Separation Calculation of a Defined Benefit Plan A pension can be a great way to plan for retirement. However, they can cause difficulties in separation and divorce. Deciding how much a pension is worth, how it should be divided and what discounts may apply can all be complex issues. Before a spouse retires and starts collecting a pension, the pension is “property” (like a house or RRPS or other assets) that is divided as part of property equalization pursuant to Part 1 of Ontario’s Family Law Act. (Note common-law couples do not equalize their assets on separation and so they have no claims to each other’s pensions under the Family Law Act). Pensions are very valuable assets. Their value is not what the spouse paid into the pension, but the total present value of what the spouse will receive on retirement from the part pension that accrued during the marriage. A spouse will be getting payments of just $2000 per month could have a pension worth half a million dollars! So, prior to changes to the Family Law Act in 2009, where one spouse earned his or her pension during the marriage, it was common for that spouse to get the pension and the other to get the house, which could make life financially difficult for the spouse with the pension. Since 2009, the most common way that people have dealt with pensions is to divide them “at source.” That means the portion of the pension that has to be transferred to the other spouse’s pension or LIRA (locked-in retirement account). That decreased the pension payments for one spouse while increasing the money paid to the other spouse on retirement. However, no payments are immediately necessary to deal with the pensions when equalizing property on divorce. To divide a pension at source after separation, spouses with a provincially regulated pension go to their HR departments, fill out some paperwork, pay a fee (usually $600 per pension) and the pension board calculates how much should be transferred to “equalize” the part of the pension or pensions that accrued during the marriage. Federally regulated pensions can also be divided at source, but the process is a little different. This takes the pensions out of the equalization calculation and all the other property is divided as if there was no pension. That avoids one spouse getting the pension and the other spouse getting everything else. But sometimes the best long-term financial decision is not to divide the pension at source. Financial advisors helping a separating spouse may advise that the spouse with the pension will be better off in the end if they keep the full pension and get all the full pension payments on retirement. So, one or both spouses may prefer that the pension be included in the equalization calculation and be reflected in the cash that changes hands immediately. If the parties cannot agree on which way to divide the pension, sections 10.1(4) and (5) of the Family Law Act have the effect of making division at the source the preferred way to divide a pension and only allow a judge to order the cash payment in limited circumstances. Where spouses are going to include the pension in the equalization calculation so as to leave the pension intact, the spouses use the calculations that they got back from the pension board after filing the forms through HR. The pension board gives the value of pension accrued during the marriage, so that is the number to plug into the equalization calculation for the value of the pension. However, that calculation contemplates that the pension will be transferred to another pension or to a LIRA, which means the person who receives the transfer will pay the tax when receiving the payments after retirement. When the pension is not being divided at source, the spouse who is keeping the pension will have to pay all the taxes on the pension benefit payments. So, the tax debt associated with the pension also has to be included in the property equalization calculations. Essentially that means that the total value of the pension is reduced by the liability. So instead of sharing 100% of the calculated total value of the pension in equalization calculations, only 85%, 75%, 60% or some other amount is shared between the spouses. The reduction takes into account the taxes that have to be paid on the pension benefits payments. The amount of tax that a person will ultimately have to pay on pension benefit payments is influenced by several factors, such as: the size of the pension benefits payments what other income the person will be declaring and what impact that has on the marginal tax rate applied to the pension earnings what credits or deductions can be applied to reduce the tax on the pension benefit payments when the pension benefit payments will start what other assets the person may be using during retirement There is no way to know what the tax liability will be without consulting an accountant or other tax professional. Even then, the liability can change with other changes in a person’s life. For that reason, the value of the liability is often “discounted” to take into account uncertainty and the fact that liability will not be incurred for some time. Rather than hire an accountant to do more precise calculations, many people just want to use an educated guess as to what the tax liability will be. For most pensions, the benefit payments will pay the recipient between $44,000 and $50,000 per year, which puts there tax rate at a little over 24%. For income over $48,353 but less than $78,783, the marginal tax rate is just under 30%. So many people just assume that the tax liability will be around 25% of the pension payments. The 25% reduction is not set out in the law. It is an assumption. The factors above could make it too high or too low. For a person with a modest pension and no other retirement income, or who is a long way from retirement, 25% will too much of a reduction. For people with good pensions, or who have other money for retirement, 25% may be too low. Getting the number right is something that you should really speak to a lawyer about to make sure the pension is shared at the correct value. Since pensions can be worth a lot of money, the discount can also be worth a lot of money. Speaking to a lawyer to get the numbers right can save you money. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” By Fauzan SiddiquiBlog, Family LawJuly 6, 2020September 29, 2020
Am I Liable For My Ex-wife’s RRSP Losses? Toronto Family Lawyer John Schuman was recently asked the following question: Is there any case law that would show I am not liable for any of the following losses? When applying for a divorce, you must fill out a financial statement. Before we were married my wife had RRSP’s that were called labour-sponsored funds. They subsequently lost 90% of their value after we were married. I contend that I should not be liable for any of these losses. Answer: On the breakdown of a marriage (but not a common-law relationship), spouses “equalize” their assets and liabilities and share, with some exceptions, the growth in their net worth during the marriage. This video explains “Equalization of Net Family Property” in greater detail. Many separating spouses can feel that the equalization process can be unfair – particularly where one spouse has spent money on stupid things, gambled it away, is getting a windfall due to the division of the matrimonial home, or it has been a very short marriage. In these and other situations, dividing up all property “50/50” can seem unfair. Section 5(6) of Ontario’s Family Law Act does allow a Court (or Family Arbitrator) to deviate from the usual equalization of Net Family Property and divide the family’s wealth another way. It accommodates all of the scenarios above and a few others. However, the test that the Family Court (or an arbitrator) has to use is not whether the normal “equalization” would be unfair. Section 5(6) says that to deviate from the normal equalization, the Court must be “of the opinion that equalizing the net family properties would be unconscionable.” “Unconscionable” is much more than just unfair. The case law says that it means that the usual result must be “shocking to the conscience of the court.” That is much more than just unfair. One spouse spending a lot of money on an affair is not enough. A spouse spending too much is not enough. Justice Jennings put it this way: The result must be more than hardship, more than unfair, more than inequitable. There are not too many words left in common parlance that can be used to describe a result more severe than unconscionable. Specifically, on the issue of investment losses, the Courts have held that improvident (stupid) investing is not enough to justify an unequal division of net family properties. The investment must have been made recklessly or in bad faith. That means the spouse must have known or should have known, that the investment would become worthless. Risky investing is not enough. The spouse must have acted deliberately to lose money or knowing that he or she was likely to lose money. That can definitely seem unfair – especially when one spouse is a conservative investor and one spouse is a high-risk investor, or where one spouse’s savings have done really well and the other spouse’s investments have done poorly. But, fairness is not the test. Different opinions on finances can cause stress in, or event the end of, a lot of marriages. Where spouses have significant differences of opinion about money, they should consider getting a marriage contract. Spouses can get a marriage contract at any point during the marriage. They can keep a marriage together if one spouse wants to do something risky and the other one wants financial protection. This video explains how to protect yourself and save your marriage with a marriage contract. But, if you are separated now, it is likely too late for a marriage contract, and you have made one of the common family law mistakes. You should speak to an excellent Family Law Lawyer as the only way to correct this may be through spousal support, as section 15.2(6)(a) of the Divorce Act allows a judge to address the economic consequences of the marriage and its breakdown through spousal support. That can be through either awarding spousal support or reducing an amount of spousal support to reflect how the marriage affected the spouses financially. You can get a lot more information about Ontario Family Law issues, including support and property division, and most other common family law issues by downloading this $9.99 e-book for Kindle, Kobo, or iPad/iPhone/Mac, or ordering the paperback version. But, to keep out of trouble, it is always best to speak with a good family law lawyer. John Schuman is a Certified Specialist in Family Law. He is the partner managing the Family Law Group at Devry Smith Frank LLP, a full-service law firm located near Eglinton and the Don Valley Parkway in Toronto. Learn more about John! Call him at 416-446-5080 or 416-446-5847 or email john.schuman@devrylaw.ca Listen to the Ontario Family Law Podcast! By Fauzan SiddiquiBlog, Family LawJune 30, 2017June 24, 2020
Determining Summer Custody Schedules with Your Child(ren)’s Best Interests in Mind For many separated families with school-aged children, summer can be a challenge. A written agreement or court order that sets out summer access with the children makes the season a lot less challenging, but for many families, such formalities are not in place. With regards to those families without order or agreement in place, the summer access schedule may still be straightforward. Consider, for example, those families who follow the same summer schedule informally every year. However, arranging such a schedule may prove to be difficult for families who are newly separated, or those who negotiate a summer schedule each year to accommodate the varying schedules of the parents and the child(ren). When there is no existing access agreement in place, parents have a lot of freedom in arranging the summer access schedule. Parents are free to negotiate and compromise when planning the schedule, however, they must ensure that the schedule is in accordance with the child(ren)’s best interests. The reason being, if the issue were to ever proceed to court for settlement, the judge will decide what is fair based on the best interests of the child(ren). See CLRA 24. (2) Best interests of child It is important to mention that when a court is considering an access award, the focus is always on the best interests of the child(ren), and not on the interests and rights of the parents. Although parents’ wishes are often at the forefront of a summer access negotiation – as mom or dad may only be allotted a certain week off work for a vacation for instance – it’s important to remember that for the court, these wishes are irrelevant. Rather, the best interests of the children are what the court will examine. For example, will the child(ren)’s best interests be met if they were to travel to Disneyland? For more information on how a judge may go about determining who should be granted custody, please listen to our podcast on this matter. Although it may seem that a vacation is always in a child(ren)’s best interests (after all – who doesn’t love a vacation?) this is not the case for the courts. According to one Canadian Judge, “The best interests of a child are not to be confused with such things as the “benefits” of a vacation.” In this case, the father sought to take his child on a vacation outside the country, and the mother obtained an order which restrained the father from doing so. Ultimately, the court made the final determination in accordance with the child’s best interests, and the father was not permitted to travel with the child. For the court, the evidence did not establish that the children’s best interests would be served by removing them from their home jurisdiction. As a parent, if you are seeking to travel outside the country with your child(ren) for a vacation, it will be necessary for you to obtain a consent to travel from your ex-spouse. If such consent is denied, you may consult John Schuman’s blog post “My Ex Won’t Sign a Travel Consent” to determine how to proceed. In any case, it is best to consult with a family lawyer prior to taking any legal action. To avoid both the cost and uncertainty of court, parents ultimately need to be able to agree on how to divide their child(ren)’s time during the summer. They must do so in a way that is best for their child(ren). Mediation may also be an option for parents who would like to settle their dispute outside of court. To find out more about family mediation services, please see our mediation page. If you are experiencing difficulties with scheduling summer access arrangements with your child(ren), contact Devry Smith Frank LLP’s family lawyer John Schuman today for a consultation, or call our office directly at 416-449-1400. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” By Fauzan SiddiquiBlog, Family LawJune 8, 2017June 24, 2020
The Dangers of the Online Separation Agreement In the age of the internet, the law is (at varying speeds) adapting to the online realities of the people it applies to. People can now file their taxes, issue small claims court applications and, most recently adjust some child support orders, at the click of a button. With the advent of websites such as lawdepot.ca and other sites which offer templates for legal contracts, people have started turning to the web to construct separation agreements. However, these agreements are no substitute for agreements crafted by experienced lawyers, and people should be aware of the very real dangers of relying on these agreements before using them. In Ontario, separation agreements, marriage contracts and cohabitation agreements (“domestic contracts”) are all subject to the same legal requirements. There are strict rules about the process for concluding an agreement, and the language contained in the agreement, that must be followed if the agreement is to be legally valid enforceable. In no uncertain terms, the strength of a domestic contract is dependant on how it was reached and the language it uses. The ‘Click-Click-Print’ Method Doesn’t Fulfill the Requirements for Negotiating a Domestic Contract In Ontario, domestic contracts must comply with the rules applicable to all contracts. They must be in writing, signed and witnessed by the parties, must not contain illegal terms, and must be made without undue influence or duress. The first few conditions are simple and can be satisfied with a downloadable agreement. While many people believe that short of openly forcing someone to sign an agreement means there is no duress, this is not the case. In terms of domestic contracts, duress can arise from unequal bargaining power (one party is better educated or more affluent than the other) or from situational factors (e.g. if a marriage contract is signed only weeks before a wedding). The best way to ensure that an agreement is not vulnerable to challenge based on duress or undue influence is to have a lawyer represent both parties during the negotiation of the agreement. Judges believe that lawyers provide a ‘buffer’ between the parties and can work to mitigate many types of duress or undue influence. Lawyers will typically negotiate the agreement in writing (such as through emails or letters between them), and this can be important evidence if the agreement is challenged later on. With online agreements, there is no buffer between the parties. There is no written record of negotiations or any evidence that possible sources of undue influence or duress were identified and addressed. Judges will assume that there was little to no negotiation about the agreement. If this is what the judge believes, it is very likely that the agreement will be set aside. The Language is Online Agreements is Basic, Not Comprehensive, and Not Creative No two families are the same and, because of this simple fact, no two domestic contracts are the same. When spouses marry, cohabit or separate, their circumstances are unique, and any domestic contract has to take account of this. Unfortunately, online agreements are ‘boiler-plate’ and the language is drafted in such general terms as to apply to as many people as possible. The limitations of using these agreements is apparent – you are limited to including the terms that the website provides and in the language it uses. There is no room for crafting an agreement that works best for your family. This is why it is always recommended that you have an agreement drafted by an experienced family lawyer, who can advise as to what form of agreement will work best for you and your family. There is no substitute for this. As well, the generality of the language in these agreements can make parties vulnerable if the agreement is challenged. Experienced family lawyers are aware of recent and important cases about domestic contracts, and craft contracts to reflect what these cases say about how contracts should be worded. For instance, the clause for waiving spousal support in the law depot standard online separation agreement is six lines long. Most clauses drafted by lawyers are over a page and include specific language to consider the cases to which I just referred. Without this protection, a lawyer could easily challenge the agreement and have it set aside. The Final Word Domestic contracts are like insurance policies – they are contracts entered into to protect oneself against future liability, be it disability from a car crash or spousal support from a divorce. Just like insurance policies, the value of a domestic contract is not when it is signed but is years down the road when an issue arises. Just as one should want to make sure their insurance policy is valid and enforceable, they should want their domestic contract to be airtight. Unfortunately, online agreements just don’t get there. Many people don’t see the need to hire a lawyer to help them draft an agreement. They think an online separation agreement is sufficient and, let’s be honest, most people don’t enter into these agreements believing they will ever be used; most people don’t buy home insurance because they expect their home will burn down. This can be a costly mistake. Without a properly negotiated and worded contract, people are exposed. They can lose hundreds of thousands of dollars in property and be liable for years of support if agreements are set aside. The up-front cost of hiring a lawyer to do the agreement properly is minimal in comparison. If you are in the process of negotiating a domestic contract, are moving in, getting married or separated, or would like to learn more about domestic contracts, contact a member of our Family Law Team. “This article is intended to inform and entertain. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” By Fauzan SiddiquiUncategorizedMarch 17, 2017June 18, 2020
Help! Will My Foreign Divorce Be Recognized in Canada? DSF’s family lawyer was recently asked the following question: If someone gets divorced in Tennessee, is the divorce legal in Ontario if they haven’t registered their divorce in Canada? I am planning on getting married again in Ontario. In the 21st century, it is important that the law keeps pace with the realities of an increasingly globalized world, one of which is the increasing flow of people between countries. In the context of family law, the shifting of families, children and individuals across borders has created a host of challenges for family lawyers, judges and legislators alike. One of the areas that continue to be the subject of focus is the recognition of foreign marriages and divorce. While the traditions, ceremonies and requirements for marriage and divorce vary from country to country, when it comes to recognizing them in Canada, there is only one set of rules. Whether you are divorced in New York or New Delhi, the test is the same. If you want to get remarried in Ontario after obtaining a divorce in a foreign jurisdiction, you have to establish that the foreign divorce is recognizable in Canada. Under s.22(1) of the Divorce Act, a foreign divorce will be recognized where one of the spouses was ‘ordinarily resident’ in that country for at least a year immediately before obtaining the divorce. However, that is only the first step to being able to remarry in Ontario. Before the Ontario government will issue you a marriage license, you have to obtain an authorization from the Registrar-General. To do this, you have to provide the following documents to the Office of the Registrar-General, Marriage Office: A marriage license application completed by you and your new spouse; The original divorce order or notarized copy of the divorce order. If the divorce judgment was written in a language other than English or French, you will have to obtain a court-certified translation of the document; A completed Statement of Sole Responsibility, which is a document that attests that you and your new spouse understand that the granting of a new marriage license does not necessarily mean that the foreign divorce would be recognized by an Ontario Court. A legal opinion letter from a lawyer, addressed to you and your new spouse, giving an opinion that the foreign divorce would be recognized as valid in Ontario and giving the reasons for their opinion. Once you have submitted these documents, the Registrar General will provide an authorization allowing you to obtain a marriage license. Only then will you be free to remarry in Ontario. It is important that you speak to a lawyer before embarking on remarriage. There are a number of legal hurdles to get over, and you will need a lawyer to draft an opinion letter in any event. If you are planning to get remarried in Ontario and need some advice, assistance or an opinion letter, contact a member of our Family Law Team. “This article is intended to inform and entertain. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” By Fauzan SiddiquiBlog, Family LawMarch 9, 2017June 18, 2020
