What you need to know about dividing pensions and other employment benefits

If you're separating, you may have questions about employment benefits and pensions. Below is some basic information on these topics.


Employment benefits

Some jobs just pay a salary, but in many cases, employees are entitled to additional benefits, such as:

  • medical and dental benefits,
  • life insurance,
  • group RRSPs,
  • car allowance,
  • severance,
  • sick leave,
  • disability benefits,
  • share ownership plans,
  • annual bonuses, and
  • pensions.

In some cases, employees can choose from a number of different benefits to put together a package that best suits their own personal and family needs. These packages are called flexible benefit plans.
Executives may be entitled to a whole range of other benefits, including:

  • stock options,
  • deferred profit sharing plans, and
  • additional pension entitlement.

Employment benefits can take other forms as well. Partners in accounting firms may be entitled to benefits when they leave the partnership that are similar to pension benefits. Financial advisors and stockbrokers may be entitled to compensation for the portfolio of customers they leave behind when they leave their firms.

These assets are often complicated and difficult to divide, and raise tricky tax questions. The important thing to remember is to get and share full information about all employment and retirement benefits. If either of you is entitled to these types of benefits, you need to see a lawyer who specializes in this area to find out how to deal with them correctly.

Tip: The Continuing Legal Education Society of BC’s Family Law Agreements: Annotated Precedents has some information about these types of assets. For $250, you can access this online resource.

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Pensions

Under the BC Family Law Act, benefits in a pension plan are family property. This means that you're both entitled to an equal portion of the pension benefits that you or your spouse accumulated while you were living together.

Dividing pension benefits can be complicated. Don't agree to divide pension benefits until you know what type of plan you or your spouse has. The best person to give you this information is the plan administrator. If you don't know who the plan administrator is (for your pension plan or your spouse's), ask the employer.

Once you find out who your plan administrator is, send them a Claim and Request for Information and Notice (Form P1). The plan administrator will then give you important information about your plan, such as the most recent benefits statement.

Does BC law apply to pensions?

The Family Law Act has rules for dividing pension benefits. Figuring out whether these rules apply to your plan is a tricky area of law. Generally, if you earned the benefits from employment in BC, BC law probably applies.

If you worked outside BC and earned a pension, another law probably applies. In that case, you'll have to check the laws of that province or country to find out how to divide the benefits.

Choosing the dates

The portion of the pension benefits divided between spouses is usually based on:

  • when you started living together in a marriage-like relationship, or
  • when you got married, and
  • when you separated.

But you could use different dates. For example, if the spouse with the pension benefits earned part of them before your relationship began, that part isn't usually divided. But if your relationship was long, and you’re both retired or close to retirement, then dividing all of the benefits may produce a more appropriate result.

Your agreement should say what dates you're using to figure out what portion of the pension benefits will be shared. You must send this agreement to the pension administrator so they know the details of how the pension is divided.

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How do we divide the pension benefits?

The pension administrator can often provide you with information about when benefits can be divided, and the options for receiving them. A lot of useful information about this is available in Questions and Answers About Pension Division on the Breakdown of a Relationship in British Columbia (the "Q&A") on the BC Law Institute website.

Below are some common situations.

The pension is not yet being paid

Not all pension plans are the same. The pension division rules take into account the type of pension plan the member has. The plan administrator should be able to give you information about the type of plan you're dealing with. The two main types of pensions plans are:

  • defined contribution plans (see Chapter 3 of the Q&A), and
  • defined benefit plans (see Chapter 2 of the Q&A).

The pension is being paid

If one of you (the plan member) has retired and is receiving a monthly pension, the other spouse is entitled to get a share of each monthly pension payment from the plan administrator. (See Chapter 5 of the Q&A.)

If the pension is being paid, you also need to consider how to adjust for any payments that were made before you arranged for pension division. Should the member have to pay compensation for the past payments? If so, from what date? If the member has been paying child/spousal support in this period, is that meant to be a share of the pension?

Pension payments are taxable, so the compensation needs to take into account the tax that the member must pay on the past payments. The parties can be taxed separately for their separate shares of the benefits paid after the agreement is made.

Spouse becomes a limited member

Often the spouse of a plan member is entitled to become a member of the plan (called a limited member). (See Chapters 2 and 5 of the Q&A.)

If the pension hasn't started yet, usually the limited member can choose between getting their share in:

  • a single payment transfer from the pension plan to another specific type of plan (such as a locked-in RRSP), or
  • a separate lifetime pension.

The limited member's share must work exactly like the member's pension, so these options are available only when the plan member is eligible to start collecting the pension. (That's usually at age 55. But some plan members can start collecting a pension before then. For example, pilots, police officers, and firefighters are often allowed to start collecting a pension at age 50).

If the pension has already started, the limited member will start receiving a share of the monthly payments after becoming a limited member.

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Immediate transfer — Defined contribution plan

Under a defined contribution plan, the benefit paid comes entirely from contributions made to an account by the employer (and, in some cases, the member) and investment returns on those contributions. When the member retires, the member usually has three choices: use the funds to buy an annuity, keep the funds in the account and make withdrawals, or transfer the funds to a registered plan and make withdrawals from the registered plan.

If the benefits are still in the account, the non-member spouse can take their share right away. The administrator will transfer the whole of the share from the plan to a plan in the non-member spouse's name (such as a locked-in RRSP).

If you both have pension benefits

If both of you have pension benefits, you may want to divide only the difference between the two plans (this is called "setting off" entitlement). If you keep more of your own pension benefits, this usually gives you greater flexibility for your own retirement planning because you're only dealing with your own pension.

Also, keeping more of your own pension benefits can sometimes protect the overall value of the benefits.

Where you both have pension benefits, carefully structuring the pension division arrangements might be able to save both of you money, or give you greater flexibility in retirement planning. But this is often something that can only be done with the help of a professional.

Survivor benefits

When you retire, if you're a plan member, you can choose between different pension options and different types of survivor benefits. Under BC law, a member with a spouse must take a pension that pays a survivor benefit to the spouse if the member dies first (unless the spouse gives up that right by signing a prescribed form).

After a separation, a retired plan member may want the survivor benefits to go to someone other than their former spouse. But under BC law, you can't change who gets the survivor benefits by transferring them to someone else. The non-member spouse could agree to hold the benefits in trust and pay them to someone else, but few spouses are likely to agree to give up these benefits. In fact, the law considers it so important that the former spouse keep the survivor benefits that they can't give them up (waive them) unless they fill out a Form P5.

If both spouses have pension benefits, or are still working, a common arrangement is to let each pension member keep their own monthly pension benefit.

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Forms

If you sign an agreement or have a court order to divide pension benefits, you must send the agreement or order to the plan administrator, along with some forms:

For more information about the forms, see Chapter 13 of the Q&A.

Canada Pension Plan

Benefits under the Canada Pension Plan (CPP) can be divided one year after you separate, or after you get a divorce. You each receive half of all CPP contributions you both made in each year of your relationship. This is called credit splitting. Each of you can then decide when to take your CPP, using your separate contributions.

To divide CPP benefits with your spouse, you must apply to the federal government. See ISP1901 on the Service Canada website for an application kit and information sheet.

You don't need an agreement or court order to divide your CPP credits. They'll be divided unless you agree with your spouse not to divide them. After you or your spouse apply, the government divides your yearly contributions to CPP between you on a year-by-year basis (from the year you began living together to the year before you separated).

Tip: In addition to Service Canada's website, there are many other online resources available.

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When you might not want to credit split

CPP credit splitting often works fairly, but in some cases, it can bring down the overall value of the pension. In these situations, one spouse loses more than the other spouse gains.

Talk to an expert about whether credit splitting, or credit splitting right away, makes sense for you if:

  • an older spouse has paid more into CPP than the other spouse,
  • one spouse is receiving disability benefits, or
  • one spouse already receives CPP, but it will be some time before the other will be eligible to receive it.

Old Age Security

The federal government pays Old Age Security benefits (OAS) to:

  • Canadian citizens,
  • permanent residents, and,
  • in some cases, temporary residents.

OAS payments start when you turn 65. They're based on how long you've lived in Canada. There's no way to get the government to divide OAS payments between separated spouses. But sometimes the amount of OAS each spouse receives is taken into account when figuring out how much one spouse should pay another in spousal or child support payments.

RRSPs

Registered savings and income plans (RRSPs, RRIFs, and LIFs) can be divided between spouses when they separate.

A registered savings or income plan allows you to put off paying taxes on contributions and investment returns until you make withdrawals from the plan. The Income Tax Act allows spouses to divide benefits in these plans when they separate. The spouse who receives a share can have it transferred to a registered savings or income plan, and continue deferring taxes until they make withdrawals.

Once you have an agreement dividing benefits in a registered savings or income plan, the person entitled to receive the share must go to their bank or credit union and set up a registered plan to receive the transfer. Their financial institution will then provide them with the completed Income Tax Act Form (T2220). This form is sent to the financial institution holding the plan being divided so it can then transfer the share.

Tip: Check the investments in the plan to make sure you know what you'll have to pay in transaction costs. Selling an investment can cost you money (you might lose interest, for example, or trigger commissions). Sometimes you can avoid these additional expenses by transferring the investment itself. But often the investments have to be cancelled or sold to raise the funds for the transfer. Make sure you ask about transaction costs so you can minimize your financial losses.

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