I. Introduction

1. Preliminary Considerations: Drafting

When drafting a domestic agreement, a lawyer must deal with often contradictory considerations. He or she must use the skills of a commercial lawyer in negotiating and drafting agreements, particularly where the parties own significant corporate assets or real estate. In that situation, transfer of assets between spouses often requires consideration of many of the same issues as transfers between business associates, such as income tax, protection from liability to creditors, etc. At the same time, specific legislation governs many of the matters dealt with in domestic agreements and the lawyer must be familiar with the relevant law in order to properly advise the client and properly draft the agreement. To further complicate matters, most domestic agreements deal with matters relevant to the day-to-day routines of the parties, with the result that the lawyer must also draft the agreement so that the parties can easily understand and follow it.

Ideally, a domestic agreement must clearly and completely resolve the obligations of both parties now and in the future. Provisions for custody, access and financial support may continue for long periods of time and therefore must stand the passage of time. At the same time, the lawyer is dealing with people who are often extremely upset and angry with one another. The parties may react emotionally and misunderstandings may easily occur. In this volatile setting, the lawyer must negotiate an agreement dealing with the parties present situation but must also deal with future contingencies as the lawyer cannot assume that the parties will easily, if at all, reach agreement upon changes to the agreement or upon matters not dealt with clearly in the agreement.

The following are a few drafting points that are relevant to drafting domestic agreements. Recognize that some of these points may be inconsistent with one another and/or impossible to achieve in any given set of facts. There is always a conflict between certainty (which may require an exhaustive spelling out of every detail) and flexibility (which may only require a brief statement of broad principles and virtually no detail).

Be clear. Clauses in an agreement should be drafted clearly so there is no room for uncertainty. A provision that is vague may be open to more than one interpretation and may lead to misunderstanding or conflict between the parties.

Avoid repetition. It is not necessary to repeat covenants. Further, repetition can lead to misunderstanding, particularly if not all of the covenants are subsequently repeated.

Avoid legalese. While certain words or phrases have specific legal intent and must be used, other terms can be replaced with wording which will be more familiar and understandable to the parties.

Tie up loose ends. Try to consider all reasonable contingencies to avoid possible future disputes. For example, where the parties have agreed to sell the marital home at some future time, the agreement should deal with such detailed matters as how the parties will determine the listing price, the sale price and the real estate agent, as well as who will pay for the maintenance and upkeep of the home until sale.

Use proper and complete descriptions. Care should be taken to use the proper description of assets. Confusion may result from describing assets improperly or incompletely.

Avoid agreements to agree. Do not draft clauses providing that the parties are to agree upon a matter unless the clause also provides for the method of determination of the matter if the parties fail to agree.

Use definitions. Definitions should be used when the defined thing is referred to more than once in the agreement. Identifying assets, individuals, events or other things by the use of a word or phrase is useful. The definition may be placed in the body of the agreement immediately after the first full description of the thing being identified or it can be included in a list of definitions placed at the beginning or end of the agreement.

Use schedules. To avoid lengthy descriptions of property or long lists of items in the body of the agreement, set this type of information apart in schedules.

Use a preamble. Factual information relevant to the agreement may be set out in a preamble so that it will be more readily understood and may be used in the interpretation of the agreement. However, care must be taken to ensure that matters intended to bind one or both parties are not addressed solely in the preamble. Matters set out in the preamble are not binding unless a clause is included in the body of the agreement providing that the preamble forms part of the agreement and that the matters set out in the preamble are binding on the parties.

Be practical. The parties must abide by the terms of the agreement and as such, it should contain obligations with which the parties can reasonably comply. A dispute is bound to arise if one party agrees to something that he or she cannot possibly fulfil. The time to address this issue is before offers are made, not after an offer is accepted.

Be correct. All statements made in the agreement should state the facts correctly or they may be of no value or invite judicial intervention. If an agreement states that full disclosure of assets has been made then full disclosure should, in fact, be made to avoid a later claim by one of the parties that he or she was not aware of the extent of the other party's assets when the agreement was made.

Use precedents with caution. Consulting precedents can provide ideas to the draftsman and can be extremely time saving. However, a precedent should never be used unless you are certain of its exact meaning and the full implication of its use.

2. Preliminary Considerations: Negotiation

Before attempting to negotiate a settlement a complete list of the client's assets and liabilities should be obtained. Further, as much information as your client knows of the other spouse's financial circumstances should be obtained. Information with respect to assets should include accurate and complete legal or other descriptions. Information with respect to liabilities should include the amount outstanding, the interest rate, the date payments are due, when it was incurred, what it was incurred for and on which party the obligation for payment rests. If shares of a private company are involved, a determination should be made as to whether any guarantees have been given by either spouse with respect to company obligations and whether the shares or other assets have been pledged as security. Consideration should also be given to whether any assets are exempt or otherwise non-shareable and/or whether a claim should be advanced for unequal division of assets or for equitable relief by way of constructive trust, unjust enrichment, etc. Give consideration as to what steps must be taken to secure assets to avoid the possibility of the other spouse dissipating them.

Where there is a joint bank account or where a client is responsible on a line of credit or on credit cards, he or she should be advised to consider his or her best interests and whether a lender, credit card issuer or bank should be advised as to the separation. However, be mindful that the officials of banks and lending institutions may be very concerned about the security of their loans and may not understand their status as a creditor. Therefore, they may react negatively or impulsively in a way that may limit the possibilities for resolving the financial issues between the parties. For example, if a loan is required to pay out a spouse, or if one or both parties may remain a creditor of the lending institution, cooperation between the parties and the lending institution should be encouraged.

If the client does not know the complete financial circumstances of his or her spouse, the information must be obtained from the opposing spouse's counsel. If the information is received piecemeal during the course of negotiation, a summary of the information and documents that have been received should be sent to the opposing counsel in order to clearly record the factual basis upon which the settlement was made. Consideration should be given to always obtaining a sworn financial statement from the other party.

a) Confirm Ownership and Value
The information the client provides as to the value of any particular asset or the manner in which title to it is held cannot be relied upon. It is important to:

- Conduct property searches to ascertain exactly how title is held, when the property was obtained, the consideration given, and the particulars of any encumbrances;

- Conduct corporate searches to ascertain the officers, directors and shareholdings of any private companies, when the shares were obtained and the particulars of any encumbrances;

- Confirm with creditors directly or by other objective means, the nature and details of debts and liabilities;

- Obtain valuations where required. With respect to valuations it is helpful if one can be obtained for both parties jointly, as even valuators can take on an advesarial role and distort the financial picture in a very unhelpful manner.The information the client provides as to the value of any particular asset or the manner in which title to it is held cannot be relied upon. It is important to:

b) Obtain Information for Custody and Maintenance Issues
If maintenance is at issue, complete information as to the source or sources and the total amount of all income of the client and the opposing spouse and a list of their normal monthly expenditures should be obtained. If custody is at issue, background information on both parents and, in particular, information regarding their education, mental and physical health and any limitation on their ability to care for the child as a result of their employment should be obtained.

The background of the child should also be investigated, particularly with respect to the relationship between the child and the parents and the child with his or her siblings, the child's ability and special needs at school, the existence of any physical or mental health problems and the reliance on the neighbourhood for entertainment and friends. The parent who has had the primary care of the child should also be ascertained.

c) Analyze the Facts and Issues
Once the facts are reasonably clear, the lawyer should assess what outcome the client is seeking to achieve, should discuss with the client the possible costs and results of litigation and should obtain instructions from the client to open negotiations. The lawyer should formulate an approach to achieve the client's goals. Any offer intended to be sent to opposing counsel should be thoroughly reviewed with the client and approved by him or her. Ideally, the client should sign a copy of the letter containing the offer indicating his or her approval before it is sent out. It should be explained to a client that once a position is taken that is attractive to the other side, it is difficult to retreat from it.

d) Relationship with Client
Normally, a client will be concerned about the possible outcome of his or her matter. It is a mistake to alleviate these fears by giving your client unrealistic expectations. To do so may very well raise an insurmountable obstacle to your being able to settle the matter in the end. It is better to encourage the client to accept the inevitable changes, whether financial or emotional, which result from a separation.

e) Relationship With Counsel
Do not waste time arguing with opposing counsel or discussing why his or her client is worse than yours. Discussions with your client about the strength and weaknesses of opposing counsel or your personal feelings about him or her should be avoided. In the heat of an argument even the most well-meaning client may blurt out your statements to his or her spouse who may in turn relay them to his or her lawyer. Negotiations then could become strained simply because of a personal clash between counsel.

f) Relationship Between Spouses
In many cases, clients are best able to solve their own problems and should be encouraged to discuss possible solutions with their spouse during negotiations. However, it should then be emphasized that such discussions are without prejudice and cannot form the basis of an agreement until confirmed with counsel.

g) Interim Separation Agreements
If negotiations might take some time, try to seek an interim agreement dealing with matters such as custody, access, preservation and management of assets, possession of the marital home, and maintenance on a basis that will not prejudice the final settlement to be reached. An interim agreement can be useful in giving the parties security and setting the ground rules for the relationship between them until a final settlement can be achieved.

h) Specific Issues:

i) Spousal Maintenance
When spousal maintenance is at issue for a non-working spouse, the lawyer should be aware that retraining may be necessary to allow the client to live at a reasonably comparable standard of living to that which he or she enjoyed during the marriage. If the client does not have any special expertise or profession it may be useful to send him or her to a career counsellor for aptitude testing and to discuss future employment possibilities. Particularly, as to the issue of time limited support, the lawyer must be realistic about the non-working spouse's future ability to earn income. When drafting the agreement, it is important to state the basis upon which the amount or duration of maintenance was agreed upon. For example, if more assets or greater value of assets were given to a spouse to compensate for a smaller amount of support, that should be stated.

ii) Custody and Access
Custody and access issues are often the most difficult to negotiate. If there is a problem, try to reach an agreement quickly or consider a referral to mediation to assist the parties in resolving the dispute. If the situation is emotionally charged, both parties will likely distort it, which makes it very difficult to negotiate. A great deal of time may be spent simply exchanging complaints with the opposing counsel and accomplishing nothing. Do not encourage parties to claim custody as a negotiating tool in relation to financial considerations. Aside from the ethical considerations, doing so may inflame the situation and provoke the other spouse.

Avoid negotiating a loosely defined custody arrangement if the parties temperment demands a more structured one. The ability of the parties to cooperate is key. It is pointless to simply specify reasonable access if one or both of the parties are unreasonable. Instead, the agreement might provide reasonable access and define minimum specified access, thereby allowing a degree of flexibility yet assuring a minimum level of access.

When acting for the non-custodial parent, calculate with the client the time he or she will have with the children compared to that of the custodial parent. Often, the number of waking hours each party will have with the children does not vary greatly. Also discuss the type of relationship that the client will have under the various alternatives available.

The lawyer acting for the access parent should be extremely careful in defining his or her client's rights and duties, as the non-custodial non-guardian spouse has few rights and little ability to determine the future of the child. Unless there is a term of the agreement to the contrary, the non-custodial spouse will not have the right to determine the religious upbringing of the child, determine the educational future of the child, or even authorize medical treatment. The non-custodial spouse will have little say in the actual location of the child. In a mobile society, family members can easily be separated by thousands of miles, thereby effectively limiting access. Therefore, consider whether the agreement should include a clause whereby custody or access will be reviewed if the child is removed from the geographical area contemplated by the parties at the time of signing the agreement.

In a joint custody situation where guardianship of the child is to be shared, the parties must be able to cooperate enough to agree on the many aspects of guardianship to ensure proper care of the child. Particularly where one party is assuming a clear custodial role, that party will want to be able to make the decisions regarding education and lifestyle. It may be useful in that situation to provide that that spouse will make certain decisions if a dispute arises. The difficulty with such a provision is that it can quickly result in joint custody being joint in name only.

In a joint custody situation, consider the tax implications, namely, which parent will deduct the child as a dependent and which parent will receive the family allowance cheque.

It may be useful to name a particular person or organization to be a mediator in the event of an access or custody dispute.

iii) Real Estate
Most often, the marital home is the most valuable asset that the parties own and forms the focal point of the negotiations. While both parties are normally familiar with any real property at issue, to avoid the many pitfalls that exist, the lawyer may want to view the transaction as if the parties were unrelated.

Transfers between spouses. The most common method of dealing with real estate is a direct transfer between spouses. The lawyer acting for the purchaser should first confirm that the client has determined that he or she has a sufficient cash flow to pay for the maintenance and upkeep of the property, including major repairs. Potential increases in such costs should be brought to the client's attention. For example, the client should consider possible increases in the interest rate on mortgage financing and the effect that an increase would have on the monthly mortgage payments if refinancing is required.

The lawyer acting for the purchaser should review all encumbrances and charges against the property with the client. The terms of the mortgage registered against the property should be examined. Is the mortgage assumable? If it is assumable but refinancing will be required at the end of the term of the mortgage, does the purchaser qualify for the required financing?

Before a client agrees to transfer property to his or her spouse with the spouse assuming obligations under the mortgage registered against the property, the client should be advised of his or her continuing liability to the mortgagee.

Further, the tax consequences of the transfer must be ascertained.

Occupancy by one or both spouses. In negotiating a separation agreement in which one spouse is to reside in jointly owned property or in the property of the other spouse until the property is sold or until a specified event in the future, the following matters should be considered:

- Who will pay general maintenance and upkeep costs;

- Who will make the decisions about and pay for major repairs;

- Who will be responsible for keeping the property adequately insured;

- Who will pay the monthly mortgage payment and the property taxes;

- Can any other person reside in the premises;

- What events terminate the right of the spouse to reside in the premises;

- Does the spouse residing in the premises have to pay occupation rent;

- Does the non-residing spouse have to contribute towards mortgage, insurance or property taxes. Can the residing spouse make a claim for those amounts in the future.


Sale to a third party. If jointly owned property is to be listed and sold, the agreement should address such matters as the listing agent, listing price, terms of sale and the sale price, division of proceeds, payment of real estate fees and legal costs of the sale. Division of proceeds should normally be on a percentage basis (after deducting mortgages, real estate commission and legal fees). If there is a possibility of a shortfall, the responsibility for payment of the shortfall should be specified in the agreement. Consideration should be given to possession of the premises pending sale. The matter must be considered both with respect to making a sale easier and avoiding tax difficulties.

iv) Corporate
Prior to negotiating any settlement that deals with corporate assets, the lawyer must obtain the pertinent corporate information and have considered the problem from a corporate perspective. For example, failing to do this may result in the lawyer negotiating a separation agreement that obliges his or her client to sell shares to the opposing spouse, which shares the client is obliged under a prior existing shareholders' agreement to first offer to the other shareholders. There are endless planning possibilities for structuring the division of assets between spouses if one or both spouses own shares. As an alternative to a direct transfer of shares between spouses, the transaction can take the form of a sale of assets or involve the reorganization of the capital of the company. Normally, income tax consequences will be of great importance in the decision as to the form of the transaction.

When there are shareholders of the company in addition to the spouses, the transaction must be reviewed in light of the rights of those other shareholders. Normally, where there are only a few shareholders, the articles may contain restrictions on the right to transfer shares or such a restriction may be found in shareholder agreements. Therefore, one should obtain the articles and any shareholders' agreements prior to negotiating settlement.

If the company has creditors, the rights of the creditors must be reviewed. Is there an agreement (which is not uncommon) which restricts the company from altering its capital or incurring any debt to be repaid before payment of the creditors' debt.

In many cases, the purchasing spouse will not have sufficient funds nor be able to raise sufficient funds to pay the entire amount of the purchase price at the time that the agreement is signed. In such circumstances, the lawyer acting for the vendor spouse will want to ensure that there is adequate security to protect his or her client. The lawyer for the purchaser will want to ensure that the client has an adequate cash flow to meet his or her other obligations and that the security does not interfere with the operations of the company, nor limit the client's ability to obtain additional financing which may be required.

v) Form of the agreement
Once the basic terms of the settlement have been agreed upon, the next step is to negotiate the wording of the agreement. Drafting a completely one-side agreement wastes the parties' money and everyone's time. Review the terms of any draft agreement with the client before sending it to the other lawyer.

3. General Principles of Negotiation
Negotiation is an integral part of a family law practice. The Divorce Act, 1985 [s.9(2)] places the following duty on the lawyer:

It is the duty of every...lawyer .... who undertakes an action on behalf of a spouse in a divorce proceeding to discuss with the spouse the advisability of negotiating the matters that may be the subject of a support order or a custody order...

The traditional approach to negotiation has tended to be a competitive one, where negotiation is more a prelude to court action than an end in itself. The issue is whether the competitive approach is the only approach or the most effective approach in resolving family law disputes. For example, some writers (notably, R. Fisher & W. Ury, Getting to Yes (Boston: Penguin Books Ltd., 1981)) argue that principled or problem-solving negotiation is an effective alternative.

a) Competitive Approach
The traditional competitive approach has been common in family law negotiations. The style is characterized by what is known as positional bargaining, each lawyer starts out by taking a firm position on the issues at hand and a compromise is eventually reached through a series of concessions. A difficulty with this style is that if negotiators start with extreme positions and make small grudging concessions, checking with the client from time-to-time, the process takes time and is not particularly efficient. Additionally, at its worst, in a competitive negotiation, there will be few concessions, false issues will be created and the parties may have high and unrealistic expectations as to the outcome. By creating tension and mistrust, there is the tendency for the other side to respond similarily, thereby producing more deadlocks and perhaps an increased risk of negotiations breaking down.

Certain factors may result in the use of a competitive approach. These include:

Imbalance of power between clients or between lawyers. Here, the individual with more power may take a win-lose, competitive approach to negotiation. Unless the less powerful lawyer or client can demonstrate that this approach will be costly or ineffective, it is difficult to move to a different approach.

Unclear, unrealistic or changing instructions from clients. It is hard to talk of principles and mutual problem solving unless each client has realistic and clear goals. To help the client articulate his or her needs and interests into goals which the lawyer can then use as a basis for negotiations, the lawyer may first have to negotiate with the client.

Uncertainty as to outcome. It is difficult to articulate principles when the legal principles are expressed in imprecise terms (e.g. the best interests of the child). A by-product of indeterminate standards is uncertainty about results. Results may be uncertain for many reasons, such as concerns as to the credibility of the client or the evidence the other side may call. One way of approaching this difficulty is to identify and acknowledge the uncertainties and to treat the uncertainties as a problem for mutual resolution. This appears to be the process used in pre-trial discussions in which a judge reduces the uncertainties and helps the litigants adjust their expectations to be more realistic.

b) The Problem Solving or Principled Approach
The advocates of the problem solving approach to negotiations stress four elements, with a caveat. The elements are (see Fisher & Ury, supra, at 11):

- People: Separate the people from the problem.

- Interest: Focus on interests, not positions.

- Options: Generate a variety of possibilities before deciding what to do.

- Criteria: Insist that the result be based on some objective criteria.

- The caveat is that the negotiator should go into negotiations with a predetermined "walk away" point or a planned alternative such as mediation, arbitration or litigation.

- The process for generating possible best alternatives to a negotiated agreement scenario involves the following steps (Fisher & Ury, supra, at 108):

- Invent a list of actions that might be taken if no agreement is reached;

- Improve the more promising ideas and convert them into practical options;

- Select the option that seems best; and

- Consult regularly with the client.

The idea behind focusing on interests rather than positions is that if the parties can go beyond staking out rigid positions and examine their underlying interests, they will often find that there are more shared or compatible interests than conflicting ones.

Development of effective negotiating skills. Lawyers often claim that they learn their skills intuitively or through experience and they cannot describe what they do well or why it works. This often means that a lawyer is not capitalizing on trial and error experience to assess the effectiveness of his or her negotiating skills. It is useful to take time after a negotiation to reflect on what was successful, what was not and why. Criteria to consider include client's satisfaction, efficiency in reaching a result and whether cases amenable to settlement are being settled. A lawyer can choose to become familiar with all major styles of negotiation and select the most effective one in each situation.

Alternatively, a lawyer can choose or develop one basic style with which he or she feels both confident and comfortable. In either case, the lawyer should, on an ongoing basis, assess the effectiveness of his or her style, using the above criteria.

General Comments:

Not all issues are amenable to a principled negotiation approach. For example, many access disputes are most amenable to principled negotiation as there is a variety of potential solutions, money is rarely involved and, practically speaking, parties cannot keep running to court to solve access problems. By contrast, where there is a contest as to custody, one side will perceive himself or herself as loser and the outcome may be uncertain by reason of the facts, credibility issues, etc.

In a sense, negotiators act as adjudicators. It is their responsibility to determine whether something is objectively true or legally correct. It has been said that there are three categories of fact-finding: (a) agreed facts; (b) facts in dispute; and (c) unknown facts. The negotiator's focus should be to move as many facts as possible into the category of agreed facts. Where this is not possible, the negotiators can create a list of disputed and unknown facts. As negotiations proceed, negotiators may be able to agree that some facts should remain unknown because they are too expensive or too difficult to discover.

It has been suggested that all issues should be dealt with simultaneously, not in sequence, and that putting aside unresolved issues and coming back to them is a technique which can be successfully used.

When faced with a positional negotiator, there is a great temptation to strike an opposing position. Instead, consider probing the negotiator with questions to get at his or her client's underlying interests. Try to define the mutual problem and ask how the negotiator's position contributes to resolution of the problem.

II. The Law to be Considered

The Law To Be Considered
1. The Divorce Act
2. The Family Maintenance Act
3. The Marital Property Act
4. The Pension Benefits Act
5. Canada Pension Plan Act
6. The Homesteads Act
7. The Intestate Succession Act
8. The Dependants Relief Act
9. The Income Tax Act

1. The Divorce Act
Before making an order for maintenance, s.15(5) of the Act requires the court to consider "the condition, means, needs or other circumstances of each spouse and of any child". The sub-section then specifically lists three matters to be considered, one of which is any "agreement or arrangement relating to support of the spouse or child" [s.15(5)(c)]. Further, as to child support, the Court has a duty to satisfy itself that reasonable arrangements have been made for the support of any child of the marriage and if such arrangements have not been made to stay the granting of the divorce until such arrangements are made [s.11(1)(b)]. With respect to the issues of custody, access or child support, it is generally accepted that the parties cannot, by private agreement, override the court's inherent discretion in these areas. However, with respect to spousal support, it is arguable, and even probable, that the effect of The Supreme Court of Canada decisions in the maintenance trilogy (as the decisions in Pelech, Caron and Richardson will hereinafter be referred to) dramatically limits the circumstances in which the court's discretion will be exercised where the variation of a spousal maintenance provision in a separation agreement is sought in a divorce proceeding (for a further examination of this issue, see the discussion under 6.07 - "Finality and Variation of Agreements", supra).

2. The Family Maintenance Act
Insofar as this Act is concerned, the sections relating to separation agreements are ss.9(2), (3) and (4) with respect to the effect of a separation agreement on the issue of maintenance and that dum casta clauses are inoperative. In addition, the Act provides at s.53(3.1) that either party to a separation agreement may file the agreement with a designated officer where both parties consent to its filing and the agreement contains a provision permitting it to be filed. Where the parties have done so, the maintenance provisions of the agreement will be enforceable by the Maintenance Enforcement Office in the same way as maintenance provisions contained in a judgment or order.

3. The Marital Property Act
The Marital Property Act provides a code for the sharing of assets of the parties to a marriage upon the breakdown of the marriage. The Act provides at s.5 that the parties can agree by way of spousal agreement that the Act does not apply to any or all assets and that any provision of the Act can be varied in its application to an asset.

4. The Pension Benefits Act
The Pension Benefits Act applies to pensions within the jurisdiction of the Act. Generally speaking, the Act will apply to all provincial government, civic and private pension plans in Manitoba except for those plans within federal jurisdiction. The Pension Commission of Manitoba will advise whether a particular pension is within its mandate or not.

The most significant section of the Act is s.31(2) which provides:

31(2) Subject to sections 31(3) and 31(3.1), where:

(a) pursuant to the Order of the Court of Queen's Bench made under The Marital Property Act, family assets of a person are required to be divided; or

(b) pursuant to an agreement between spouses, family assets of the spouses are divided between the spouses; or

(c) pursuant to an agreement between two persons who have been parties to a common law relationship and who have terminated the relationship, assets which, if the parties had been spouses, would have been family assets of the parties are divided between the parties, the pension benefit credit of the spouses or the parties, as the case may be, in a pension plan, or any payments due to them under a pension plan, shall be divided between them, and the division shall be made in the manner prescribed in the regulations notwithstanding that the order or the agreement, as the case may be, may require the division to be made in a different manner.

The above subsection only applies to spouses who began living separate and apart from each other after December 31, 1983 (s.31(3)).

he applicable regulations provide that the pension benefit credits shall be divided on an equal basis and shall be calculated from the date of the marriage to the date of separation. The trustee of the pension plan will normally retain an actuary who will calculate the value of the pension that has accrued over the course of the marriage and one-half of the value will be transferred to the other spouse's pension plan or R.R.S.P.

It is important to note that the sharing is mandatory notwithstanding any order or agreement. It would appear that the only way of avoiding the operation of s.1(2) of the Act would be for the parties to refrain from agreeing to divide their family assets and further agreeing not to institute court action under The Marital Property Act. If the parties then divorce (and assuming that neither party institutes action under The Marital Property Act until the limitation period in s.19(2) expires), the parties would no longer be spouses and neither party could obtain an order for a division of family assets under The Marital Property Act. As the condition precedent in s.31(2) of The Pension Benefits Act could not be met, the Act would have no application to the parties. Unfortunately, it is difficult for most couples to forego a division of the family assets for the sole purpose of avoiding the effect of this legislation.

5. Canada Pension Plan Act
The Canada Pension Plan provides a mechanism to pool the pension credits of separating spouses and divide them equally. The normal procedure is that an application to divide pension credits is made. Upon the spouse meeting certain criteria, pension credits will be transferred to his or her plan.

The law dealing with division of pension credits has changed from time to time and it is therefore essential that you consider which procedure is applicable to the facts of the case.

By way of brief overview, the Canada Pension Plan Act began operating in 1966. It was not until 1978 that the Act was changed to allow for division of credits between spouses. Initially, it was thought that parties could not opt out of the sharing provisions of the Canada Pension Plan Act and that provisions in a separation agreement purporting to do so were invalid. Commencing in 1983, pension appeal tribunals decided otherwise, going so far as to say that a general property release clause in a separation agreement was sufficient to bar a later application for division of Canada Pension Plan credits.

Legislation has now been enacted which applies to spousal agreements made after June 4, 1986. The Act now provides that a division of pension credits can only be prevented if the agreement contains a provision that expressly mentions the Act and indicates that the parties have no intention of splitting the pension and that such a provision of the spousal agreement is expressly permitted under the provincial law that governs the agreement. (As Saskatchewan appears to be the only province which has passed legislation allowing parties to opt out of the Canada Pension Plan, the result is that at least since June 4, 1986, Canada Pension Plan credit sharing is mandatory).

6. The Homesteads Act
An agreement will normally contain a general homesteads release whereby each party releases any rights which he or she may have to claim against the estate of the other as well as a specific release with respect to the homestead property, if applicable. Where one party is releasing homestead rights with respect to particular real estate, that party must sign a homestead release in the form set out in The Homesteads Act and register it in the Land Titles Office. This used to be known as dower.

7. The Intestate Succession Act
A separation agreement does not change status, as does a divorce. Under the previous Devolution of Estates Act, a spouse who was separated from the other spouse at the date of death would still be entitled to claim against the spouse's estate (unless there was an enforceable separation agreement to the contrary). Section 3 of this Act provides that if at the time of the intestate's death, the parties were living separate and apart and one or more of the following conditions is satisfied, the surviving spouse shall be treated as if he or she had predeceased the intestate. The conditions are:

(a) during the period of separation, one or more of the spouses applied for a divorce or for an accounting or equalization of assets under The Marital Property Act and the application was pending or had been dealt with by way of final order at the time of the intestate's death; or

(b) before the intestate's death, the intestate and his or her spouse divided their property in a manner that was intended by them or appears to have been intended by them, to separate and finalize their affairs in recognition of their marriage breakdown.

Accordingly, s.3(b) gives specific recognition to the fact that the parties can, by agreement, opt out of the operation of this Act.

8. The Dependants Relief Act
This legislation replaces the former Testators Family Maintenance Act. The Act provides [at s.2(1)] that if it appears to the court that a dependant is in financial need, the court, may order that reasonable provision be made out of the estate of the deceased for the maintenance and support of the dependant. Further, s.2(2) provides that an order may be made under s.2(1) whether the deceased died testate or intestate and notwithstanding the provisions of the deceased's will or The Intestate Succession Act. Perhaps more importantly, the Act defines "dependant" as follows:

(a) the spouse of the deceased;

(b) a person divorced from the deceased ... and in whose favour an order or agreement for maintenance ... was subsisting at the time of the deceased's death;

(c) a person of the opposite sex to the deceased not legally married to the deceased who

(i) cohabited with the deceased continuously for a period of not less than five years in a relationship in which the survivor was substantially dependant on the deceased, if

(A) cohabitation was subsisting at the deceased's death, or

(B) cohabitation was not subsisting but had ceased within one year of the deceased's death,

(ii) cohabited with the deceased continuously for not less than one year if there is a child of the union, and if

(A) cohabitation was subsisting at the deceased's death, or

(B) cohabitation was not subsisting but had ceased within one year of the deceased's death, or

(iii) was being paid or entitled to be paid maintenance by the deceased under an agreement or court order at the time of the deceased's death.

There is no provision in the Act which allows the parties to opt out from the operation of the Act or to release any claims which either may have pursuant to the Act. However, s.8(1) of the Act requires the court in determining the amount and duration of maintenance and support for the dependant to consider:

- the measures available for a dependant to become financially independent and the length of time and cost involved to enable the dependant to take such measures;

- the age and the physical and mental health of the dependant;

- the capacity of the dependant to provide for his or her own support;

- if the dependant is a spouse, any distribution or division of property that the dependant has received or is entitled to receive under The Dower Act or The Marital Property Act;

- any provision which the deceased while living made for the dependant and for any other dependants.

On balance, irrespective of the above, it is better practice for the agreement to contain a clause releasing all rights under The Dependants Relief Act. Given the court's discretion under the Act, a bona fide agreement may be effective against a surviving spouse who makes a claim under the Act. In the case of a dependant child, such a release would not be effective as the child is not a party to the agreement.

9. The Income Tax Act
The Income Tax Act must be considered in every case where there is maintenance or support payable, property transfers, division of R.R.S.P.'s, division of pensions and related issues arising on marriage breakdown. See the discussion under 6.06 - "Income Tax Considerations", supra, for a summary of the relevant income tax provisions.

III Cohabitation Agreements
Cohabitation Agreements:
Cohabitation agreement means an agreement entered into between two people who intend to live together as husband and wife but who do not contemplate marrying. Historically, cohabitation agreements had been held to be unenforceable as against public policy aimed at maintaining the sanctity of marriage. It is now clear, however, that cohabitation agreements will be recognized and enforced by the courts. [See Chrispen v. Topham (1986), 9 R.F.L. (3d) 131 (Sask. C.A.)]. The reality is that by statute and by caselaw, individuals who are unmarried, but living together, may acquire rights and obligations as against each other. A cohabitation agreement allows the parties to deal with ownership or division of their property, their support obligations and any other relevant matters in the settlement of their affairs. (You may want to raise with the parties the possibility that they will marry. If so, what is the effect on the Agreement?).

Cohabitation Agreements
1. Relevant Legislation
(a) The Family Maintenance Act
(b) The Pension Benefits Act
(c) The Dependant's Relief Act
2. Common Law
3. Income Tax Considerations
4. In Loco Parentis

1. Relevant Legislation:

(a) The Family Maintenance Act
Section 14(1) of the Act provides that where a man and woman who are not married to each other have cohabited for a period of one year or more and there is a child of the union, the Act applies if an application for an order is made while the parties are still cohabiting or within one year after they ceased cohabiting. Alternatively, s.4(3) provides that where the parties have cohabited continuously for a period of not less than 5 years in a relationship in which the applicant has been substantially dependent upon the other for support, s.10 of the Act will apply. (Section 10 is the empowering section which gives the court jurisdiction to deal with issues of maintenance, financial disclosure, costs, etc.).

b) The Pension Benefits Act
The Pension Benefits Act will apply where there is a common law relationship. A common law spouse is defined to be a person publicly represented by another person as the spouse of that other person, where either of the persons is prevented by law from marrying the other, for a period of not less than three years or where neither of them is prevented by law from marrying the other, for a period of not less than one year [see s.1(1)].

(c) The Dependants Relief Act
The Dependants Relief Act provides at s.1 that if it appears to the court that a dependant is in financial need, the court, may order that reasonable provision be made out of the estate of the deceased for the maintenance and support of the dependant. Section 1 of the Act provides that "dependant" includes a person of the opposite sex to the deceased, not legally married to the deceased, who cohabited with the deceased continuously for a period of not less than five years in a relationship in which the survivor was substantially dependant on the deceased, or a relationship where the parties cohabited continuously for not less than 1 year if there was a child of the union.

2. Common Law
The Supreme Court of Canada has held that a trust relationship can be established even in the absence of common intention [see Pettkus v. Becker (1980), 19 R.F.L. (2d) 165 (S.C.C.) and Sorochan v. Sorochan (1986), 2 R.F.L. (3d) 225 (S.C.C.)]. Essentially, the non-owning party may be awarded an interest in property based on the contribution that party made if the circumstances would otherwise result in the non-owner being deprived, the owner being unjustly enriched and there being no juristic reason for the enrichment.

In Sorochan, the Court held that in order to impose a constructive trust as a remedy, there must be a clear causal connection between the contribution and the property. The contribution does not have to be to the acquisition of the property. A sufficient connection exists where the contribution relates to the preservation, maintenance or improvement of property. Particularly, in situations where the parties consult counsel prior to cohabiting together, the possible impact of these decisions can be raised with the parties and they can make their own decision as to how property issues will be dealt with between them.

3. Income Tax Considerations
It is essential to keep in mind that the Income Tax Act does not necessarily apply to unmarried couples in the same way as it applies to married couples. For example, in order to be deductible as between two unmarried parties, maintenance must be payable pursuant to a court order (unlike the situation between a married couple where maintenance payable pursuant to a court order or agreement can be deductible).

Perhaps more importantly, property transfers between unmarried couples who cease living together cannot be done by tax-free rollovers. In short, given the often crucial importance of income tax considerations in negotiating domestic agreements, the lawyer must carefully consider the income tax consequences of maintenance and property transfers where the parties are unmarried.

4. In Loco Parentis
In situations where the parties cohabit together and one of the parties has a child or children from a previous relationship, the other party may be called upon to support that child. In this regard, see The Family Maintenance Act, ss.36(3) and (4).

36(3) - A person who is cohabiting with, but is not married to, another person has the obligation during cohabitation to provide reasonably for the support, maintenance and education of any child of that other person, while the child is in the custody of the persons or either of them...but the obligation is secondary to that of the child's parents...and is an obligation only to the extent that those parents fail to provide reasonably for the child's support, maintenance or education.

36(4) - A person who stands in loco parentis to a child has the obligation to provide reasonably for the support, maintenance and education of that child...but the obligation is secondary to that of the child's parents...and is an obligation only to the extent that those parents fail to provide reasonably for the child's support, maintenance or education.

Whether a person can be said to stand in loco parentis to a child is a question of fact. Generally, the cases adopt the idea that a person does not stand in place of a parent unless it is done voluntarily and knowingly. It means something more than the bare provision of the child's pecuniary wants. It implies an intention on the part of the person to fulfil the office and duty of a parent.

On this point, the decision of the Manitoba Court of Appeal in Carignan v. Carignan (1989), 22 R.F.L. (3d) 376 is instructive. (It must be emphasized that in Carignan the court was dealing with the issue of in loco parentis in the context of the Divorce Act, 1985 rather than The Family Maintenance Act. While there are significant differences in the respective Acts, nonetheless, it is submitted that the court's analysis on the issue of in loco parentis under the Divorce Act, 1985 is likely to be adopted by the Court in dealing with that issue under The Family Maintenance Act). In Carignan, the Court held that the time to determine whether a person stands in loco parentis to a child for the purpose of awarding child support is the time that the order is made. In turn, this depends upon the intentions of the adult payor at that time. The Court held that a person is entitled to unilaterally withdraw from the in loco parentis relationship up to the time that the court considers the application for support.

Given the apparent requirement that the intention of the parties is key, the issue of whether a person is or is not assuming a parental role with respect to a child or children of the other spouse may be addressed in a cohabitation agreement. At the same time, one must recognize that it is the child's right to support and that the child is not a party to or signatory to any agreement between the parties. As such, the comments with respect to the court's ability to override an agreement where the support of children is an issue would also be applicable to situations where the parties are unmarried and living together.

IV. Pre-Nuptial and Spousal Agreements
A spousal agreement is defined in s.1(1) of The Marital Property Act as:

(a) any marriage contract or marital agreement, or

(b) any separation agreement, or

(c) release or quit claim deed, in writing, or any other written agreement or other writing between spouses, made within Manitoba or elsewhere before or after the coming into force of this Act and either during marriage or contemplation of marriage, affecting all or any of the assets of the spouses in a manner described in s.5.

In general terms, where the parties are not married but intend to get married, they will enter into a pre-nuptial agreement. A pre-nuptial agreement is, by definition, a Spousal agreement within s.1(1) of the Act. Where parties are already married but wish to opt out of the provisions of The Marital Property Act, either totally or in part, the parties will enter into a spousal agreement.

In either case, two parties who are married to each other or who intend to marry may enter into an agreement in which they agree on their respective rights and obligations under the marriage or on separation or on death, including ownership in or division of property. Additionally, the parties can deal with support obligations (although recognizing the possible role of the court in varying an agreement, particularly as to support for children). These agreements may address matters arising during marriage but more frequently they are intended to resolve issues arising in the event of marriage breakdown or death.

For the purposes of pre-nuptial and spousal agreements, the most important section of The Marital Property Act is s.5 which provides:

5(1) This Act does not apply to any asset disposed of by a spousal agreement or as to which the Act is made inapplicable by the terms of a spousal agreement, but where a spousal agreement is silent as to an asset this Act if otherwise applicable to the asset applies as if the spousal agreement did not exist.

5(2) Where a spousal agreement by its terms makes a provision of this Act inapplicable to an asset, that provision does not apply to the asset but the remaining provisions of the Act if otherwise applicable to the asset apply as if the spousal agreement did not exist.

5(3) Where a spousal agreement by its terms varies any provision of this Act in its application to an asset, that provision if otherwise applicable to the asset applies as varied and the remaining provisions of the Act if otherwise applicable to the asset apply in an altered form.

Pre-nuptial agreements are ideally suited for individuals who have significant assets at the time of marriage or where one of the parties has significant assets and the other does not. Pre-nuptial agreements should be executed as far in advance of the marriage as is possible under the circumstances. Agreements that are negotiated while wedding plans are being finalized or that are executed by the parties just before the wedding create tremendous pressures and may raise questions of undue influence or duress.

From the point of view of enforceability of either type of agreement, it is best to have comprehensive financial disclosure. With respect to pre-nuptial agreements, it is the better practice to have a detailed financial statement attached as a schedule to the agreement.

Provisions relating to spousal support are not within the scope of The Marital Property Act. One must therefore look to the common law and to the relevant statutes. According to one school of thought, specific support provisions that contemplate marriage breakdown are unenforceable on the grounds that they are contrary to public policy. This position is taken not because the provisions are inconsistent with the sanctity of marriage but because it is usually impossible to determine in advance what the means and needs of the parties will be at the time of marriage breakdown. Arguably, a spousal or pre-nuptial agreement dealing with support payable on separation would be treated as a separation agreement within the meaning of s.9 of The Family Maintenance Act. However, with respect to the Divorce Act, it has not been clearly established whether a spousal or pre-nuptial agreement would be treated by the court the same way as a separation agreement. In Manitoba at the present time, the best view is that the support provisions are likely to be persuasive but the court might well vary the provisions of the agreement with respect to spousal support

V. Separation Agreements: Court Order or Agreement

Separation Agreements
1. A Separation Agreement
(a) Variation
(b) Enforcement
(c) Collateral attack
(d) Scope
(e) Certainty
(f) Structure
2. Combination of Court Order and Agreement

1. A Separation Agreement
A separation agreement is a contract between spouses providing for the resolution of all issues upon the break-up of their marriage. After obtaining all of the relevant information from your client, you will want to consider and advise the client as to whether or not a court order, a separation agreement or some combination of the two, will be the most suitable vehicle for resolving the client's case. This analysis will take into account the following considerations:

(a) Variation
A separation agreement can normally only be varied either where the agreement specifically contemplates variation or where the parties mutually agree to a variation. Many separation agreements will contain a variation clause allowing for terms such as maintenance to be varied upon a material change in circumstances. With limited exceptions, an agreement that does not specifically provide for variation will be considered final and binding.

An agreement can restrict the right of a spouse to look to the court for an increase in maintenance in the future or for maintenance at all where a valid release has been given. (see ss.9(2) and 9(3) of The Family Maintenance Act). In the case of divorce, the Supreme Court of Canada maintenance trilogy held that a court should override the spousal maintenance provisions in a valid separation agreement only if there had been a radical change in circumstances flowing from a pattern of economic dependence engendered by the marriage.

By contrast, the maintenance provisions of a court order or judgment are normally variable upon a change of circumstances having been demonstrated (e.g. ss.17(4) and (5) of the Divorce Act, 1985 or s.46 of The Family Maintenance Act).

(b) Enforcement
The issue of enforcement must be considered not only as to the possibility of a breach of an agreement in the future but also from the perspective of whether it is even appropriate to consider an agreement at all. For example, where there are allegations of violence or abuse by the other spouse, the client will normally want and need a restraining order which cannot be embodied in a separation agreement but must be ordered by the court. Alternatively, where there are concerns as to a party absconding with assets or with the children of the marriage, again, the client will want and/or need a more readily enforceable remedy than will be provided by a separation agreement. Either of these scenarios does not necessarily mean that the parties cannot ultimately resolve the matter by way of agreement, but it may well be a situation where both an agreement and a court order are required. Generally speaking, there are more ways and easier ways of enforcing a court order than a separation agreement.

As to maintenance, while it is true that a separation agreement can now be filed for enforcement under the Maintenance Enforcement Program, there are more remedies available where there is a default pursuant to court ordered maintenance. For example, for court ordered maintenance, there is a mechanism for a continuing garnishing order, for all of the creditors remedies available pursuant to The Queen's Bench Act and Rules and The Judgment Act. Outside the Maintenance Enforcement Program, to enforce maintenance owing pursuant to a separation agreement, a Statement of Claim or other grounding action must be instituted. A garnishing order can be obtained for the arrears but a continuing garnishing order is not available. A court order can be registered in the Land Titles Office against the title to any property owned by the payor spouse. An agreement could not be so registered except possibly where there is an express provision in the agreement allowing a caveat to be registered against title.

For the purposes of The Child Custody Enforcement Act or the abduction provisions of the Criminal Code, an agreement is effective to trigger enforcement. Nonetheless, a court order will likely be more persuasive to a layman or to a policeman who may be asked to intervene in a crisis. Obviously, foreign courts are more likely to honour a court order than a separation agreement. For that matter, in a country with ten competing jurisdictions and where individuals are increasingly mobile from province to province, there is clearly an advantage in obtaining a corollary relief judgment dealing with custody and maintenance under the Divorce Act, 1985. Such a judgment or order can readily be registered in another jurisdiction in Canada and, upon registration, will become a judgment of the court of that jurisdiction.

(c) Collateral attack
Agreements are open to collateral attack on grounds such as undue influence, duress, unconscionability, mistake, etc., which are not normally available to challenge the validity of a court order or judgment.

(d) Scope
A court order is limited in scope by the provisions of the applicable statutes and the court's own jurisdiction. An agreement is subject only to the general limitations of contractual freedom, such as illegality and public policy. An agreement, therefore, may cover many areas that a court cannot.

(e) Certainty
A court order, particularly in a contested situation, is a solution to the parties' difficulties imposed upon the parties by the court. As such, the court's decision may satisfy no one. By contrast, the parties to an agreement know exactly what is the nature of their bargain and can compromise on matters which are less important to the individual party in order to obtain concessions from the other party on issues which are of more importance.

(f) Structure
An agreement is a contract the terms of which each party must accept. As such, one cannot force the other party to enter into an agreement nor can one force the other party to negotiate in good faith or adopt reasonable positions. With some individuals, court action may be necessary simply because the litigation process imposes deadlines and structure on parties who might otherwise be incapable of, or unwilling to negotiate.

2. Combination of Court Order and Agreement
It is open to the parties to enter into an agreement and file a consent order at the same time. The order will contain the provisions of the agreement that are within the court's jurisdiction and which the parties may be particularly anxious to enforce whereas the agreement will be the more comprehensive document which will deal with all issues which the parties wish to resolve, whether within the court's jurisdiction or not.

VI. Income Tax Aspects of Income and Property Division

1. General

The Income Tax laws are extremely complex and their application to separation and divorce is often not readily understood. The material presented here is introductory and is not meant to be a substitute for the Income Tax Act. In matters where there are significant assets or a novel agreement, it is useful, if not essential, to obtain advice from an income tax specialist.

2. Support Generally

(a) Under the Income Tax Act, payments may be deductible from the otherwise taxable income of the payor spouse and the corresponding money received may be included in calculating the taxable income of the recipient spouse. Therefore, one must look at after tax amounts to determine the ultimate dollar cost of the payment and the net amount available to the recipient.

(b) The following factors should be considered when calculating the tax effect of support:

Payor and recipient spouse's anticipated income before and after giving effect to the property and support scheme of the settlement;

- The number of children and who will have custody of them;

- Who will receive the family allowance;

- Which spouse is entitled to child care expenses;

- Determination of the child tax credit;

- Who will have the benefit of the married equivalent tax credit; and

- The claiming of personal credits for the year in which the parties separate and for subsequent years.

In order for support to be deductible by the payor and consequently taxable to the recipient, the Income Tax Act sets out strict criteria. (Specific reference should be made to ss.56(1)(b), (c) and (c.1), 56.1, 60(b), (c), (c.1) and 60.1.)

The following criteria must be met in order to ensure the deductability of support payments:

(a) The parties must be living separate and apart not only at the time the payment is made but also throughout the remainder of the year.

(b) The payment must be made pursuant to a court order or written separation agreement entered into by both parties. The separation agreement must be a formal, written, legal document, signed by both parties. It must set out the date upon which the parties separated and commenced living apart and their agreement to continue to do so. In the separation agreement, court order or other formal, written, legal document, signed by both parties, there must be a clear description of the specific amounts and the timing thereof, since only payments made pursuant to the agreement will qualify for deduction. Support payments to a common law spouse or for children born out of marriage will be deductible if made pursuant to a court order. (A separation agreement as defined in the Income Tax Act contemplates that married persons are parties to the agreement and therefore, a common law spouse paying support pursuant only to an agreement would not come within the definition.)

(c) The payment must be made for the maintenance of the recipient, that is for such things as medical expenses, clothing, education, and all the normal, daily needs of an individual or a dependant.

(d) The support payments must be payable on a periodic basis. A periodic payment is contrasted with a capital payment resulting from the division of property and final settlement of all future marital rights. A one-time payment in settlement of such future obligations is not an allowance or periodic payment and is not deductible.

3. Third Party Payments

Third party payments are payments made to a third party for the benefit of the spouse, the former spouse, or a child in his or her custody. These payments include mortgage payments paid directly to the mortgagee, occupancy costs of a home paid directly to utility companies, insurance premiums paid directly to the insurer, tuition fees directly to the private school etc. Under current legislation, third party payments will be deemed to be specific, periodic allowance payments for the maintenance of the recipient spouse provided they meet the following tests:

(a) The court order or written agreement must specify the precise nature of the third party payment to be made. The precise amount of the payment and the precise payee need not be specified. It may be helpful to name the contemplated amounts and the specific payees but that this is not mandatory;

(b) The amount must be provided for in an order or written agreement and both parties must agree to the intended treatment. The court order or written agreement must specifically refer to the intention to have ss.60.1(2) and 56.1(2) of the Act apply to the payments;

(c) The amount must be for the maintenance and/or the benefit of the spouse (including a common law spouse) or the former spouse or dependant children in the custody of the payee;

(d) The payment must be in respect of a maintenance expense that was incurred in that year or the preceding year. Generally, incurred means "when the obligation to pay is established";

(e) Reimbursements to a spouse which would otherwise qualify if they were third party payments are dealt with in the same manner as third party payments;

(f) The parties must be living separate and apart, not only when the payment is made, but also at the time that the expense is incurred.

4. Payments Made Prior to an Order or a Written Agreement

Section 60.1(3) of the Act gives retroactive deductability to payments made prior to the signing of an agreement or the obtaining of a court order. The following conditions are necessary for the deductability and income inclusion of support payments made prior to the signing of the written agreement or order:

(a) The payments made prior to the signing of the agreement or order must have been made in the same year that an agreement or order is signed or in the immediately preceding full calendar year;

(b) The prior payment must have all the attributes of the previously described deductible support payments: they cannot be lump sum payments, they must be periodic and for the maintenance of the recipient; and

(c) The agreement or order must specifically refer to the payments made prior to the signing of the documents and the parties must clearly indicate that these payments are to be deductible to the payor and included in the income of the recipient in the year in which the amounts were paid.

5. Transfer of Property

Marital settlements often require the transfer of property between spouses or former spouses. Income tax consequences of these transfers must be carefully considered during negotiations.

Property transferred between spouses usually is capital property. (Non-capital properties and personal use properties are not specifically referred to herein. Separate rules are contained in the Act that cover the effects of transferring or selling these types of assets). Capital property is best described by analogy. The courts have applied the "fruit and the tree analogy" namely, the tree is the capital and the fruit produced by the tree is the income. Capital properties are typically of some permanence and have an enduring value. They produce income, as opposed to being the income itself.

In normal commercial circumstances, when a capital property is sold for an amount in excess of its costs for tax purposes, a capital gain will result. If it is property against which capital cost allowance has previously been claimed, then there is a potential for recapture of the previously claimed depreciation into taxable income. If the proceeds are less than undepreciated capital cost (UCC), a terminal loss may result.

While spouses are married and prior to marital breakdown, capital gains and losses and recaptured depreciation are avoidable when capital properties are transferred between spouses (s.73 of the Act). Capital gains and losses and recapture are also generally avoidable when capital properties are transferred between spouses or to a former spouse if the transfer is in settlement of marital property rights (s.73). The transfer will not give rise to taxable capital gains or recapture of capital cost allowance. The property is deemed to be transferred at the transferor's adjusted cost base (ACB) and, therefore, neither a capital gain nor capital loss results. In addition, recapture is not triggered since the transfer is deemed to take place at the transferor's UCC.

The transferor's tax values of the property will be inherited by the transferee. Subject to attribution, the potential tax liability arising from future capital gains and recapture will be that of the recipient spouse. This factor is essential when valuing property transfers between spouses.

The rollover (i.e. the assumption by the transferee spouse of the transferor's cost base) on inter-spousal capital property transfers or transfers to a former spouse is automatic. No election is required for these provisions to apply to the transfer. However, a transferor may elect (s.73(1)(d)) on a property by property basis, not to have the rollover apply by indicating in his or her tax return for the year in which the transfer takes place that these provisions should not apply and that the transfer takes place at a fair market value. This would only be done where it was advantageous to the transferor either because the transferor has unused capital losses of other years which are available to offset the gain or if the fair market value at the transfer date is below the property's tax cost. In this latter situation, the transferor would realize a capital loss. It may also be desirable to elect to have a fair market value apply in order to realize a capital gain which will enable the transferor to utilize the capital gains exemption and provide the transferee with a higher cost base in the transferred property.

(a) Capital gains exemptions

Individuals other than trusts have a cumulative lifetime capital gains exemption of $100,000. In 1990, only three-quarters of a capital gain is taxed and that three-quarters is taxed as if it were income at the increasing graduated rates. A $500,000 capital gains exemption is available for certain farm properties and shares of certain small business corporations (s.110.6(3) of the Act as amended). Where property has been rolled over from one spouse to the other on a tax free basis, the transfer in itself will not encroach on the other party's $100,000 exemption. Where a transferor has elected at fair market value and triggered a gain on the transfer of property by use of s.73(1)(d), the transferor will be able to shelter the gain to the extent of the first $100,000 at the rate permitted by the Act. This will permit the property to pass to the transferee at a higher cost base, which may be of future value to the transferee if the transferee in turn intends to sell the property or can depreciate the property.

(b) Attribution

One must distinguish between "income" and "capital gain" because the attribution rules are different for each type of income. Furthermore, income attribution rules apply only to the transfer of property that gives rise to property income or loss as opposed to income or loss from a business. For example, if property is transferred and it is employed to earn income from a business, such income is not attributable to the transferor. The attribution rules of the Act are designed to prevent the manipulation of taxable incomes between spouses. Otherwise, income of the spouse with higher earnings could be transferred to the spouse with lower earnings thereby allowing the family to benefit from the transferee spouse's lower marginal income tax rate. In essence, any income or capital gain that is produced by property which has been transferred or loaned to a spouse will be considered to be that of the transferring spouse during the lifetime of the transferor spouse unless there is a marriage breakdown.

Where there is a marriage breakdown, there will be no attribution of income during the period in which a person is living separate and apart from his or her spouse by reason of marriage breakdown (see s.74.5(3)(a)) unless the parties resume cohabitation within the same year.

The attribution of capital gains and/or losses arising from the disposition of inter-spousal transferred capital property can also be avoided when the parties to the transfer are living separate and apart by reason of a marriage breakdown and have not resumed cohabitation within the same year. The successful avoidance of capital gains attribution requires the parties to make a joint election whereby both parties agree not to have the rules relating to capital gains attribution apply (see s.74.5(3)(b)). This jointly signed election must be filed by the transferring spouse with his or her personal tax return for the taxation year during which he or she commenced to live apart from his or her spouse. If property is transferred pursuant to a separation agreement which is signed in the year subsequent to the year that the parties commenced to live separate and apart, then the election should be filed with the tax return for the taxation year in which the property was transferred (i.e. the year the agreement is signed). If the election is not made then the taxpayer cannot escape the attribution of any capital gains upon the disposition of transferred capital property by the separated spouse.

Parties to a common law relationship are treated as arm's length, unrelated parties for tax purposes and therefore, when property is transferred between them, it will be deemed to take place at fair market value. The special rollovers available to married spouses are not available. There is no attribution of income or capital gains on property transfers between common law spouses. Therefore, property may be transferred without the concern that the income generated from the property will be attributed back to the transferor. However, as the transfer must take place at fair market value, the transferor may realize a capital gain if the property is transferred.

(c) R.R.S.P.

The Act provides that spouses can transfer, without immediate tax consequences, all or part of one spouse's R.R.S.P. fund to the R.R.S.P. of the other spouse or former spouse if:

Such transfer is made on or after marriage breakdown and pursuant to an order or separation agreement (see s.146(16);

An order or agreement dividing property specifically requires the transfer be made in settlement of rights arising out of the marriage;

The funds must be paid by the trustee of the transferor's plan directly to the trustees of the plan for the receiving party. Within thirty days of transferring the funds, the transferor must file with Revenue Canada a copy of the order or separation agreement with a special form (T222O) providing the details of the transfer. Only the recipient party is required to sign this form.

It is important to remember that the transfer is not "tax free" but rather "tax deferred" in that the burden of tax is not immediately payable but will be payable if and when, the monies are withdrawn from the R.R.S.P. at the marginal tax rates applicable in the year of withdrawal. Therefore, when the value of monies transferred is determined such valuation must take into account the deferred income tax liability.

When there is a significant difference between the marginal tax rates of the spouses and the amount being transferred is intended to provide for the transferee in later life when taxable income will be minimal, there may be significant advantages to the parties in making use of the tax deferral.

VII. Estate Considerations

1. Binding the Estate

A contractual obligation to pay maintenance may continue after the death of the supporting spouse if that is a term of the agreement. Before including a clause making the obligation binding on or enforceable against the supporting spouse's estate, one should consider the following matters:

- the clause may create hardship for beneficiaries and be a source of difficulty to the personal representatives of the estate;

- the continuing obligation to pay support is in the nature of a debt, therefore, the estate receives no tax deduction and the supported spouse receives the payments tax free;

- if maintenance is to be paid indeterminately, distribution of the estate may have to be postponed indefinitely; and

- if a C.O.L.A. clause is used, this will add to the difficulty of setting aside a fund to provide for continued support payments because the proper amount of the fund cannot be determined.

These problems may be avoided by the use of a life insurance policy.

Because an agreement can provide that maintenance payments continue after death and are binding on the payor's estate, it is suggested that the agreement be clear on this point. The intention of the parties is the determining factor but often the intention of the parties is difficult to ascertain. It is suggested that if maintenance is to be binding on the estate, a clause specifically stating that this is so should be included in the agreement. Conversely, if maintenance is not to be binding on the estate, the agreement should specifically say so.

2. Alternatives to alteing the Estate

Where there is to be provision for continuing payments of maintenance by a spouse after death, in addition to or as an alternative to binding the estate, one can require:

(a) That the payor spouse keep in force a policy of insurance upon his life in an agreed amount, with the recipient spouse as the irrevocable beneficiary. It is important that the designation be irrevocable (i.e. that the payor spouse cannot change the designation without the payee spouse's consent). It is further advisable that the payee be the owner of the policy so that it cannot be cancelled, or lapse for non-payment of premiums, without notice to the payee. The issue of whom should pay the premiums is a matter for negotiations but it is normally the obligation of the payor, as an incident of his or her maintenance obligation. The Insurance Act of Manitoba provides for the registration of an irrevocable designation of a beneficiary at the head office of the insurer. It is the better practice to require such registration and proof of same from the payor spouse. As well, one may also include a provision that a designation will be revocable upon the payor spouse's maintenance obligation ending.

(b) That the payor spouse provide certain monies to the payee in his or her will. This can either be by way of direction in the will that maintenance be paid by the executors as if the testator were still alive or can be by payment of a specific lump sum which can vary depending upon the ages of the children. The difficulty with the former approach is that it may be impossible for the executor to wind-up an estate or pay other bequests where maintenance is a continuing obligation, the final amount of which may be unknown. (With respect to a will, one must also keep in mind that if the payor spouse re-marries, The Wills Act provides that his or her will would be revoked upon the marriage. Additionally, the Act provides that a bequest to a spouse is revoked by divorce unless a contrary intention is shown in the will).

Clients should always be advised to up date their wills immediately following the execution of a separation agreement. In the event that the spouses are only separated and the will has not been changed, even where there is an estate release and a separation agreement, the surviving spouse is still entitled to take pursuant to the specific provision in the will. In Pearson, an unreported decision of the Manitoba Court of Appeal, it was held that a wife was entitled to take under her husband's 47 year old will despite the fact that she had released the deceased from any and all claims against his estate.

VIII. Variation and Finality of Agreements
Normally speaking, where one of the parties seeks to vary a term of a separation agreement it will be a term relating to support. That process will normally take place in the context of a divorce proceeding. It must be said that the caselaw dealing with this issue is often contradictory and confusing, not just between courts in different jurisdictions but even between courts of the same jurisdiction and at the same level. There is a recent and helpful article which provides an overview of the post trilogy maintenance cases. (See G. Lang, "Pelch: Variations on a Theme" (1990) 69 Can. Bar. Rev. 78.)

Prior to The Supreme Court of Canada maintenance trilogy, it was clear that the Court always had an overriding discretion to deal with the issue of support and to override the provisions of a separation agreement, if necessary. Pursuant to the Divorce Act, 1968 the court could make an order as to maintenance if it thought it "fit and just to do so having regard to the conduct of the parties and the condition, means and other circumstances of each of them".

Prior to the trilogy, there were differing approaches by courts across Canada as to when a court should or would exercise its discretion to deal with maintenance in a manner inconsistent with the separation agreement between the parties. Some courts took a restrictive approach, stating that very compelling reasons would have to be shown to award maintenance inconsistent with the terms of the agreement. Some courts took a very broad approach, stating that the court must, above all, do what was fair between the parties, despite any agreement. This latter approach was consistently taken by the Manitoba Court of Appeal (see for example, Newman, Katz and Ross, decisions of the the Manitoba Court of Appeal.

In the trilogy, the Supreme Court of Canada decided that the broad approach was inappropriate and enunciated a new test. (One must however remember that the trilogy was decided pursuant to the Divorce Act, 1968 and not the Divorce Act, 1985. As has been noted, the Divorce Act, 1985 specifically provides that the existence of a separation agreement is only one of the factors which the court is to take into account in the issue of support. While it is entirely likely that the reasoning set out in the trilogy will be applied by the Supreme Court of Canada to decisions under the Divorce Act, 1985, it is by no means certain that it will do so.)

In the trilogy, all three cases involved situations where there was an existing separation agreement which provided for maintenance to cease at a certain time or upon the happening of a certain event. Thereafter, rights to claim maintenance were released and the agreements provided a final and complete resolution of all matters between the parties. In all three cases, following the execution of a separation agreement, there had been significant changes in the financial circumstances of the recipient wife.

All three applications for maintenance were dismissed, with the Court stating that agreements between parties should be respected and the court should exercise its power of intervention under the Divorce Act, 1968 only in the case of a radical change in circumstances relating to a pattern of economic dependence of one party on the other generated by the marriage relationship.

In each of the cases decided in the trilogy, there was no variation clause specifying in what circumstances maintenance might be varied. If the parties themselves provide in the agreement that the agreement may be varied, then clearly, the agreement will not be a final settlement of all matters between the parties. Even then, however, the court may impose a heavy standard when interpreting variation clauses. For example, in the McKenzie decision, there was a general variation clause (providing for a variation upon a material change of circumstances) in a separation agreement. The Manitoba Court of Appeal held that such a clause was intended to cover some unforeseen event that imposed unexpected financial burdens upon the husband or wife, for example, an accident, a catastrophic illness or the like, and not, as in that case, a gradual change in the husband's income.

Where the agreement makes no provision for variation, the Manitoba Courts have held that before the court can vary maintenance, the change in circumstances must be radical, related to the marriage and unforeseeable. Obviously, this imposes a very heavy standard on the spouse seeking relief inconsistent with the terms of the agreement.

Therefore, in drafting a separation agreement, the lawyer must give careful consideration to whether a variation clause should be included in the agreement and, if so, whether the clause should specify the bases on which the agreement could be varied. Keep in mind that if triggering events for a variation are specifically set out, there is a risk that the list will be treated as exhaustive and that no variation will be allowed by reason of an event not listed in the variation clause.

 

Family Law Agreements

I. Introduction
II. The Law to be Considered
III. Cohabitation Agreements
IV. Pre-Nuptial and Spousal Agreements
V. Separation Agreements: Court Order or Agreement
VI. Income Tax Aspects of Income and Property Division
VII. Estate Considerations
VIII Variation and Finality of Agreements