The Ontario Court of Appeal recently addressed what happens to a federal pension in pay following a separation and discussed how federal pension legislation should be interpreted in light of the Family Law Act.

What Happened?

The parties cohabited for three years prior to marrying in 1994. They had three children during the marriage, but ultimately separated in 2013. They are both in their 50’s and, at the time of trial, the children are aged 17, 19, and 21.

The ex-wife had been the primary income-earner throughout the marriage, having joined the Canadian Forces before marrying the ex-husband. She retired in 2008 and began drawing a Canadian Forces pension. She now works as a financial planner and advisor with the Royal Bank of Canada and has two bank pensions which have yet to mature.

The commuted value of the ex-wife’s Canadian Forces pension was $747,200 and she receives monthly payments from it.

The Original Trial Decision

The parties were able to settle many of the issues stemming from the breakdown of their marriage including child support, special expenses, and property issues. However, a major issue of contention was the division of the Canadian Force’s pension.

Limitations on Canadian Forces Pensions

The parties relied on a letter sent by National Defense to the ex-wife which explained how a division of the pension would work and highlighted certain restrictions. The letter stated:

Below you will find the financial information you requested under Section 13(2) of the Pension Benefits Division Act (PBDA), with respect to your pension entitlement under the Canadian Forces Superannuation Act.

Mr. Tim Fawcett would receive approximately $373,600.00 as a result of the division of your pension for the cohabitation period of 14 May 1994 to 24 July 2013. This one-time lump sum payment must be deposited into his locked-in RRSP account. There would be a corresponding reduction to your pension of approximately $1,145.56 per month. For the cohabitation period of 14 May 1994 to 8 March 2014 the approximate amount is $374,900.00. The corresponding reduction to your pension is 1,149.67 per month. When indexed, the increase to your pension would be based on the amount remaining after the reduction, which is for life. [Emphasis in original.]

At trial, the original trial judge heard expert evidence from an actuary who was asked about the administration of the Canadian Forces pension. The actuary explained the differences between the division of a Canadian Forces Superannuation Act (CFSA) pension and pensions falling under provincial legislation.

The actuary noted that the PBDA (the legislation governing Canadian Forces pensions) allowed only for a lump-sum division and that if the parties wanted to do things differently the Canadian Forces would be unable to assist in that.

The Ex-Wife’s Argument Against a Lump Sum Payment of Pension Money Owing

The ex-wife argued that the Family Law Act (FLA) determines how her Canadian Forces pension should be treated during the division of property. Since her pension is already in pay, s. 10.1(5) of the FLA precludes a lump-sum division, and she could only be ordered to split monthly pension payments (which was permissible under the Pension Benefits Standards Act).

The ex-wife also argued that if the trial judge were to make an order for a lump-sum transfer, he should exercise his discretion under the FLA to delay payment for 10 years based on hardship.

The trial judge rejected both these arguments, noting specifically that the ex-wife’s lawyer had not explained why or how the payment of an immediate lump sum would create hardship and that:

The pension income that the applicant is currently receiving would be similarly reduced in both scenarios. Further, the applicant’s counsel did not provide any plan or proposal; she simply made the argument without detail or thought as to how it would work. Specifically she did not address how the respondent would be fairly compensated for such a delay. My sense was that rather than wanting to avoid hardship, which was not established, the applicant was seeking to gain an advantage for herself at the respondent’s expense. I decline to make that order.[Emphasis added.]

The trial judge ordered the ex-wife to make an equalization payment of $312,002 through a PBDA transfer from her Canadian forces pension.

The ex-wife appealed, arguing that the pension could be ordered to be split monthly at source.

The Court of Appeal Decision

The Court of Appeal agreed with the trial judge that the PBDA, along with related federal statutes, did not allow a judge to order the pension administrator to split monthly payments for the purposes of property

division. In addition, s. 10.1(5) of the FLA should likewise not be interpreted to preclude a trial judge from ordering a lump sum division simply because a pension was already being paid.

Federal Pension Legislation

Several statutes govern the administration of federal pensions. While the CFSA is the governing legislation of a Canadian Force’s pension, it does not determine how the pension is dealt with in a family law context (during division of property, for instance).

Rather, the PBDA governs the division of CFSA pensions and should be read harmoniously with the FLA. The PBDA contemplates only lump-sum divisions of a member’s pension, whether the pension is in pay or not, and provides for a one-time transfer of funds into locked-in financial instruments (such as an RRSP).

The Court of Appeal noted that the original trial judge’s conclusion that the PBDA only provides for lump-sum payments is “borne out by the plain language of the provision”, is in agreement with the letter from National Defence, and is consistent with the actuary expert witness’ understanding of the PBDA. The Court of Appeal also pointed out that such an interpretation was also consistent with various textbooks written about pension valuation and division in a family law context.

Federal legislation does not give a PBDA administrator the power to split pension payments as a method of dividing family property, and the administrator cannot be ordered to do so. Parliament could potentially create such a power but has chosen not to.

Provincial Pension Legislation

Section 5 of the FLA creates a prima facie (i.e. on the face of it) entitlement to an equal division of net family property. Section 9 empowers a court to order equalization payments and to make collateral orders to secure their performance.

One spouse’s interest in the other spouse’s pension benefits has long been recognized as a matter of family property. The FLA was specifically amended to address division of pension entitlements. The Court of Appeal noted that the FLA creates a general power to order an immediate lump-sum division, but that this power is guided by several factors, including the nature of the assets available to each spouse, the proportion of a spouse’s net family property that consists of the imputed value of his/her interest in the pension, and the liquidity of the lump sum (among other factors). Taking these factors into consideration, a judge may make an order for the division of pension payments “but not for any other division in the spouse’s interest in the plan”. The Court of Appeal stated that this did not prohibit a lump-sum transfer for a pension being paid, but simply provides another option (the division of payments) and allows a judge to order only one of these two forms of payment.

The Court of Appeal noted that the relevant sections in the FLA, read together, lead to the following options for federal pensions:

  • Before a pension is in pay: only a lump-sum division is available. This makes sense since there is no monthly payment to divide at that time.
  • Once a pension is in pay, a judge can choose between the two options, depending on all of the circumstances of the case.

The Court of Appeal further notes that, in this case, the ex-wife’s restrictive interpretation of the FLA potentially compromises the goal of the FLA, which is a division of assets that is fair to both parties.

In addition, a broader interpretation of the FLA is more compatible with the PBDA, since the provincial legislature likely did not intend to undermine or limit the operation of the PBDA. When the FLA was amended to specifically address pension division, the legislature “would surely have known that the PBDA only provides for a lump sum division”. The Court of Appeal notes that since the PBDA applies to pensions of “countless Ontarians”, the Court wanted to avoid any interpretation of the FLA that would frustrate the PBDA. A broader interpretation of the FLA advances the goals of that legislation while achieving harmony with federal pension legislation.

The Court of Appeal was careful to note that it would not always be appropriate to order a lump-sum division of pension. Every case must be interpreted based the underlying nature of the relevant pension legislation, and the particular circumstances of that case, in order to achieve a just result in those circumstances.

The Court of Appeal found that the trial judge had not erred in ordering a lump-sum transfer of the ex-wife’s pension. Such a division of the pension assets “involves little downside to [her]. She does not have to ‘find’ the money or arrange financing to satisfy the equalization payment”. Rather, the pension is divided at source, and the ex-wife is in the same monthly position had her pension payments been split.

On the other hand, the ex-husband will benefit from an immediate one-time transfer of the pension property to which he is entitled, which will facilitate a “clean break” between the former spouses, avoiding potential future disputes.

If you are considering a separation or divorce, it is it is critical to obtain legal advice from a knowledgeable family lawyer with significant experience dealing with pensions. The value of pensions accumulated during the marriage can be a significant part of a family’s assets and can, therefore, be a significant liability during the division of assets. Mark Feigenbaum brings many years of litigation, corporate law, tax law, estate law, and accounting experience to family law disputes. Mark relies on this experience to provide nuanced and knowledgeable guidance to clients to help them retain financial stability throughout the uncertainty of divorce and separation.