When a marriage breaks down (or in some provinces, when a common-law relationship ends), family property is split between the separating partners. Besides the matrimonial home and joint bank accounts, family property can also mean pensions — both government and private. In fact, the value of pensions your clients accumulate during their relationship could represent a significant portion of their assets.
While the Canada Pension Plan (CPP) and some private pensions (for employees in federally regulated industries such as chartered banks, telecommunications and inter-provincial transport) are federally regulated, the Quebec Pension Plan (QPP) and other private pensions are governed by provincial statutes. This can create a web of subtle, but important, differences among the provinces that may affect some clients, especially if they or their soon-to-be ex worked in more than one province during their relationship.
If you have clients whose divorce proceedings include pension splitting, encourage them to get legal advice to help ensure it reflects both the laws where their pensions were built up and the specific needs of their family. You might also want to brush up on some basic information about pension credit splitting in the CPP/QPP, private pension plans and registered retirement savings plans (RRSPs).
Since January 1, 1987, legal or common-law spouses (common-law meaning having lived together for at least 12 months) who separate, divorce or have their marriages annulled have been able to apply to have their CPP contributions split. This is called credit splitting.
Credit splitting means that the amount of CPP contributions (called credits) both spouses accumulated during their marriage are added together and split between them. Credits can be divided even if only one spouse made CPP contributions.
Depending on how much each spouse earned during the marriage and paid into the plan, this could mean that one spouse’s pension will be higher and the other’s will be lower than it would have been, had no split occurred. One partner doesn’t need the other’s permission to apply for a split, but the eventual division may be appealed.
The QPP also adds up the pension accrued in each spouse’s name for the period of the relationship and then divides it into two equal parts.
Generally a spousal agreement doesn’t prevent a CPP or QPP credit split if one partner applies. However, Quebec, Saskatchewan, British Columbia and Alberta currently allow couples to agree not to split CPP or QPP pension credits.
DIVIDING PRIVATE PENSION PLANS
Funds in employer-sponsored pension plans accumulated during marriage are also family property. However, in all provinces except British Columbia and Manitoba, only legally married spouses are entitled to a family property split when the relationship ends.
Still, common-law spouses can sign a domestic contract at any time before or during the marriage (and in Quebec, within 12 months of the separation date), agreeing to split some or all of their property, including pensions, in the event of a break-up. This arrangement could also be included in a separation agreement.
When a pension is split, the non-member spouse can opt to transfer the commuted value1 of a defined-benefit (DB) plan or the lump sum from a defined-contribution (DC) plan to a personal RRSP or, depending on the province of jurisdiction, leave the money in the spouse’s plan and receive a pension at retirement. Pension funds that are locked in must be transferred into locked-in retirement accounts that can’t be accessed until the person receiving the money retires.
If a pension is being paid at the time of separation or divorce, the non-member spouse may be entitled to receive part of the member’s monthly benefits.
In general, the maximum amount payable to a non-member spouse is 50% of the value accrued by the plan member for a pension or of the monthly benefit during the marriage. However, in Quebec, British Columbia and New Brunswick, a court can order that a spouse receive more than 50%. A plan member with a federally regulated pension plan can also assign up to 100% of their pension to a former spouse or common-law spouse.
When there are sufficient family assets, couples may decide to trade other assets instead of splitting the pension plan. For example, the wife may get to keep the house while the husband retains the full pension.
Defined-benefit pension plans are complex assets and must be valued at the time of separation and divorce. In most provinces, the method of valuation is regulated and plan administrators must provide the separating partners with either a valuation or sufficient information to instruct independent actuaries.
In contrast, RRSPs (both locked-in and non-locked-in) don’t need to be valued upon marriage breakdown. This is because RRSPs are simply tax-deferred investment accounts, and their value at any time is equal to the account balance. In many provinces, however, defined-contribution pension plans do have to be valued.
THE BOTTOM LINE
In all cases of separation or divorce involving government or private pensions, encourage your clients to consult a lawyer to fully understand their entitlement and transfer options. And regardless if they have a pension — and especially if they don’t — encourage them to develop a new financial plan to reflect their new status.
1 Based on be the amount they’re entitled to under a court order or domestic contract and that is limited by legislation