Statistics Canada tells us 37.7% of all Canadian marriages will end in a divorce before the 30th anniversary. And divorce before age 30 is becoming so common that it’s creating a demographic phenomenon: The starter marriage.
Going through separation can be diffi cult at any time. It’s complicated by the fact that the Divorce Act, Child Support Guidelines and Spousal Support Guidelines are federal legislation, while the provinces have enacted legislation to deal with issues collateral to divorce and have incorporated child support guidelines into their own legislation. Add an economic climate in which asset values and wages have decreased dramatically and quickly, and you have an ever more complex set of factors.
For divorcing couples, the date on which assets are valued is a particularly sticky issue in this economic climate. There are a number of competing considerations, which impact this issue.
With respect to marriages, in British Columbia assets can be valued on the:
› Date of trial;
› Date the court declares there is no possibility of reconciliation; or
› Date the parties agree to divide the assets.
When parties in that province are separating from a common-law relationship, assets may be valued at:
› Date of trial;
› Date of separation; or
› Such other date as the parties can agree on.
And, in both legal and common-law marriages in B.C., matrimonial homes are generally valued at the date of sale or the date of trial.
So a lot of circumstances can create diffi culties for parties as a result of these rules. Recently, investments, RRSP accounts and property values have plummeted, so it is important to consider changing values when entering into an agreement on property division. Rather than agreeing to transfer a dollar fi gure to ensure settlements are fair, it’s now more prudent to transfer a percentage value, or in the case of investment accounts, to divide the account in specie (where permitted). This requires a division of each stock held within the account. The recipient spouse can then elect to change the asset into something more suitable if he or she deems it necessary.
But what about a house—that’s pretty hard to separate in kind. There can be several problems, the fi rst being the value of the house may have declined signifi cantly in recent months and depending on how the remaining assets were split, the spouse keeping the house may not have received the value of assets originally agreed upon. On the other hand, he or she may be able to capitalize on an eventual upturn in the real estate market while the other spouse’s equity in the house is insuffi cient to buy replacement real estate.
In cases where one spouse needs to obtain fi nancing against the property to pay out the other spouse, advisors must be aware that fi nancing may no longer be available. Further, it may not be possible to get or agree on an appraisal, and applying to the court to enforce or vary an agreement will further erode the family assets. In the meantime, separated spouses may be forced to keep living under the same roof until the market recovers and the settlement becomes more palatable.
Recent market volatility also affects pension plans—both defined contribution and defined benefit plans. Each will be divided somewhat differently if the underlying assets have declined in value.
If a defined contribution plan is to be divided by a transfer to a prescribed pension vehicle, such as a locked-in RRSP, the date the asset is valued is important.
In B.C., the spouse’s share is valued at the end of the relationship and any increase or decrease arising from investment performance is automatically taken into account, up to the date of transfer. In some provinces, like Manitoba for example, the spouse’s share is valued as of the date of separation and then interest is added up to the date of transfer based on plan performance (the interest cannot be less than zero). This can mean the spouse’s share may not have allocated to it a reasonable share of any loss in value and options may need to be considered—including waiving pension division and compensating the spouse in some other way.
In a defined benefit plan, benefits to be paid are based on a formula and as a result, the success of the underlying investments may not be relevant. There is one proviso, however, when a pension has not met the minimum solvency levels and where the threshold is not met to increase funding over a specified period of years. In such a case, only part of the spouse’s share can be transferred from the pension plan, with the balance payable when the solvency requirements are met.
It is important to obtain an actuarial valuation of a defined benefit pension plan, based on the value of the future income stream. Often it’s thought to be adequate to work with the statement of contributions and investment returns as a good estimate of the pension’s value. In fact, the present value of a defined benefit pension plan may be 2 to 2.5 times the value of the contributions (or more)—a pension valuator will also take into consideration the plan’s solvency.
There is a fundamental difference between property claims where couples are married and those where couples are not. Legislation enacted in each province provides for considerations to be applied to the division of family property when marriages dissolve. In B.C., those same considerations may apply when those involved in commonlaw relationships separate, if they have entered into an agreement dealing with the division of their property. Otherwise, trust principles will apply.
Once a separation agreement has been signed, it’s generally final but can, under extreme circumstances, be set aside. The court will look at whether the process for entering into the agreement was fair, including whether there was full disclosure of assets, capital gains and other taxes payable; and whether there was legal advice. They will then consider whether the agreement is fair (in the case of marriages) and not unconscionable (in the case of commonlaw marriages). In the recent Supreme Court of Canada case of Rick v. Brandsema, the court made it clear an agreement will be set aside if one party has taken advantage of the psychological frailty of the other, regardless of whether the latter party had legal and financial advice throughout the negotiation process.
Child and spousal support are determined by federal guidelines and based on the income of the parties. The Spousal Support Advisory Guidelines (SSAG) have not been incorporated into legislation, but most courts are applying them. Unlike the Child Support Guidelines, the SSAG only apply if the applicant is entitled to support, for instance where a spouse is ill, or unemployable because of absence from the workforce to raise children.
Payers facing loss of employment or reduced earnings may wish to apply to reduce their payments, particularly if the change in income is dramatic and/or prolonged. They should keep in mind the requirement that they come to court with clean hands. This means a party applying for a review of maintenance should pay the maintenance ordered, even if they need to utilize their RRSPs to do so (Zollinger v. Zollinger, B.C.S.C., July 28, 2008). A claimant may apply for arrears of child maintenance, and if the payer is guilty of blameworthy conduct, the court will order retroactive support, although in most cases it will not go back further than three years.
If a spouse is not making support payments as stipulated by court order or agreement, or is paying irregularly, the spouse entitled to the money can register with the Family Maintenance Enforcement Procontinued gram (FMEP) at no charge, as long as she has a copy of the court order or signed separation agreement. Most provinces have a program in which the payor is instructed to send the money directly to the FMEP which will monitor payments and calculate interest on late or missed support payments.
The FMEP has very broad enforcement powers, including the power to seize income tax refunds. The applicant must be aware it will take time for the FMEP to process a payment (cash the cheque, ensure it clears and then issue a cheque to the recipient), so applicants must not expect to receive their maintenance on the first day of the month. Where delay of a day or two is the only problem, the recipient might want to reconsider registering. On the other hand, it can be extremely helpful to have the FMEP monitor which payments are made and which are returned, as this can be very difficult to keep track of and can create an expensive accounting nightmare for the recipient.
Courts today also have to deal with increasing levels of self-representation. In the last 20 years, the amount of legal aid available to the public has decreased substantially. While many lawyers have taken on more pro bono work, there’s such an enormous need that these services are bare bones at best and don’t replace what was formerly available.
This has been the trend across the country, and while the Provincial Courts have been set up for self-representation, the Supreme Courts of each province, which hear divorce and property cases, are not. This not only results in the courts getting bogged down but also may mean individuals who don’t fully understand their rights may not get what they’re entitled to.
Tough economic times add stress to families and increase the risk of divorce. And when couples do divorce, they dissolve their most significant financial partnership. While many are able to get past the pain and anger, a small subset of individuals remain locked in persistent conflict. If you, as a professional, are experiencing such situations with clients, try referring them to counselling that can help them learn more effective ways of communication and break old, unproductive patterns.
Divorce can rip a hole in a couple’s universe, so an understanding of some of the issues can help us support clients during these difficult times.