The MacDonald & Partners Team, Working for You

 

ARTICLES
Georgina Carson, Partner

Money and Family Law - Vol. 25, No. 9 - September 2010

Money and Family Law - Vol. 25, No. 8 - August 2010

SELF-REPRESENTED LITIGANTS IN THE FAMILY COURTS: IS SELF-REPRESENTATION AN UNFAIR TACTIC?

Enforcing Cross-Jurisdictional Support Orders under the Interjurisdictional Support Orders Act, 2002

SPOUSAL ENTITLEMENT TO EMPLOYEE RELATED BENEFITS & RRSPs

 

SPOUSAL ENTITLEMENT TO EMPLOYEE RELATED BENEFITS & RRSPs1

Since the Family Law Act took effect twenty years ago, the goal of promoting an equitable settlement on marriage breakdown has resulted in an ongoing tension between the division of net family property and determinations of support entitlement. Disability benefits and life insurance exemplify the entanglement of these issues. Judges have variously treated these benefits, causing uncertainty in their ramification on separation issues. Support issues are further complicated by the growing value and cost of health benefit plans and private coverage.

I   DISABILITY INSURANCE – Property or Support?

Historically, judges have differed in their treatment of disability benefits, just as they have differed in their treatment of similar benefits such as Workers’ Compensation benefits and damages in personal injury actions.

On January 19, 2006, however, the Ontario Court of Appeal released its decision in Lowe v. Lowe2, which appears to have settled, at least to a certain extent, the ongoing debate of how disability benefits should be treated on marriage breakdown.

The cases have focused around the issue of whether disability benefits should be treated as income for support purposes or as property to be equalized and secondly, if disability benefits are to be treated as family property, whether they can be excluded as damages under section 4(2) of the Family Law Act.

In Lowe, the parties were married in 1984 and separated in 2003. The husband injured his back at his workplace in 1985. He was partly disabled as a result of the injury and received benefits from the Workplace Safety and Insurance Board (“WSIB”). The wife argued that the husband’s benefits should be included in his net family property; whereas the husband claimed they constituted income replacement. The trial judge concluded that these benefits were property. However, the Ontario Court of Appeal overturned the lower court’s decision and found that disability benefits (in this case Workers’ Compensation Benefits) are not property for the purpose of a net family property equalization and are better considered as income stream replacement for the purposes of support.

In writing for the majority, Justice Sharpe relied on the 2005 decision of Hamilton v. Hamilton.3 In that case Justice Aitken provided a detailed and coherent judicial analysis of the legal implications of disability insurance on marriage breakdown and reviewed the inconsistent jurisprudence on the issue of disability benefits.

In Hamilton, the wife injured her back while working and because of her back pain, she did not work outside the home for the last years of the marriage. She was in receipt of two disability pensions through the Canada Pension Plan and a private pension plan. In determining her net family property, the issue arose as to whether the wife’s disability pensions should be included as her property within the meaning of section 4(1) of the Family Law Act. Justice Aitken found that disability benefits should not be considered family property for equalization purposes.

Prior to both Hamilton and Lowe, there had been inconsistent treatment of disability benefits that are “in pay on separation” (or current disability benefits), and those “not in pay on separation” (or future disability benefits). This bifurcated treatment stems, in part, from the definition of property under the Family Law Act, which states:

s.4(1) “Property” means any interest, present or future, vested or contingent, in real or personal property and includes,…
(a) in the case of a spouse’s rights under a pension plan that have vested, the spouse’s interest in the plan including contributions made by other persons; …

For example, in McTaggart, Justice Huneault found that the husband’s disability pension in pay prior to separation constituted property under the Act and then found that it did not fall under the exclusion provision in section 4(2)3 of the Act.4 Justice Huneault found that benefits earned during the marriage and not dependent on service following separation should be shared by the spouses. The judge found that the husband’s disability pension had attributes of a retirement pension. The company pension plan was fully funded by the employer and allowed an employee to become eligible for retirement benefits in several ways, including, normal service retirement, early service retirement, 30-year early service retirement, late service retirement and disability retirement. As a result, Justice Huneault found that the disability benefits represented a level of income earned by the husband for services rendered to the company, and not as compensation for his disability. In other words, the husband’s disability allowed him to collect his retirement pension at an earlier date and as such was commensurate with a pension and therefore shareable property.

A similar case dealing with the same company pension plan arose in Brignolio v. Brignolio5. Although the court in Brignolio found the disability pension to constitute property, he excluded it from the party’s net family property under section 4(2)3 of the Family Law Act, which states: “damages or a right to damages for personal injuries, nervous shock, mental distress or loss of guidance, care and companionship, or the part of a settlement that represents those damages”. 6

Current Disability Benefits (In Pay on Separation)

In both Hamilton and in Lowe, the spouses were receiving disability benefits at the time of separation – so they were “in pay”. Although Justice Aitken found that disability benefits in pay on the date of separation are less speculative than benefits not yet in pay, she also found that a person’s entitlement remained subject to review as a person’s impairment could improve or disappear in the future, ending their entitlement to benefits.

Except in situations where a disability plan is a form of pension, a disability benefit is normally payable during a person’s work life up to age 65 and replaces in whole or in part the income that the person would have earned had he/she been able to work in the normal course; therefore it should be treated as income.

Future Disability Benefits (Not in Pay on Separation)

Justice Aitken found a spouse’s entitlement to receive future disability benefits too speculative to qualify as a property right worthy of valuation and inclusion in a spouse’s net family property. In explaining her reasoning, she stated at paragraph 124:

Future disability benefits to be paid following the valuation date fall outside the concept of net family property for many reasons. They are paid due to an ongoing personal characteristic or condition of a spouse, namely that spouse’s state of health and impairment. Entitlement must be earned each day after the valuation date through the disability continuing. In that sense the rights are created on a very current basis, they are not created in advance of the period for which they relate. Entitlement has not gelled as of the valuation date; there is no accumulation of benefits as of that date. Disability benefits are not payable to a spouse due to the joint contributions of both spouses in one form or other to the marriage partnership. Disability benefits are intended to replace income on an on-going basis, as and when the need for such an income replacement arises; they are not intended to be a form of savings available regardless of what the fund holds. They exist to support the person who cannot work, and that person’s dependents.

In other words, the true essence of disability benefits differs markedly from other property rights owned by spouses on the valuation date, and mirrors more closely other future income streams or sources of income that we do not consider captured by the definition of “property” and “net family property” under the Family Law Act. Justice Aitken also found that the application of disability benefits in determining the issue of support will reflect people’s reality as they move through periods of employment, unemployment, poor health or injuries.

Analysis

Justice Sharpe in Lowe agreed with Justice Aitken’s analysis of both in pay and future disability benefits, finding that disability benefits replace income during the working life of the employee and therefore is appropriately treated as income, not property. In arriving at this conclusion, Sharpe J. considered the argument that where a husband’s permanent disability pension is payable for life (as in Lowe), it should be included as property as it is a fixed entitlement and therefore is not contingent on the husband establishing disability on an on-going basis. However, Sharpe J. stated at paragraph 24,

It seems to me preferable from the perspective of clarity and predictability to treat all disability benefits the same whether they are calculated strictly in terms of lost income or as compensation for impairment to earning capacity. However, […] disability payments that form part and parcel of an employee pension benefit plan may be on a different footing. In the end, the central point is that disability benefits represent income replacement and, from the perspective of family property and spousal support, are more appropriately treated on the same basis as income for employment.

Post-Lowe Cases

There have been a few cases post-Lowe that have addressed the treatment of disability benefits on separation.

In Elias v. Elias, released just one week after Lowe, the husband was permanently partially disabled and received $273 per month from the Worker’s Compensation Board (“WCB”), which he deposited into a separate account in his own name.7 He was able to find alternative employment earning approximately $50,000 per year. Upon separation the husband argued that the account containing his WCB payments was not a family asset to be included in his net family property calculation. In finding that the account was a family asset to be including in his net family property and therefore subject to equalization, the court held that the husband saved this money while the wife used her earnings to support the family. There was a clear intention that this account was to be used for a family purpose and it was therefore not excluded. The court did not consider Hamilton in deciding this case.

In Lamothe v. Lamothe, the husband was receiving 2 supplements from the WSIB in addition to his employment income, which totaled $700.00 monthly.8 The first was paid to take into account the duration of the wage loss sustained by an injured worker, in an attempt to bring the old wages, on which the benefit was based, up to more current levels. This supplement was to be paid until the recipient turned 65. The second supplement was meant to compensate for the worker’s reduced earning capacity due to a work related injury, and for the resulting entitlement to lower CPP benefits. The wife argued that the husband’s reduced earning capacity supplement is not a disability pension as it is a fixed and permanent benefit, which should factor into the equalization equation.

Justice L.L. Gauthier, however, disagreed with the wife. He relied on the decision by the Ontario Court of Appeal in Lowe, wherein the fixed entitlement argument was considered and rejected, stating that for clarity and predictability, all disability benefits should be treated the same.

In 2007, the Ontario Court of Appeal considered the issue of whether the husband’s pension was a retirement pension and not a disability pension. In Maphangoh v. Maphangoh, the husband had almost 18 years of service with the Federal Government.9 In 1997, he became disabled. Under the federal government pension plan, the husband became entitled to a disability pension. This disability pension was, in essence, an entitlement to take early retirement without penalty. But for his disability, the husband would have been required to wait until he was 60 years old before being entitled to draw upon an unreduced pension.

By the time of trial, the husband was over the age of 60. Although his payments were still categorized as a disability pension, he was in effect receiving his retirement pension. The trial judge found that the value of the husband’s pension accumulated during the marriage was property and included it in the net family property calculations. However, the judge was careful to only include the value of the husband’s pension entitlement at age 60 in the calculation and excluded the value of the disability benefits that the husband was entitled to receive up to the age of 60.

The trial judge’s decision was upheld unanimously by the Court of Appeal, which relied on statements made in its own Lowe decision, that disability payments forming part of an employee benefit/pension plan “may be on a different footing” than other forms of disability pensions that are payable during a person’s working life and which clearly form income replacement.

In Ratman v. Ratman the husband was injured in a workplace accident and was receiving WSIB payments in the amount of $1,022 per month.10 The husband completed a retraining program as a computer analyst, but did not work again after his injury. The wife applied for an equalization of net family property. Justice Daley held that the husband’s WSIB loss of retirement benefits payments were in the nature of a pension and were therefore to be included in the calculation of the husband’s of net family property. The value of the benefit as of the valuation date was included in the husband’s net family property calculation.

Double Dipping

Another aspect to consider and which Justice Aitken noted in her Hamilton decision, was that the inclusion of a party’s disability benefits in net family property could lead to double dipping. The income received from the disability plan would require exclusion from any consideration of available income when considering support entitlement, to avoid double dipping. Clearly, if the benefits have been equalized, the determination of ongoing support becomes more complicated. For example, if the recipient spouse is collecting disability benefits which have been equalized through a division of net family property and that spouse is also entitled to receive spousal support, the recipient spouse’s disability payments would not be included in the determination of support entitlement, possibly skewing the levels of support. The disabled recipient could be left paying income taxes arising from spousal support and the payor retaining less income, as a result of the equalization payment.

Conclusion

Courts are now applying the reasoning in Hamilton and Lowe to support the proposition that disability benefits, whether in pay or not in pay at separation, must be treated the same – as income. Whether the disability benefits have a specific fixed value on separation or not, if they are intended to supplement income or compensate for lost wages, lost CPP benefits or otherwise, they are to be treated as income within the context of family law proceedings. In this regard, the previous distinction between income replacement/loss of earnings and compensation for disability will not matter.

The exception, as demonstrated by Maphangoh and Ratman, is if the disability benefit forms part of an employee pension benefit plan or is in the nature of a pension. In these cases, a different treatment applies and the benefit/pension will be treated as property.

These cases highlight the complexities of classifying disability benefits in matrimonial proceedings. The following ramifications must be considered: future uncertainty, ability to value, crystallization of entitlement, double dipping, quantum of support, income tax and long term investment needs of the parties.

Practical Pointers
  1. Do not assume that because something is called a “disability benefit” means that in the post-Lowe world, it will automatically be treated as income and not property.
  2. Understand the nature and type of disability benefits being paid and the overall plan of coverage;

    • Do they form part of an employee/group retirement pension plan or are they a separate plan?

    • Must the individual qualify based on the disability or is it subject to review while in play?

    • Is it an income replacement supplement or is it really part of an early retirement pension plan?
  3. Adduce evidence about the nature and details of the disability benefit plan, why is it being paid, what are the particulars surrounding payment etc… Understand the nature and type of disability benefits being paid.
  4. Consider how the disability benefit will be factored into the determination of support entitlement and quantum. Avoid double dipping.

II     LIFE INSURANCE

An insurance policy is a contract in writing by which the insurer, in consideration of a premium, engages to indemnify the insured against a contingent loss, by making the insured or his or her designated beneficiaries, a payment in compensation, whenever the event shall happen by which the loss is to accrue.

A group life insurance policy is a type of life insurance commonly offered by companies or universities to their employees in which there is a master insurance contract providing life insurance benefits to each covered employee who holds a certificate indicating his/her participation and generally without requiring a medical examination.11

Pursuant to section 34(1)(i) of the Family Law Act, a court can require a spouse who has a policy of life insurance as defined in the Insurance Act, to designate the other spouse or a child as a beneficiary as security for support obligations in the event of the payor spouse’s death.12 Even where the spouse does not have a life insurance policy in place at the time, the court can order the spouse to obtain a policy to secure his support obligations.13

The obligation to maintain a former spouse as beneficiary usually continues for the duration of the support obligation. In some cases, payors have attempted to free their life insurance from this security obligation in order to designate a new family as beneficiary, without success.14

Unfortunately, ensuring a payor spouse complies with insurance designation and maintenance requirements can be difficult. For example, payors routinely ignore requests for confirmation that the policy remains in good standing and that the recipient has been properly maintained as the designated beneficiary.

A court can order that the recipient spouse be named as irrevocable beneficiary, but such an order does not safeguard against non-payment of premiums.

Other provisions can be contracted or ordered to protect the recipient spouse’s interest and/or entitlement to support. These include:

  1. If the policy is a whole life policy, the payor spouse can be enjoined from borrowing against the policy or pledging it during the period of time the recipient spouse is entitled to support;
  2. The recipient spouse can take over ownership of a private life insurance policy on the payor’s life and thereby maintain control of the policy and access to information about the policy.
  3. The contract or order can include a provision that if the payor spouse dies without the life insurance provisions in place, the recipient spouse may be entitled to a first charge against the payor spouse’s estate. However, a “first charge” is effectively meaningless in the face of secured debts or an estate without value, where a testator has circumvented assets through direct beneficiary designations, joint assets or other forms of estate planning.

These safeguards can assist the support recipient but are not guarantees that the life insurance will be in place at the time of the payor’s death. A further safeguard is to maintain the right to seek support as dependents at the time of the payor’s death. However, recipients are then often faced with a material change in circumstances argument from the payor’s estate.

Group Insurance

Group insurance is generally cancelled when employment ends providing no security for the recipient spouse. In addition, the recipient spouse is often unaware of the job change and his or her loss of status as beneficiary under the group insurance plan.

The parties’ agreement or court order should, at minimum, include a provision that imposes a positive annual obligation on the payor to provide proof that the policy and its terms remain effective, in addition to a direction that the insurer provide that information directly to the recipient. Some insurers, however, do not honour such directions, particularly since they often flow from a contract between the parties, to which the insurer is not bound.

Nonetheless, the recipient spouse should regularly request proof, in writing, from both the payor and insurer of the policy’s status. In addition, he or she should seek authorization in the court order or agreement to receive notification immediately from the insurer of any default, change to the beneficiary designation or job change.

This scenario was highlighted in Manufacturers Life Insurance Company v. Walters.15 In this case, during the relationship, the husband had named the wife as beneficiary of his work group life insurance policy. When the parties separated, the wife made a claim for spousal support which the husband agreed to pay. However, when executing the agreement, the husband failed to disclose that he had resigned from his job due to illness. The order did not stipulate that the husband maintain life insurance with the wife as beneficiary to secure the support obligations. About one year later, the husband was rehired and made a new application for group life insurance. He named his son as the beneficiary, as opposed to his former wife. The husband died having accumulated support arrears and having changed the beneficiary designation on his group life insurance policy.

The group life insurance policy specifically outlined the following provisions with respect to coverage:

(a) One had to be an employee to qualify for coverage;

(b) To become insured under the policy an eligible employee must apply in writing on forms supplied by the company;

(c) If an employee is rehired within 24 months of termination of insurance under the policy due to termination of employment, he must reapply for insurance under the policy;

(d) Once an application for insurance has been completed, the insurance becomes effective if the employee is then actively at work; and (e) An employee’s insurance is terminated the date his employment is terminated, but if an employee ceased to be actively at work due to illness, all insurance coverage continues.

After analysis of the particular provisions of the policy and the facts of the case, the court found that because the deceased did not request a leave of absence for illness, which he was entitled to do, but rather voluntarily quit and then reapplied for employment after treatment, the coverage of life insurance had in fact terminated. Had the deceased obtained a leave of absence, the widow would have remained beneficiary. However, the deceased’s coverage terminated when he quit and he was free to name a new beneficiary when he reapplied for a new policy on being rehired. Any fraudulent actions by the deceased against the widow had no effect on the designation as beneficiary. So not only was the support order left unsecured, due to the deceased husband’s deception, the widow was left without support and received no proceeds from the group life insurance policy.

This is a clear example of the problems that recipient spouses can face with respect to securing support under group policies of life insurance.

Securing Support through Group Life Insurance

Should a payor spouse lose his/her job and therefore lose the benefit of such coverage, an obligation may be imposed on the payor spouse to secure alternate insurance, without any gap in coverage, at his/her expense in the event that the original security lapses through unemployment, retirement or otherwise.

For some payors, it would be financially onerous to maintain private life insurance policy or they are uninsurable for health or age reasons.

A life insurance obligation under an agreement or court order may trigger a material change in circumstances justifying a variation in support. The life insurance provisions of an agreement should routinely be qualified as variable in a material change in circumstances so that alternate security can be considered instead.

Transferring Ownership

On some occasions, parties have agreed or the courts have ordered the ownership of a life insurance policy to be transferred to the recipient spouse. This has been the case both to secure support obligations and to satisfy part of or all of an equalization payment (in the case of a whole life policy).

Although the courts have ordered the transferring of ownership of life insurance policies, those cases have been limited to where the payor spouse has owned a private insurance policy.16 Where the courts have ordered one party to transfer their private life insurance policy to the other, the court has also ordered that the recipient spouse have the corresponding duty to maintain and be responsible to pay for the premiums.17 With entitlement comes obligation. The recipient’s payment of the policy premiums should factor into the determination of spousal support quantum.

When ownership is transferred to the beneficiary, the beneficiary takes control of the contract, receives the policy information and gives instructions to the insurer.

Although transferring ownership of a privately held life insurance policy is possible, transference of ownership through a group policy is not. Although each policy differs and the particular policy should be reviewed in each case, generally, the following are standard requirements with respect to group policies:

1. To be covered by the group policy, the person must be a member of the union, association or a permanent, full time employee.

2. For the member/employee to qualify for coverage, they may need to work for a specified period (such as three months).

3. If the individual leaves that job or he/she ceases to be a member, coverage of the group policy terminates (whether immediately or within a short period of time thereafter).18

Accordingly, it is not possible for the employee’s “interest” in a group policy to be transferred from the payor spouse who is a member/employee to the non-member recipient spouse. The employee does not own the policy but is a member of the plan. The coverage is directly linked to the employment relationship. If the employee’s interest in the policy was somehow transferred to non-member, there would, arguably, be no insurable interest19.

The primary difference between a privately owned insurance policy and a group employment policy rests with ownership. With a privately held policy, the insured, being the payor spouse, contracts directly with the insurer. As a result, the insured can transfer the policy to another person, provided the person complies with the contract and maintains the obligations, requirements and commitments attached to the policy. In contrast, with a group employment policy, the employer owns the policy and contracts with the life insurance company, not the employee/member. The employee/member has the benefit of a life insurance policy provided by their employer. When the employment relationship ends, so does the insurance coverage. Accordingly, the employee/member does not own the policy and does not have the right to transfer any interest in the coverage, unless the employer and/or policy permits that involvement by the recipient spouse.

Recipients should nonetheless pursue entitlement to information and status relating to the policy, through court order or agreement.

Dependent Claims on Death

The death of a payor spouse does not necessarily terminate their obligation to pay support. In the absence of security for support, and the provisions of a domestic contract or order confirming the termination of support on death, the deceased’s estate is often liable for support. However, a recipient is better protected by anticipating the possibility of a payor’s death and arranging for security in the form of independent life insurance contracted by separation agreement or court-ordered rather than seeking relief from an estate that my be complex and its administrators hostile.

The recipient spouse may apply under section 58(1) of the Succession Law Reform Act20 for an order for support.

Section 72 of the Succession Law Reform Act permits the court to attach assets other than estate assets. This statutory remedy was necessary to permit the courts to enforce an order against assets which the estate may not legally own but the deceased had control over prior to his/her death. This would allow the court to assist the recipient spouse due to the insufficient security for support left by the deceased.21

Life insurance that is payable to a beneficiary other than an estate, is the most common asset which is attached. There has been substantial litigation over section 72(1)(f), which states:

“any amount payable under a policy of insurance effected on the life of the deceased and owned by him or her.”

The controversy has centered around the issue of whether a group life insurance policy is attachable. In two cases, the Ontario Divisional Court determined that the deceased did not own his group life insurance policies and therefore the group policies were not attachable to his estate.22

This omission in the Succession Law Reform Act was remedied by a 1999 amendment to the section:

“s.72(1)(f.1) … any amount payable on the death of the deceased under a policy of group insurance”.

As a result of this amendment, should the recipient spouse be left without adequate security for support on the death of the payor spouse, they may make an application to the court and request an order attaching the deceased’s group life insurance policy.

Tax Considerations

Under the Income Tax Act, a change or partial change in ownership (even beneficial ownership) is a 'disposition' for tax purposes. A disposition of an interest in a life insurance policy under subsection 148(1) of the Income Tax Act generally refers to any transaction in which the interest is transferred to another party.

These provisions apply to whole life policies as opposed to term policies without cash surrender value.

Generally, tax consequences arise from the disposition of the ownership of the policy. However, there are exceptions to the general rule, including that between spouses. Subsections 148(8) to (8.2) provide automatic rollovers on the transfer of an interest on a life insurance policy to a child, spouse or common law partner, or former spouse or common law partner of the policyholder in specific situations. Where a rollover applies, the transferor will be deemed to have disposed of the interest in the policy for proceeds of the disposition equal to the adjusted cost basis of that interest, and the transferee will be deemed to have acquired the interest in the policy at the adjusted cost base of the transferor.

Subsection 148(8.1) is an automatic provision which is intended to mirror, in many respects, the spousal rollover provisions in subsection 73(1). The policyholder can elect out of the automatic rollover by filing an election in the policyholder’s income tax return for the year of the transfer providing that the transfer will take place at fair market value.

If the policyholder elects not to rollover the asset, the general tax consequences from a disposition apply.

What must also be noted is that because life insurance is considered “property” for income tax purposes, the spousal attribution rules under section 74.1 must be considered. Accordingly, if the policy is transferred to a spouse or common law partner under the automatic rollover provisions and the spouse/partner subsequently disposes of the interest in the policy, any resulting policy gain, income and capital gains generated from substituted property, will be taxable to the original policyholder (i.e., the transferor) unless the parties are divorced at the time of disposition or have executed the appropriate waivers of attribution rules.

Calculating Amounts of Life Insurance Needed to Secure Support

In considering amounts required to secure spousal support, many counsel retain the assistance of actuaries or other experts to assist in calculating the prospective support obligations, applying present-value discounts, reviewing amortization factors and other contingencies and considering the tax consequences. Others simply use a rough estimate or designate the policy currently held by the payor, which is often insufficient. In determining appropriate levels of insurance, counsel should remember that, unlike spousal support, life insurance proceeds are not taxable to the recipient. Furthermore, life insurance proceeds received in a lump sum will be invested upon receipt and generate additional income. Spousal support, on the other hand, is eked out over time and is variable in a variety of circumstances.

Reducing Quantum of Life Insurance

Just as the quantum of spousal support changes over the years, the question arises as to whether the amount of life insurance can be varied as well.

Many separation agreements now provide for lock-step reductions in the quantum of life insurance security over time. A lock-step reduction may be more appropriate in securing a child support obligation. On the other hand, spousal support obligations are often indefinite and indeterminate in duration and reductions are potentially problematic. Even child support obligations may become indefinite if a child becomes disabled. More flexibly, some agreements and orders now permit a review of life insurance quantum “from time to time” A more flexible provision allows an opportunity to review and ascertain a new and more appropriate amount of life insurance to provide security for support at a specific time.

In Rondeau v. Kirby, the parties added a clause in their settlement that life insurance could be reduced when support was reduced.23 However, the parties did not specify the amount of any reduction. Justice Campbell found that he lacked expert evidence to capitalize the support payments, that the current support award mimicked the original award, and that a reduction in life insurance would not be appropriate.

In Ravka v. Ravka, Justice Magda refused to reduce the life insurance obligation for the following reasons:

  1. The payor had agreed to carry $720,000.00 in life insurance for as long as he was required to support the wife pursuant to the agreement;
  2. Justice Magda was not comfortable with simply applying a percentage reduction of a sum parallel to the reduction in spousal support as there was no evidence that such sum would adequately secure spousal support; and
  3. There was no provision in the Separation Agreement allowing for the proportional reduction in life insurance.24

In contrast, Justice Yard in Cadigan, found it appropriate to reduce the quantum of life insurance in the same ratio as spousal support was reduced.25

Changing Beneficiary Designations on Termination of Support

If you represent a spouse obligated to maintain a life insurance policy, naming the other spouse as beneficiary or trustee of the policy so long as spousal or child support is payable, it is important to remind your client that once their support obligation terminates, they should change the beneficiary designation on their life insurance policy; otherwise the recipient spouse may receive the life insurance proceeds even though there is no longer an entitlement to support. If the life insurance designation was irrevocable, the recipient spouse’s consent will be required to change it. If the support obligation has ended, their co-operation should be automatic; however, obligating a recipient spouse to co-operate in changing the beneficiary once the obligation has ended can be enunciated in the agreement or court order to facilitate compliance.

Similarly, on separation, and depending on their support obligations and other considerations, clients should be reminded to change their beneficiary designations on life insurance policies and RRSPs. They should be reminded to update their wills as separations do not invalidate prior made wills. In Richardson Estate v. Mew,26 the parties executed a Separation Agreement which contained mutual releases of property. The husband remarried and later died but did not change the beneficiary designation of his life insurance policy – which still named his former wife. The new wife brought a motion for a declaration of constructive trust to the proceeds or for rectification declaring the estate beneficiary under the policy. The court held that both arguments must fail. Foremost, the court recognized that a beneficiary designation is permanent absent a declaration changing the beneficiary. With regard to the constructive trust claim, a beneficiary designation was held to be a juristic reason for deprivation of the second wife. With regard to rectification, there was not sufficient evidence that the husband intended the new wife to be beneficiary and no legal declaration had been made as the separation agreement did not constitute a declaration.

III    EXTENDED HEALTH BENEFITS

Extended Health Care Insurance is a form of health insurance that provides in one policy, protection for hospital and medical expenses not covered by government programs and usually other health care expenses, such as prescribed drugs, medical appliances, ambulance, private duty nursing etc. 27

Coverage of extended health benefits for children is habitual.28 If a parent does not have coverage, health care costs are expected to be shared proportionally through contribution to section seven expenses under the Child Support Guidelines. Counsel should carefully review their client’s contributions to group and private benefit coverage to determine whether or not contribution towards these costs constitute section 7 expenses in the circumstances requiring proportional contribution from the other spouse or the appropriate set-off to tabled or other support. Analysis of the costs of single versus family coverage is generally required.

More controversial, however, is the continuation of or replacement of extended health benefits for spouses upon separation and sometimes divorce.

Due to the rising cost of medications and procedures not covered by government health plans, extended health benefits through employment are becoming increasingly important for families in general, and an important issue on marriage breakdown. For some families, coverage of extended health benefits is crucial to their welfare. If a spouse has a medical condition and is receiving treatment through costly medication, that spouse will likely be unable to obtain a cost-effective private plan if they cease to be entitled to receive benefits through their spouse’s employment related health plan. The result can effect an employee’s decision to remain in their current employment and a spouse’s support needs on marriage breakdown.

Extended health benefits are not considered family assets to be equalized upon separation. These benefits or the potential loss of these benefits affect support entitlement and obligations.29

Cost to Employee

Counsel and parties should pay close attention to the employee’s cost for these benefits. Many employees or self-employed individuals working alone or in partnerships, contribute significant sums on a yearly basis to extended benefit plans for which they may receive little, if any, return benefit. At the time of relationship breakdown, parties and their counsel should examine the cost borne by the payor, the benefits available and whether the monies spent are appropriate. Alternatively, the payor spouse could increase tax-deductible support for the recipient spouse to purchase his or her own private insurance rather than the payor maintaining an expensive family policy through the payor’s group plan which will end with employment; or, for the spouse, divorce.

Double Policies

When both spouses have extended health plan coverage, the parties should consider the most cost-effective means of maintaining family coverage after separation and divorce. Many policies allow parties to submit health expenses for reimbursement to both plans so that each plan contributes a proportion to the expense, usually providing for more comprehensive (although not duplicate) coverage. If both parties agree and the health plan permits this arrangement post-separation, the parties can include this type of arrangement in a separation agreement or court order.

In MacDonald v. MacDonald, the husband requested a court order compelling the wife to continue to provide for him and the children on her health plan, even though he had a plan of his own.30 The wife had alternate health coverage for herself and the children at no cost to her under her new partner’s plan and accordingly, she wished to discontinue her health plan which also covered her former husband. The court found that under the circumstances, it was appropriate to relieve the wife of her responsibility to provide health coverage to the former husband given that he had his own coverage.

Coverage Post-Divorce

Previously, insurers routinely denied coverage post-divorce. However, more frequently, insurers are allowing coverage post-divorce provided that the employee does not add a new spouse to the plan. Counsel and parties should consider carefully the potential benefits of maintaining a spouse with health issues on a plan and ensuring safeguards to maintain that agreement.

Whether the spouse has coverage privately or through a group insurance policy, the question of whether coverage can continue after the parties obtain a divorce rests on the fundamental question of how “eligible dependents” is defined.

“Eligible dependents” is not a defined term in the Insurance Act, nor is there any provision in this Act that specifically excludes former spouses. Accordingly, whether the former spouse falls within the group of eligible dependents is a question to be determined upon review of the particular individual’s policy, whether it is a private or group policy.

Generally speaking, group health insurance plans cover all members/employees and their eligible dependents. Under private plans, the coverage will include specified individuals most often the owner’s immediate family members. Usually “eligible dependents” include spouses or partners (including same-sex partners) and children.

A spouse’s ability to continue coverage of their former spouse will depend on the definition of eligible dependent in that spouse’s policy.

Preventing Divorce at Interim Stage– Prejudice to Spouse Losing Benefits

On an interim basis, Justice Stewart in Milotzki, refused to sever the divorce from the corollary issues, as it would have terminated the wife’s entitlement to receive extended health benefits through the husband’s coverage through his employment. Judges have found that benefits and their impact on spousal support are serious issues to be determined at trial on a full exposition of the evidence.31

The post-divorce prohibition on coverage for former spouses appears to be eroding. Some insurers now allow former spouses to continue on the extended benefit plan provided no new spouse is added.

For example, some health insurance plans permit a spouse with extended health and dental benefits to extend coverage to eligible dependents including a spouse, common law partner, and children. Although nothing specifically includes or excludes former spouses from coverage, some plans specifically restrict coverage to one spouse at a time. However, many plans take the position that they have no contractual obligation requiring them to cover former spouses, even if specified in a separation agreement or court order. Some plans indicate that a former spouse may be covered on an extra-contractual basis, to extend coverage for a short period until that former spouse can obtain alternate coverage.

Counsel must turn their minds to the ramifications of lost coverage. In Tremblett v. Desjardins, Justice McDermid ordered the husband to pay the wife $130.00 a month to cover her medical needs as she was no longer eligible for coverage on the husband’s extended health care benefits. This amount considered the wife’s payment of tax on receipt of the support.32

In other cases, courts have required that the payor spouse maintain the recipient spouse on any and all health, dental and medical plans available, if possible, for so long as support is payable.33 Such a provision provides cold comfort to a dependent spouse who may be denied coverage.

Impact on Spousal Support

Many courts now consider the financial burden of extended health benefits when determining quantum of spousal support. For example, in Fisher, Justice Campbell required an upward adjustment of spousal support on a go-forward basis once the wife lost her entitlement to the husband’s health benefits. This increased support was to compensate the wife for her loss of this extended health benefits. Similarly, in Storey v. Storey, the respondent was receiving $1,100 per month in interim spousal support.34 In granting the divorce, Justice Jenkins noted that the respondent had an increased need for spousal support, as she would lose the health, dental and drug coverage she was receiving under the applicant’s plan. The respondent’s medical expenses were $300-$400 per month and spousal support was adjusted upward to $1,500 to cover these expenses. In Dufresne v. Dufresne, the wife lost the benefit of her husband’s extended health coverage on divorce and the court ordered the parties to share the cost of the wife’s medical expenses until she reached the age of 65, at which time her expenses would be covered by the province.35

The court has also ordered increased spousal support where the payor spouse removed the recipient spouse from his extended benefits plan without notice or good reason. In Meiklejohn v. Meiklejohn the parties entered into a separation agreement after a 23 year marriage.36 The Agreement provided that the husband would maintain the wife on his extended health benefits plan and that, upon retirement, the wife had the option of insisting that he maintain this coverage at her expense through a reduction in spousal support. When the husband retired, without notice to the wife, he cancelled the health care coverage from his employer as well as certain insurance policies naming the wife as beneficiary. The husband then sought to vary spousal support based on his reduced retirement income. The husband suggested that support be reduced to $1,083 per month, which would roughly equalize the parties’ incomes. The trial judge dismissed the husband’s application. On appeal, Rosenberg J.A. held that the husband was entitled to a reduction in support based on his reduced retirement income however, rejected the husband’s proposed amount as it ignored the wife’s increased need resulting from the husband’s bad faith conduct in cancelling her coverage. The husband was ordered to pay extra support to share the cost of replacing the wife’s benefits.

The court in this case also made it clear in their analysis that the husband was entitled to a reduction in support based on his reduced retirement income and not based on the argument of double-dipping. The court commented that a court will not automatically exclude consideration of a payor spouse’s pension income from their income for the purposes of determining support solely because the capital value of the pension had already been equalized and, in some circumstances, a court will be justified in awarding support from pension income that has already been equalized. In this case, the court held the general rule against double-dipping did not apply. The court determined that the husband’s pension had been undervalued at the time of the agreement and therefore a significant portion was not equalized. Also, a portion of the husband’s pension was earned after separation; it was “sweetened” by the employer. Lastly, the wife was in poor health, had limited ability to earn income, and the majority of her assets were tied up in the matrimonial home and RRSPs. The court held that spousal support must continue, even if this meant a portion of it will come from the already equalized part of the husband’s pension.

Maintenance and coverage of extended health benefits is particularly important where the non-insured spouse has a serious illness or disability.

In Eng v. Eng, the parties were only married for 3 years.37 However, prior to marriage, the wife advised the husband that she was unable to work due to chronic pain. The court ordered the husband to pay $3,000 per month in spousal support and to pay the cost of private health care insurance required by the wife. Even though it was a short marriage, Justice Russell held that spousal support should be indefinite, as a result of the wife’s health and the husband’s means. The judge also ordered a review of support once the wife reached the maximum lifetime limit of coverage for her health expenses ($100,000.00). Once the wife reached the maximum, she could review the spousal support order to determine her needs at that time, leaving the possibility open for the husband to pay increased spousal support to cover medical expenses the wife may have as she would no longer be covered by health care insurance.

Reimbursement of Health Expenses

A frequent complaint is that former spouses do not forward reimbursements to the spouse who is out-of-pocket for their own or their children’s medical/dental expenses. The noninsured spouse submits the receipts to the insured spouse to his/her plan. The health plan sends the reimbursement cheque to the insured spouse. In some cases, this can result in a financial windfall to the insured spouse, and a not insignificant financial loss of the uninsured spouse.

To avoid this problem, it may be helpful to obtain a court order which either directs the health insurance provider to reimburse the non-insured spouse directly or which states that the insured spouse will facilitate payment of any claim under the plan and immediately pay any funds to the non-insured spouse. In the first scenario, it may be the case that the health insurance provider may not comply or be bound by the order or agreement as they were not parties. In the second scenario, although this wording may be included in an agreement or court order, the only remedy a non-insured spouse will have if the insured spouse fails to comply is to seek a remedy for non-compliance which can be costly and ineffective.

IV   SUPPLEMENTAL & ADDITIONAL EMPLOYEE BENEFITS

 

Remuneration Packages – Stock Options

The Court of Appeal has found that stock options awarded by an employer after the date of separation ought to be included in the spouse’s net family property, if, on the date of separation, the spouse had earned the right to the options.38

If there is evidence that the stock options, although being issued after separation were specifically related to work carried out by that spouse prior to the date of separation, the unvested stock options will form part of the equalization calculation.

This has been found to meet with the definition of property in section 4(1) of the Family Law Act, in that property includes any interest vested or contingent.

In order for the court to make this finding, it must first determine whether the spouse/employee was entitled as of right to the benefit or whether the benefit was ex gratia. The court will look closely at the structure of the benefit arrangement.

In Ross, although there was evidence that the granting of the options was discretionary, the evidence also disclosed a relatively consistent history of issuing stock options to the husband. Justice Rouleau noted that “past conduct can be such that what started as a discretionary benefit becomes an integral part of an employee’s compensation package.”

Two recent cases which should be noted are the Ontario Court of Appeal decisions in LeVan v. LeVan39 and Serra v. Serra40 as they relate to post-valuation decreases in the value of a spouse’s shares.

In Levan, the Court of Appeal confirmed the trial judge’s decision holding that a dramatic decrease in the value of the Husband’s shares post-separation did not entitle the husband to relief under section 5(6) of the Family Law Act. The parties entered into a marriage contract which was set aside by the trial judge based on the husband’s failure to disclose significant assets, among other things. The husband argued that there should be an unequal division of net family properties under subsections 5(6)(g) and (h) of the Family Law Act. It was the husband’s position that, given the decrease in the value of his shares, it would be unconscionable to equalize the parties’ net family properties as this would result in his entire net worth being given to the wife. In finding that a decrease in net family property that is solely market driven and not caused by a party's conduct does not fall within section 5(6)(h), Justice Backhouse noted that the post-separation decrease in value in this case was not an uncommon situation and found that, had the legislature intended for post-separation events to be considered in determining an unequal division of net family property, a specific provision would have been enacted. As there is no such provision, Justice Backhouse held that section 5(6) does not permit the court to consider post-valuation date fluctuations in value of net family property. The Court of Appeal affirmed Justice Backhouse’s decision, finding no reason to interfere with the conclusion that section 5(6) was not engaged. However, the court left open the possibility that a court may account for post-valuation date events in considering the application of section 5(6) in the future.

Shortly after Levan, the Court of Appeal had the opportunity to consider the issue again in Serra. In Serra, the value of the husband’s shareholdings (his principal asset) declined over eight million dollars between the date of separation and the date of trial through no fault of his own, but rather it was found to be the result of shifting market forces which predated the current economic downturn and not the product of a temporary recession. The trial judge did not take into account this post-separation decrease in value and ordered the husband to pay the wife an equalization payment of $3,283,272.57. In varying the trial judge’s decision the Court of Appeal held that a court may take into account a post-separation date change in the value of a spouse’s asset and the circumstances surrounding the change for the purpose of determining whether an equalization payment would be unconscionable under section 5(6). The court commented that such an order is rare and may only be made in limited circumstances and that judicial discretion is severely restricted by statute. In this case, equalizing the net family properties required the husband to pay the wife nearly double his net worth. This, in combination with other factors including the wife’s position throughout the litigation, was found to be unconscionable for the purpose of section 5(6) and the husband’s outstanding equalization payment was fixed at $900,000.

The implications of this case, including its effect on stock options awarded by an employer, are yet to be known. In the meantime it remains important that the proper evidence be obtained and adduced regarding the existence and value of a spouse’s vested and unvested stock options at separation and the employer’s patterns of granting stock options in the past. Stock options remain a potentially significant asset in the calculation of net family property.

Supplementary Executive Retirement Plans

A supplementary executive retirement plan (“SERP”) may provide benefits to an executive level employee (such as an executive or officer of the company) subject to certain pre-conditions. A SERP is generally integrated with a company registered pension plan, in which the SERP payments commence on the date the employee begins receiving payments under the registered plan. Often the amount of the SERP payment is the total pension entitlement calculated under the SERP minus the amount payable out of the registered pension plan.

In the Ontario 2007 decision of Green v. Green41, Justice Sproat considered whether a wife’s SERP should be treated as family property on separation. Justice Sproat found that the wife’s SERP was closely analogous to unvested rights under a registered pension plan and therefore is property for valuation purposes. In reaching this conclusion, the court considered the definitions of ownership and property as outlined in the Family Law Act, the caselaw regarding non-vested pension benefits, and the fact that SERP is very similar to a non-vested pension interest.

In this case, although the wife’s SERP entitlement could fail to vest if she was terminated for cause or without cause, or was demoted to non-officer status, the court found after considering all the factors including the wife’s age, years of service, and years to retirement, that there was a very high probability the wife would continue her employment as an officer and that the SERP would vest. Furthermore, in considering jurisprudence, including the Ontario Court of Appeal decisions finding unvested registered pensions to be property, Justice Sproat found that a SERP was analogous to an unvested pension, with the exception that a SERP requires the continuation of “officer” status, not merely employment status. Given the similarities, Justice Sproat found there was no reason to distinguish between an unvested pension right under a registered plan and an unvested SERP.

Given the analysis of the court in Green, it would appear logical that if the SERP was in pay on separation, it would be given the same treatment as a retirement pension.

Stock options, whether part of a remuneration package or simply as a benefit provided to the employee, and SERP plans are just 2 examples of employee-related benefits that must be considered on separation. These assets could have significant value to the party, depending on company profitability and years of service. They should not be overlooked.

V   SEVERANCE PACKAGES

Unlike other employee benefits, such as remuneration packages, severance packages are tied to a specific event, the employee’s termination. The Ontario Court of Appeal has stated that where the offer of a severance package and the termination of the employee do not occur until after the date of separation, the employee has no right or entitlement to the severance package at the date of separation. Although the size of the severance is often related to the length of service of the employee, it is the termination of the employment that creates the entitlement, and the length of the prior service is used to determine the length of the notice period or pay in lieu of notice appropriate for that employee. In other words, the severance package is directed at compensating for the loss of employment and is not intended as pay for past service. 42

Although there are situations where severance pay will be characterized as property to be equalized, based on the jurisprudence, one should not expect that severance payments will automatically be characterized in this way. The characterization and treatment of severance pay as net family property requires an examination of the nature and origin of the asset. The court has found that 2 questions must be answered in determining this issue:

  1. How does the entitlement arise? Is it a right that has some degree of certainty attached such as that defined by statute or contract, or is it dependent on the conduct or motive of a third party such as wrongful dismissal or the establishment of an attribution policy by an employer.
  2. Is the right one of entitlement if certain conditions are met or one that is already crystallized at the relevant time, for example, the date employment was actually terminated.43

From the outset, one must ask whether entitlement to the severance pay crystallized before the separation. If it did not and it is contingent upon many different factors, such as termination, lay-off, notice period etc., the courts have not found severance packages to be property subject to equalization on separation.

For example, in Leckie, the husband received a severance package from his employer based on his years of employment. He received this amount after he and his wife separated. The trial judge included it in the husband’s net family property. The Ontario Court of Appeal held that the trial judge erred in so doing, stating “The severance package did not exist at the date of separation. Neither party had any entitlement to such a package as at the date of valuation. They are not property as of separation.”44

The Court of Appeal relied on the decision by Justice Perkins of Marquardt v. Marquardt, wherein His Honour stated at paragraph 13:

I think it is stretching the definition of property in section 4(1) of the Family Law Act to conclude that something that did not exist and to which the husband had no right at the time of separation should be considered his property, as of separation, merely because the method of calculating his entitlement to severance some 16 months later includes time during which the parties were married and living together. Fortunately I am reinforced in my own conclusion by the courts’ consideration of the issue of severance pay and similar employee entitlements in the Ontario cases of…” (see paragraph 14 for list of cases relied on). 45

Justice Aitken in Kuryliak also ruled that a termination package was not property as the husband did not have a vested right to receive termination or severance pay as of the date of separation and he was not absolutely entitled to receive such a payment at some time in the future.46 She further noted that the husband did have a statutory right to receive a proper amount of notice before his employment was terminated, but that only if such notice was not given was he entitled to receive termination pay. If notice was given and he continued to work, he would have received his salary in the normal course as income. No capital asset would have been received. Furthermore, the right to termination or severance pay was only triggered if the husband was laid off or terminated; such right would not arise if the husband resigned or retired.

Similarly in Slack v. Slack, Justice Polowin found that the husband’s lay-off was not guaranteed to occur during his employment. At the time of separation, it was not known that he would be laid off and receive a severance payment under his collective agreement. Simply because he was laid off does not mean that the husband was guaranteed a severance payment at the time of separation. In fact, as of separation, there was no evidence that the husband was likely to be laid off or that he had a property right to severance pay.47

The courts have also found that early retirement initiatives or plans offered after separation are not family property, where the initiative was solely within the discretion of the company, the plan was non-contributory, unfunded by the spouse and subject to cancellation at any time. In these cases, there was no entitlement to the incentive or crystallization of the right at separation.48 Conversely, in Birce49 retirement incentive payments already in pay, and based on many years of service, were included in the husband’s net family property. The husband was not permitted to exclude from his net family property the retirement incentive payments as an asset brought into the marriage because, at the date of the marriage, the husband had no entitlement to the funds and therefore they could not be classified as property.

Recently, the court in Hurst v. Hurst considered whether the husband’s $70,000 postseparation retirement incentive was to be considered as income for the purpose of a spousal support variation.50 In this case the husband had already passed the normal retirement age of 65 and therefore could not be said to be taking early retirement. There was also no evidence that he left his employment with the view of reducing his income to lower his support obligations, as clearly the incentive increased his income. In this case the incentive was offered to senior-rated employees in the hopes of replacing them with their junior counterparts and reducing the number of potential layoffs. In deciding that the husband’s retirement incentive should not be included in the calculation of the husband’s support obligation the court held that, although the incentive was income and had to be reported as income, its character was different from the vacation pay and other benefits payable to the husband upon his retirement. Those benefits were for past action and payable to all eligible employees upon retirement. In this case, the retirement incentive was not pay in lieu of reasonable notice nor was it future income replacement. Rather, the court considered the incentive as a “once-in-a-lifetime, non-recurring amount, available to a discrete group of long-term employees, and only for a short time”51 and therefore did not calculate it as part of the husband’s income for support purposes. The court did find that the wife had a continuing need for spousal support and excluded from the husband’s income the already equalized portion of his pension.

The court made a similar finding in Gammon v. Gammon, where it concluded that an $85,000 retirement package received by the husband was not to be included in his income for the purpose of determining his spousal support obligation.52 The payment was considered a gratuitous, non-compensatory incentive, wholly within the discretion of the employer and was not in existence at the time of separation.53

If it is determined that the severance pay is shareable property, it should only be the compensation for income that would have been earned during that time that should be characterized as shareable property. In this same vein, any package received during cohabitation/marriage that is compensation for post-separation lost wages, should not be included as property.54 For the purpose of spousal support obligations, the courts are making it clear that there is no automatic right of spouses to share in post-separation increases in income.

Conclusion

Counsel and parties must turn their minds to the increasingly relevant and costly issues of extended health benefits, life insurance and disability benefits on relationship breakdown. The foreseeable risks of illness and death should factor closely in the treatment of these benefits in the resolution of issues on the breakdown of relationships.

VI    Registered Retirement Savings Plans

There is no dispute that an individual’s registered retirement savings plan (“RRSP”) owned on the date of marriage or separation is an asset that forms part of that party’s net family property. In Maber,55 the mother converted her severance allowance into an RRSP. It was held that upon converting the severance to an RRSP it became marital property subject to division and the issue of whether the severance was initially income replacement or marital property was irrelevant.

Ambiguity, however, arises when a support payor retires and the RRSP that was equalized on separation (or a portion of it) is now one of the payor’s sources of income. How does the RRSP or registered income fund (“RIF”) get treated for support purposes? Does it constitute double dipping?

In Boston, the Supreme Court of Canada held that it is desirable to avoid double recovery from a pension when it is both an asset and an income source. The SCC also recognized that in some circumstances double recovery may be required for the support of the spouse when the payor has the ability to pay support, the recipient made a reasonable effort to generate income from the equalized assets and economic hardship from the marriage and its breakdown continues – in essence, when the recipient spouse demonstrates a continuing need. Double recovery may be appropriate in order to provide continued support.56 However, double recovery may not be permitted where the recipient spouse has not made these reasonable efforts, or has acted irresponsibly in the handling of financial affairs, in which case the court may impute income the recipient spouse could reasonably have earned had he or she acted in a fiscally responsible manner.57 Although Boston dealt with pensions, the same reasoning can be applied to RRSPs.

According to caselaw, the issue is whether the recipient can show a continuing need for support after taking into account any income that can be reasonably generated from his/her own assets in order to justify support being paid from the equalized portion of the payor’s pension/RRSP.58 The SCC in Boston also found that a court can compare the capital available at retirement and the income available from capital at retirement to decide whether a further adjustment is needed to promote inter-spousal fairness.

Furthermore, the test for variation of spousal support is set out in section 17 of the Divorce Act, R.S.C. 1985, c.3 (2nd Supp.) as amended:

Section 17(1) – allows a court to make an order for variation, rescission or suspension of a support order prospectively or retroactively.
17(4.1) - before a Court makes a variation order in respect of spousal support, the court shall satisfy itself that a change in the condition, means, needs or other circumstances of either former spouse has occurred since the making of the spousal support order, and in making any variation, the Court must take into account that change.

Both in terms of the statements made in Boston and the test outlined in the Divorce Act, the court will look at the needs and means of the parties in determining ongoing spousal support quantum on retirement: the payor and recipient’s non-income producing assets, such as homes and cottages, and income producing assets such as RRSPs/RIFs, investment income, rental properties, CPP retirement benefits, pension income, and old age security benefits. The court will also review each party’s budget, debts, planned withdrawal of capital and capital gains.59 The court will consider income levels, assets and whether assets received on equalization were properly invested or squandered and what his/her needs are each month.

The courts have and will consider whether the recipient spent all of the capital received through equalization and support, without properly saving for his/her retirement. The courts have not looked favourably on recipient spouses who have squandered assets and income without regard for the retirement of both spouses.

For example, in Winseck v. Winseck, the Husband sought a variation of spousal support.60 The husband had agreed in minutes of settlement to pay $1,000 per month in spousal support to the wife based on an income of $57,693. After retirement, the husband continued working and a portion of his income included pension income which had already been equalized. In 2005, his income was $48,693 after deducting the equalized portion. At this time, the wife was receiving disability income of $19,620 per year, interest income of $1,800 per year, and a monthly allowance from the Children’s Aid Society for taking in foster children of $3,800. On separation, the wife received the matrimonial home and $100,000 in RRSPs. The judge found that the wife had used the proceeds of the pension equalization to assist her in meeting her financial needs. She was able to use the matrimonial home to generate revenue and had the advantage of economies of scale with four foster children; her financial circumstances had in fact improved. The trial judge held that the wife was entitled to $500 per month in spousal support, but that the foster care allowance eliminated this need, and spousal support was reduced to nil. The wife’s appeal with respect to spousal support was dismissed.

In Balaban, the husband lost his job and his only income came from a Life Income Fund (“LIF”), which was formed by the husband converting his pension into a LIRA (locked in retirement account) and then to a LIF. The pension had already been equalized. Both parties had similar net worth’s at the time of the variation application. The court terminated spousal support, finding that the reduction in the husband’s income since loss of his employment constituted a material change in circumstances. Conversely, the court stated that the wife was not using her capital base to generate income with which to support herself and it was inappropriate to allow the wife to maintain her capital without risk.61

In MacPherson v. Auld, the husband brought an application to vary spousal support as he was no longer receiving employment income.62 Justice Wright looked at all of the income sources, assets and debts of the husband in ascertaining his annual income. The husband would receive approximately $75,204 in income from these sources. The husband was ordered to pay $2,800 per month in spousal support although the wife had depleted most of her assets, spent all the support she received each year, was incapable of handling money, did not live within her means or consider saving for her retirement. Although citing the principles in Boston, the court did not factor in a reduction on account of income generated from RRSPs that had already been equalized, as the court was not able to properly calculate the old versus new contributions and no expert was called to give such evidence.

Depending on the facts, assets that were already equalized, such as RRSPs and pensions, may still on retirement form part of the income source used to pay spousal support. However, the SCC has cautioned that courts should, where practicable, focus on that portion of the payor’s income and assets that have not been part of the equalization of net family property when considering ongoing spousal support. 63

Expert evidence may be required to determine the portion of the RRSP/RIF that should not be considered for support purposes.

In summary, the facts of each case will determine whether a payor’s retirement income from RRSPs or pensions, including portions of assets already equalized, should be used to determine ongoing spousal support.

Retirement & Separation Agreements

Where the foundation for the support obligation is contractual, the Miglin test requires the court to consider that the parties themselves decided what constituted an equitable sharing of the economic consequences of the marriage and its breakdown. Courts are required to give weight to that agreement unless the grounds for variation represent a significant departure from the range of reasonable outcomes anticipated by the parties at the time the order was made.64

The SCC set out a 2 stage approach for examining variation applications when the parties have entered into a Separation Agreement:

  1. The Court must look at the circumstances of execution of the document and at the substance of the agreement.
  2. The Court should afford the agreement great weight if the agreement was in substantial compliance with the general objectives of the Divorce Act. 65

Even if agreements are silent regarding retirement being a reviewable event, the courts have found that retirement may constitute a material change of circumstances warranting a review of the spousal support provisions. This was the case in Wilkinson v. Wilkinson, where the parties entered into a spousal support agreement, but did not list retirement as a reviewable circumstance.66 However, the court found that section 17 of the Divorce Act applied regardless of whether the agreement reached provided for a review in the event of a change in circumstances of the parties.

The court also found a material change in circumstances to have occurred, warranting the court’s intervention, where the parties entered Minutes of Settlement that were silent regarding variation of spousal support on retirement.67 In Fishlock, the husband was 65 years of age and did not wish to renew his franchise business for another 10 year period. As a result of his retirement, his assets from equalization (RRSP and pension) turned into an income stream, which was less than his income from business. In addition, he could no longer contribute to his income-producing assets. In coming to their decision, the court considered that the husband triggered his own retirement. However, the court also took into account that the wife spent everything she received on separation, spent capital that should have been used to save for old age and made no provision for her own retirement. In the end, the court significantly reduced the amount of spousal support the wife was to receive from $4,038 per month to $2,500 per month.

Summary

Although courts are obliged to avoid double dipping, exceptions to the general rule continue when the recipient remains in need. RRSPs, pensions, investment accounts, even if previously equalized may continue to generate income which will form the basis for ongoing spousal support awards, on retirement.

Practical Points & Reminders:
  1. Remind your clients to change the beneficiary designation status of his/her RRSP after separation;
  2. Do not pledge RRSPs as security for support as this is considered a deemed disposition under the Income Tax Act, triggering tax consequences;
  3. In drafting separation agreements, turn your minds to the consequences of future events such as retirement;
  4. On a variation application, consider obtaining expert evidence to determine the portion of RRSPs and pensions that have been equalized in order to avoid double dipping in the determination of ongoing support;
  5. Advise recipient clients to prepare for the future, invest their capital, contribute to their own support and to save for the retirement of both parties,; and
  6. Advise payor clients to be prepared to face ongoing (if reduced) spousal support obligations on retirement.

 

 

1 By Kristy Maurina, Kim Stock and Georgina Carson of MacDonald & Partners LLP. Thanks to Cheryl Goldhart and Haley Gaber-Katz of Goldhart &Associates for permission to incorporate aspects of a previous paper.

2 2006 CarswellOnt 153 (O.C.A.)

3 [2005] O.J. No.3050 (O.S.C.J.)

4 McTaggart v. McTaggart (1993), 50 R.F.L. (3d) 110 (Ont.Gen.Div.)

5 [1997] O.J. No. 1075 (Ont. Gen. Div.)

6  2006 CarswellBC 163 (B.C.S.C.)

7 2006 CarswellOnt 8150 (O.S.C.J.)

8 2007 CarswellOnt 3906 (O.C.A.)

9 2008 CarswellOnt 1158 (S.C.J.)

10 Budman v. Hayeems, [1994] O.J. No.574 (Ont.Crt.Gen.Div.), parag.3

11 In Collins v. Collins, [2005] A.J. No.213, the Alberta Court of Appeal found that only life insurance would serve the purpose of securing the payment of spousal support, as opposed to accidental death or dismemberment insurance which only secures payment in the unlikely event that the spouse dies in an accident.

12 The court in Laczko v. Laczko, [1999] O.J. No.2577(O.S.C.J.), and relying on Celi v. Eagle, [1996] O.J. No.4429, found that clause (k) of s.34(1) of the Family Law Act granted a court authority to order that a spouse purchase a life insurance policy in an appropriate amount for the purpose of securing support payments.

13Thomas v. Thomas, [2003] O.J. No. 5401 (O.S.C.J.)

14 [2000] M.J. No. 163 (Man.Crt.Queen’s Bench)

15 Brown v. Brown, [2004] O.J. No. 2519 (O.S.C.J.); Soomal v. Soomal, [2001] B.C.J. No.108 (B.C.S.C.); Riel v. Holland, [2002] O.J. No.5699 (O.S.C.J.)

16 Rodrigues v. Rodrigues, [1995] O.J. No. 3633 (Ont. Crt. Gen.Div.)

17 Canadian Health and Life Insurance Association Inc. website: www.clhia.ca

18 According to the Ontario Court of Appeal in Re Chantiam and Packall Packaging Inc. et al., [1998] O.J. No.1458, “it is a long standing and universally accepted rule that in order to insure the life of another person, the owner of the policy, that is, the person who makes the contract with the insurer and for whose benefit the insurance is placed, must have an insurable interest in the life of the insured person. Section 179 of the Insurance Act, R.S.O. 1990, c.I.8 defines insurable interest as “a person has an insurable interest in the person’s own life and in the life of […] an employee of the person”. The definition does not include the employee’s spouse.

19 R.S.O. 1990 c.S.26, as amended

20 Death and Family Law, W. Ormond Murphy and Tierney Stauffer, 9th Annual Institute of Family Law, May 26, 2000

21 Re Urquhart (1991), 3 O.R. (3d) 699 (Div.Crt); Dunn v. Dunn (1993), 12 O.R. (3d) 601 (Div.Crt.)

22 [2003] N.S.J. No. 436 (N.S.S.C.)

23 [2003] O.J. No.3198 (O.S.C.J.)

24 Cadigan v. Cadigan, [2004] M.J. No.460 (Man.Q.B.)

25 2008 CarswellOnt 7180 (O.S.C.J.). See also Gaudio Estate v. Gaudio[2005] O.J. No. 1773 (O.S.C.J.); Conway v. Conway Estate, [2006] O.J. No.234 (O.S.C.J.)

26 Ibid., note 16.

27 Section 6 and 7(1)(b) and (c) of the Federal Child Support Guidelines deals with medical and dental insurance coverage in making a child support order. The Ontario Court in Dickinson v. Dickinson, [1998] O.J. No.4815, found that where health coverage for dependents is placed at risk by a payor spouse’s threat to quit employment, the court may order an additional amount of support to replace the health insurance coverage.

28 Groenveld v. Groenveld, [2003] B.C.J. No.1337 (B.C.S.C.)

29 [2006] N.S.J. No. 264 (N.S.S.C.)

30Milotzki v. Milotzki, [2004] O.J. No.1084 (O.S.C.J.)

31 [1995] O.J. No.2783 (Ont.Crt.Gen.Div)

32 Thomas v. Thomas, Ibid., Pipitone v. Pipitone, [2000] O.J. No.2480 (O.S.C.J.). See also Eccles v. Eccles 2002 CarswellOnt 1284 (O.S.C.J.) where the parties were divorced and the husband was ordered to maintain the wife on his extended health, medical and dental plan or alternatively pay the costs of a similar plan for her benefit until such time as she may be covered similarly by her future employer.

33 [2001] O.J. No. 2113 (O.S.C.J.)

34 2008 CarswellOnt 3422 (O.S.C.J.)

35 [2001] CarswellOnt 3480 (O.C.A.)

36 [2006] B.C.J. No.2044 (B.C.S.C.)

37 Ross v. Ross, 2006 CarswellOnt 7786 (O.C.A.)

38 2008CarswellOnt 2738 (O.C.A.) affirming 2006 CarswellOnt 5393 (O.S.C.J.)

39 2009 ONCA 105 (O.C.A.) varying (2007), 36 R.F.L. (6th) 66 (O.S.C.J.)

40 2007 CarswellOnt 664 (O.S.C.J.)

41 Ross v. Ross, ibid., parag.21.

42 Slack v. Slack, 2001 CarswellOnt 4537 (O.S.C.J.) parag. 87, relying on E. Diane Pask & Cheryl A. Hess, Division of Pensions (Scarborough, Ont.: Carswell, 1990).

43 Leckie v. Leckie (2004), 238 D.L.R. (4th) 571 (O.C.A.), parag. 4-5.

44 Marquardt v. Marquardt, 1996 CarswellOnt 4569 (O.C.J., Gen.Div.)

45 Kuryliak v. Kuryliak, 1998 CarswellOnt 2534 (O.C.J. Gen.Div.)

46 Slack v. Slack, ibid., parag.89-91

47 Blais v. Blais (1992), 38 R.F.L. (3d) 256 (Ont.Gen.Div.); and Gasparetto v. Gasparetto (1988), 15 R.F.L. (3d) 401 (Ont.H.C.)

48 2000 CarswellOnt 1635 (O.S.C.J.) aff’d 2001 CarswellOnt 3481 (O.C.A.)

49 2008 CarswellOnt 5707 (O.S.C.J.)

50 Ibid at parag. 41

51 2008 CarswellOnt 6319 (O.S.C.J.).

52 Contrast this with cases where similar payments were considered as income for the purpose of determining child support obligations: See for example Walsh v. Walsh, 2008 CarswellOnt 99 (O.S.C.J.); Vallis v. Vallis (1998) 170 N.S.R. (2d) 116 (N.S.S.C.)

53 Annotation prepared by Professor James G. McLeod in Sutton v. Davidson (1999), 1 R.F.L. (5th) 157 (Alta.C.A.) as quoted in Slack, supra., parag.74.

54 Maber v. Maber, [2007] N.B.J. No. 128 (N.B.Q.B.)

55 Boston v. Boston, [2001] 2 S.C.R. 413 (SCC) at parag.65

56 Seebaran v. Seebaran, 2005 BCSC 1801 (B.C.S.C.)

57 Chamberlain v. Chamberlain (2003), 36 R.F.L. (5th) 241 (N.B.C.A.)

58 MacPherson v. Auld, 2007 CarswellOnt 6555 (O.S.C.J.)

59 2008 CarswellOnt 1868 (O.S.C.J. Div. Crt)

60 Balaban v. Balaban (2006), 35 R.F.L. (6th) 139 (O.S.C.J.)

62 2007 CarswellOnt 6555 (O.S.C.J.)

63 Boston, Ibid.

64 Miglin v. Miglin, [2003] 1 S.C.R. 303 (SCC); Napper v. Napper, 2001 CarswellSask 363 (Sask.Q.B.)

65 Miglin, Ibid.

66 1996 CarswellOnt 693 (Ont. Gen.Div)

67 Fishlock v. Fishlock, 2007 CarswellOnt 2235 (O.S.C.J.)