A much briefer version of this article appeared in the Summer 2001 issue of the Expert Witness. The brief version appears as the overview at right. The full article is below.
The Supreme Court of Canada recently ruled in the case of Boston v. Boston. This case concerned a divorced couple who had reached a consent agreement in 1994 which divided their assets roughly equally. In estimating the value of their assets at the time of separation, the original court had included the present value of the husband’s large pension, using its present value (PV) at that time. That present value in fact constituted the bulk of the assets he received at separation ($333,329/$385,000, or 86.6 percent of his total). The wife received almost all of the family’s physical and other financial assets, amounting to $370,000. In addition she was to receive support payments of $3,200 per month, fully indexed to inflation.
The husband retired in 1997 and began to receive his pension. He applied to have the support payment reduced, on the grounds that he was now paying support from his pension, which had already been considered in the original division of assets. It was argued that the wife had traded off her right to ½ the pension, and in return had received the bulk of the physical assets. He succeeded in having the monthly payment lowered to $950, unindexed, but the Ontario Court of Appeal increased the figure back to $2,000 and restored the indexing. The husband was appealing that last OCA decision in the Supreme Court.
The SCC’s decision allowed the husband’s appeal and restored the motions judge’s decision to reduce support to $950 per month, without indexing. This was in my view correct, as it would appear to be unjust that the wife should receive half of an asset at separation, and then be allowed to claim part of the husband’s half of that asset later. There are two primary issues, in my view. The first is that when a support order is made, that order should specify that the support in question should continue only until a particular assumed retirement age. That retirement age should of course be the same one assumed in calculating the present value of the pension being divided. I understand that support orders are generally indefinite, which creates the potential for double-dipping that arises in this and other cases.
Once it is recognized that no labour income is earned in retirement, the appropriate division procedure is quite clear. A correct division accounts for all of the assets held at the time of the breakup, including the present value of pension entitlement, based on agreed retirement ages. Once that (usually 50/50) division is made, then to allow another claim on the assets that were divided is by definition double-dipping and seems to me unjust. The second part of the process is the awarding of support as a share of income the payor will earn after the time of separation. In the case in question, as noted above, the wife received spousal support in addition to the 50 percent share of assets. She is perfectly entitled to a share of that future income, based on the standard arguments regarding her own career sacrifice, the raising of children, etc. The problem is that that future income ceases to be earned at retirement, but (I gather in this and most cases) the support payments do not.
There is a logical inconsistency if support in such cases carries on after the agreed retirement age, because the only source of such payments is the savings accumulated before and after separation. The wealth accumulated before separation was already divided in the original agreement; the income earned after the separation was already divided (presumably fairly) when the monthly support was set. Unless the courts set up spousal support such that payments end (or are reduced) at the paying spouse’s retirement, there will always be the potential for double-payment of the same money.
It is not complicated to prevent such double-dipping while ensuring that the spouse who is supported receives a fair settlement, inclusive of continuing monthly payments. The steps are as follows:
- At the time of separation the parties should divide assets owned already, including the present value of pensions earned to that time, using whatever formula the court sees fit to apply. This may not be equal, most often because one party brought in assets exceeding the other at the time of the marriage. For the purpose of creating an example I will, however, assume an equal division.
- The court then can assess what share of the higher-income spouse’s future income should be paid out in the form of continuing support. In the case in question, the original award of $3,200/month or $38,400 per year represented 33.25 percent of the husband’s before-tax income, or 48 percent of his after-tax future income.
- Finally, the court should assess what fraction of the payor’s incremental pension income should be awarded to the payee. This seems to be a point of contention. By incremental we simply mean that part of the pension that is accumulated after the separation. In the Boston case this amount was reported as $2,300 out of a total teacher’s pension of $7,600 per month (it appears that there was no corresponding amount earned before marriage, so I presume they were already married when he began his pensionable service). The decision by the motions judge granted $950 per month, which appears to be consistent with the rough 50/50 split that had been applied all along, in that it is on the order of half of the after-tax value of the $2,300.
- At the time of the separation it is possible to estimate the value of current assets, including the PV of pensions, and the present value of future income, including additional pension entitlement which will accumulate between the time of settlement and the agreed retirement age. Such pension growth is merely part of the payor’s future income, and if the lower-income spouse is entitled to a share of such income then the pension is properly part of the calculation of that income. The court can then award a percentage of existing assets to each party, as well as a percentage of the future income stream to the recipient spouse. The key point is that once all current assets and future income are considered, and shares awarded, then no other payment is required. If the future income is not paid as a lump, but is to be paid as continuing monthly support, then the amount should decline at the agreed retirement age. Assume the spouse’s share remains at 50 percent for the future support calculation. Monthly support should then be 50 percent of after-tax income until retirement only, declining then to 50 percent of the monthly value of the (also after-tax) incremental pension amount. In Boston, the motions judge apparently understood all of this reasoning and made the correct award, in my view.
The problem of double-dipping occurred in this case because the original separation agreement awarded $3,200 per month indefinitely, which would only be correct if the payor would never retire! While such an award may be conventional, it is clearly incorrect, when such payments can only be made after retirement using assets that were already fairly divided. If the above procedure is followed then all of the payor’s income, including future pension increases, would be considered in reaching a settlement. The problem of double-dipping would not occur, nor, conversely, would the award to the lower-income spouse wrongfully ignore future pension gains that they have a legitimate claim upon. Also, note that once a retirement age is agreed to at the time of separation, the present values of future income and future pension increments are based on retirement at that age. Ten or twenty years later, the paying spouse is still free to retire before or after that date, but there should be no change in the support payment stream (it should decline as scheduled, not before, so there is no incentive to retire earlier and therefore pay less to the former spouse).
It may be helpful in thinking of these issues to imagine a divorce that occurs at retirement. In that event there is no future income stream, and no future pension increment. The court will simply divide the assets already owned, and divide the pension using the standard formula. Say the spouse’s asset share is 50 percent while the pension share is also 50 percent. Assume in the first case that the 50 percent asset division has been made. The court can then award continuing support in the amount of 50 percent of the monthly pension payments. The recipient has no further claims – all the family’s assets have been divided.
In the alternative (second) case, the court can combine the lump-sum calculations. For example, assume $400,000 in current assets and a pension PV of $200,000. The spouse is entitled to a total of $300,000 (i.e. half of the $400,000 plus half of the pension amount of $200,000). If the goal is to have a “clean break” at the time of the settlement, then this is one way to get it. The recipient spouse receives $300,000 of the current total of $400,000, and then has no further claims. The pension-holder keeps the remaining $100,000 in assets and all of the pension ($200,000), for a total of $300,000. It should be obvious that the spouse who receives the greater share of assets will eventually have to convert some of those assets into income, and conversely the pension-holder may be renting indefinitely, no longer having (typically) the use of the family residence. While the spouse may feel entitled to both sole owner ship of the family home, RRSP’s, etc. and half of any pension, one can see that that is unrealistic under a typical 50/50 division. Finally, note that in the Boston case, the division was roughly 50/50, following the motions judge’s decision. The support awarded in the original settlement would have paid Mrs. Boston significantly more than 50 percent of the overall total, which the motions judge presumably would have thought unjust.
The critical point in such cases is that an agreed share of future income (base income plus pension gains) can either be awarded as a lump-sum or as a share of monthly or annual income. If the same dollar is paid out twice then double-dipping is the result, while if (for example) future pension increments are not counted in future income, the support provided will be too low.