conference put on by the professional development division of York University’s Osgoode Hall Law School.
Conflicts can take place, for example, between laws in two different provinces where a couple has lived, said Woodhead. These issues can make it difficult for the pension plan administrator to distribute benefits and therefore make it hard for family lawyers to know how to advise their clients, she said.
“The issue is that there are pension statutes in every province except PEI and all of them are different,” she said. “There are different rules everywhere and you may be stuck having to determine what rules apply in different circumstances.”
She noted there is the federal Pensions Benefits Standards Act but added there are no pension division provisions in it, and in fact, the act refers to provincial laws on this issue. As well, the federal Pension Benefits Division Act deafinals solely with those in the federal public service.
“How do you resolve the conflicts? There is no way to way to determine which provincial laws will be paramount and the same with pension legislation, which don’t contain any resolutions to resolve conflicts either. So in the worst case scenario, I suppose you would have to resort to constitutional arguments to try to establish paramountcy.”
There is an agreement with regards to multi-jurisdictional pension plans which tries to resolve some of the issues regarding pension legislation and division of pensions as the result of a marriage breakup, she said, but so far only Ontario and Quebec have signed on.
“Other provinces have kept saying they’re going to sign but it’s been a few years and they haven’t signed yet. While this does resolve pension conflicts, it doesn’t deal with any of the pension provision rules and doesn’t resolve any of those conflicts either. That’s not to say that it won’t happen sometime in the future, but that would take the will of a number of provincial regimes.”
Each province also has its own prescribed method of how the division of pension is calculated. Typically, there’s a maximum amount of the portion of the pension that can be divided and given to the spouse who is not a member of the pension plan.
“But that can vary,” she said. “It’s usually 50 per cent but sometimes it’s 50 per cent of the pension accrued during the period of the marriage. Sometimes it’s 50 per cent of the pension accrued during the entire relationship. Sometimes you exclude the portion of the accrual before the relationship started but you include the portion up to retirement. Sometimes it can be varied by a court order but not by an agreement. There are all kinds of possibilities there.”
Woodhead said some provincial statutes allow the separated or divorced couple the ability to make an immediate settlement, while others delay the settlement until the pension member retires. Other provinces provide a choice.
The forms of settlement can vary as well – from lump sum, setting up a separate pension to portability transfers. The federal Income Tax Act does state however, that regardless of the settlement method, the spouse who receives the pension must pay the tax. The spouse who is not a member of the defined benefit pension plan, can however, receive an unlimited rollover for the commuted value of his or her share of the pension. Spouses who are members of that plan can also roll over their share, but those spouses are subject to a maximum, she said.
Great care must be taken that clients don’t move ahead by themselves with what they perceive to be fair settlements without proper legal advice, said Mariette Matos, a lawyer with Bennett Jones LLP.
Matos gave the example of a divorced couple: Beth, who is the member of the pension plan and Joe, who is the non-member spouse. The two agree to split Beth’s pension 50-50. Often, once an agreement is reached, it can easily take two years before everything is up and rolling and both sides get their share of the pension entitlement directly from the administrator of the plan.
Under Ontario law, Joe’s share is calculated using the date the couple separated. Because of the two-year delay, Joe will be entitled to arrears on top of the 50 per cent.
But problems can arise when, without knowledgeable legal advice, the two strike a side deal. Under this deal, Beth says she will split the full pension she gets now with Joe so he doesn’t have to wait until the two years are up to get his first payment. While this sounds great for Joe, Matos said when his share legally comes through from the administrator, Joe will not only get his share, but also the arrears – plus the amount Beth gave him for the two years leading up to that. The result is double dipping. And what started out as being fair to Joe has now become unfair to Beth.
“So if you are thinking of this arrangement, you will want to have an agreement that perhaps when the division actually happens maybe the spouse will get 48 per cent or there will be some payment back to the spouse. But there is the potential for unfairness. And at the end of the day the parties haven’t contemplated it and now they are not amicable…It might cost the member more to fight it in court.”
Matos said lawyers have to determine from their clients if any of these agreements have been put in place between the former couple.
“Be armed with this information and…it will help lawyers put into place settlement agreements that make the most sense for everybody.”