In order to understand pension splitting and divorce in Ontario, we have to start with the basics.
Pensions are Considered to be Property
Under the Ontario Family Law Act, a pension is considered “property” and is valued in accordance with the Pension Benefits Act. (Although there may be different rules for differing types of pensions, i.e. federal or provincial). When it comes to the division of a pension after the breakdown of a spousal relationship, the law in Ontario provides that each spouse is automatically entitled to a share of the other spouse’s pension, as part of the family assets that are to be equalized upon separation or divorce.
Next, it gets a little more complicated, because there are detailed rules on how that post-split division is calculated – and those rules changed significantly in this province on January 1, 2012. Assuming one of the spouses is a member of an Ontario pension plan, those rules apply mainly to married spouses who separated on or after January 1, 2012, or who separated prior to that date but had not yet resolved their property issues by then. They can also apply to unmarried spouses, but only by agreement.
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There are two concepts to note:
1) The “Preliminary Value” of a pension is the total value that the pension-holder earned while he or she was a member of a pension plan, up until the marital separation date.
2) The “Family Law Value” (sometimes called the “Imputed Value”) is that pro-rated portion of the Preliminary Value that was earned during the period of the pension-holder’s marriage to the other spouse (and if the spouses agree, any period of cohabitation can also be included in this amount). Once the Family Law Value has been calculated, it forms part of the calculation for determining the pension-holding spouse’s Net Family Property for equalization purposes.
Different Valuation Approaches by Pension Type
The correct approach to valuing a pension will differ according to the type of pension. For a “Defined Contribution Pension”, the Preliminary Value is calculated by taking the value at date of marriage and deducting it from the value at the date of separation.
In the case of a “Defined Benefit Pension” – and assuming that the pension-holding spouse is not eligible for an unreduced pension on the separation date – the Preliminary Value of his or her pension is calculated through a complicated formula that incorporates various retirement dates. There is a different formula applied if the pension-holding spouse is already eligible for an unreduced pension on the separation date.
Note that the pension division is actually optional, but only in that the pension-holding spouse can buy out his or her spouse’s interest in it, using other assets. Also, a new feature of the post-2011 legislative regime allows the other spouse to receive an immediate lump-sum settlement out of the plan, which eliminates a long wait time in the case of “if-and-when” pension division arrangements, for those situations where the couple separates before retirement.
Separation and Divorce can be a difficult and uncertain time. Our team of Toronto family lawyers is dedicated to relentlessly pursue our clients’ interests, and getting exceptional results. Contact us for a consultation.