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Pensions and RRSPs
- Pensions Generally
- George formula
- Manitoba Pensions
- R.R.S.P.'s
Generally
Pensions are family property and will be included in the Family Property Accoutning between the parties.
Pensions which are resident in Manitoba are covered under The Pension Benefits Act ("P.B.A."). They are not capable of very flexible treatment. Pensions, which may be federally administered or from other provinces, are open to variance in how they might be dealt with. Some are covered by statutes such as the Pension Benefits Standards Act or the Pension Divisions Act, and often there are issues that are peculiar to the specific plan.
George Formula
For pensions not covered by the P.B.A., we often rely upon a formula, called the George Formula, named after a landmark Manitoba case, to effect a distribution of a pension as and when it is received. That formula is based upon the proportion of time during which the pension accrued and during which the parties cohabited. The formula is usually surrounded in the court order with a bewildering array of clauses to explain and protect the process, as it does not bind
the pension plan administration, but only the parties and their estates. The formula itself looks like this:
Any interest in any benefit payable, by or from the pensioner's pension plan, at any time in the future to him/her, whether during his/her lifetime or upon death, shall be shared with the non-petitioner party such that the portion to which she/he is entitled is determined by the following formula:
D = 1/2 ´ A B´ C
where:
A = the number of months of married cohabitation during which pension contributions were made
B = the number of months during which pension contributions were and will be made
C = the gross amount of pension payable to the pensioner
D = the gross amount payable to the non-pensioner spouse
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The Pensions Benefits Act ("P.B.A.") governs pensions that are sited in Manitoba, which will include the Manitoba government pensions and pensions of businesses that are Manitoba companies. It provides for a mandatory sharing of the pension on marriage breakdown, unless the parties agree otherwise.
Where the pension is divided at source, the non-pensioner spouse will have to have the credits rolled into a "locked-in" pension plan which cannot be accessed before retirement age, except in particular circumstances.
If the parties are able to agree that the pensioner can keep the pension, perhaps in compensation for some other asset like the house, the pension administrator will provide a statement of the value of credits to be divided and will require a special form, duly acknowledged by lawyers to be signed by the parties and filed.
The credits will be transferred to a locked-in R.R.S.P.
Income tax law does provide a way out, however, by allowing the tax-free transfer between spouses of R.R.S.P.'s on marriage breakdown. No tax is payable until the recipient decides to cash them in. Thus, an equalization of R.R.S.P.'s, separate from consideration of the other assets and liabilities, is generally seen as the fairest way to deal with that kind of asset.
RRSP
RRSP's are a special class of asset. Because they carry an inherent tax liability, tax is payable on deregistration, parties are usually reluctant to have them taken at face value. The holder of the RRSP will normally want it discounted for his or her presumed marginal tax rate. It might not be fair to use the rate at the date of separation, when they might be held for many years after and perhaps not cashed until retirement age when income overall would be expected to be lower.
The courts have varied in the application of a discount rate for RRSP from zero to 33% depending on different factors and the circumstances of the case. Of major importance is the ability of the parties to use an inter-spousal rollover to deal with them which transfers the tax burden to the person who actually cashes it in.
The inter-spousal rollover authorized by the Income Tax Act provides a way out. It allows the tax-free transfer between spouses of RRSP's on marriage breakdown. No tax is payable until the recipient decides to cash them in. Thus, an equalization of RRSP's, separate from consideration of the other assets and liabilities, is generally seen as the fairest way to deal with that kind of asset. A special form (CRA Form T2220) is used and care must be taken in its completion. It will be signed by the parties and each of their trustees.
Credits earned by both spouses in the Canada Pension Plan ("CPP") during cohabitation can be pooled and divided equally between the parties upon marriage breakdown and is mandatory unless the parties by agreement signed before June 4, 1986 specifically gave up the right to share CPP credits. In Manitoba the provisions in agreements after that date purporting to prohibit the sharing of the credits are not deemed valid.
The application can be made at any time following separation but and in the case of death must be made within 3 years. These provisions apply to common law spouses after January 1, 1987 where they have lived together for at least one year and separated for at least 12 months. In the case of common law partners the application must be made within 4 years of their separation. Similar provisions apply to same sex couples who separated after July 31, 2000.
