Division of CPP "unadjusted pensionable earnings" upon divorce and separation.

The Canada Pension Plan, R.S.C. 1985, c. C-8, (the "CPP Act") allows for the equal division of pension credits (called "unadjusted pensionable earnings") accumulated by both spouses or common law partners during their relationship provided that certain requirements are met. Once the Canada Pension Plan ("CPP") administrator receives confirmation of the termination of the relationship along with other prescribed information, the credits earned by each partner in each year of their relationship may be combined and then divided in half such that each partner receives an equal number of credits regardless of relative earnings. However, because of certain "drop-out" provisions (which allow a number of years to be disregarded when determining CPP benefit entitlement), a division of pension credits may reduce one party's entitlement without benefiting the other party. It is therefore important to recognize that there are situations in which a division of CPP pension credits does not benefit either party. Some such situations are discussed below.

While there are three types of CPP pension benefits--retirement pensions, disability benefits and survivor benefits--this paper will focus primarily on the retirement pension as it is the CPP benefit affecting most people in Canada and is therefore a relevant consideration in almost every divorce or separation proceeding.

CANADA PENSION PLAN RETIREMENT BENEFITS--THE BASICS

As a general rule, every person in Canada over the age of 18 who earns income from employment or from self-employment must contribute to CPP. The amount contributed is based on the amount of income earned. CPP keeps track of each contributor's "pensionable" earnings and the contributions made on those earnings over the years; these become the contributor's pension "credits" and are used to determine pension entitlement.

A person is eligible to receive CPP retirement pension if he or she has made at least one valid contribution to the CPP and is either (a) at least 65 years of age, or (b) between the ages of 60 and 64 and has substantially or completely stopped working.

The amount of CPP retirement pension benefits paid out is based on how much and for how long a person contributed to the plan. The longer a person contributes and the greater the contribution (to the maximum level allowed of $1,673.20 based on the "year's maximum pensionable earnings" of $39,100 in 2002), the greater the benefit ultimately paid out. The length of time a person may contribute to CPP is called the "contributory period". The contributory period begins at age 18 or January 1, 1966, whichever is later, and ends upon receipt of CPP retirement pension, age 70 or death, whichever is earlier.

CPP "protects" each contributor's pension by making certain adjustments before determining entitlement. For example, CPP "drops out" some low-earning years during the contributory period before determining entitlement (thereby increasing the amount of pension benefits). Specifically, 15 percent of the lowest earning years in each person's contributory period are dropped out. For example, a person who contributes every month from the age of 18 until age 65 will have contributed for 47 years. The seven years (15 percent of 47 years) in which that contributor's unadjusted pensionable earnings are the lowest will be dropped out before benefit entitlement is determined.

CPP also takes into account low-income (and no income) earning years while a person is raising children under the age of seven. To qualify for the child rearing drop-out provision (the "CRDO"), the contributor or partner must have (a) received family allowance or been eligible for the child tax benefit (even if the contributor did not receive a benefit) and (b) had reduced earnings because he or she stayed home or reduced participation in the paid labour force to be the primary caregiver of a child under the age of seven and born after December 31, 1958. A contributor must apply for the CRDO and the application should be made at the same time the contributor applies for any CPP benefit.

Seven years is the maximum CRDO allowed per child. If, for example, the earnings of a "family allowance recipient" (the CPP Act does not use the term "parent") were reduced for only three years as a result of that person being the primary caregiver of a child, then only three years may be dropped out. If a family allowance recipient with reduced earnings because of being the primary caregiver has one child and three years later has another, the maximum number of years that could be dropped out is 10. However, if the two children were born seven years apart, 14 years may be dropped out.

By allowing certain low-earning years to be dropped out, CPP assists each contributor to increase his or her ultimate entitlement. However, it is these drop-out provisions that can create difficulties in relation to credit splitting upon divorce or separation.

CREDIT SPLITTING UPON DIVORCE OR SEPARATION

Credit splitting is designed to recognize that in a marriage or common law relationship, both partners share in the building of assets and entitlements, including CPP. Therefore, upon dissolution of the relationship, CPP credits should be shared between the parties. As mentioned above, credit splitting is intended to work by increasing the credits of one partner and decreasing the credits of the other such that, for the period of time the partners cohabited, each partner receives the same amount of credits regardless of their relative earnings. Thus, credit splitting works to the advantage of the lower income earner and to the disadvantage of the higher income earner.

Different rules for credit splitting apply depending upon the year in which the couple divorced or separated and depending upon whether the couple was married or in a common law relationship. Credit splitting was introduced on January 1, 1978; credit splitting for parties divorced or separated before that date is not available. Otherwise, the following rules apply:

Divorce or Annulment of Marriage on or After January 1, 1978, and Before January 1, 1987 (CPP Act s. 55)

A person whose marriage ended in divorce or annulment on or after January 1, 1978, and before January 1, 1987, could request that CPP credits be split provided that:

(a) the couple lived together for a minimum of 36 months during the relationship;

(b) the divorce or annulment was recognized by Canadian law; and,

(c) the application for credit splitting was made within three years of the effective date of the dissolution of the marriage (unless both parties agree in writing that the credits can be split at a later date).

Divorce or Annulment of Marriage on or After January 1, 1987 (CPP Act ss. 55.1(1)(a) and 55.11)

To be eligible for CPP credit splitting, spouses whose marriage ended in divorce or annulment on or after January 1, 1987 must have lived together for at least 12 consecutive months during the relationship. Immediately upon divorce or annulment, either party may request a split of CPP credits. There is no time limit within which such a request must be made.

Separation of Married Spouses on or After January 1, 1987 (CPP Act ss. 55.1(1)(b) and 55.11)

Married spouses who separated on or after January 1, 1987 but who have not divorced are also eligible for CPP credit splitting provided the couple:

(a) lived together for at least 12 consecutive months during the relationship; and

(b) lived separate and apart for at least 12 consecutive months following the end of the relationship.

Married spouses who separate but do not divorce must apply to the minister for a credit split. There is no time limit in which an application must be made unless one spouse dies, in which case the application must be made within three years of the death.

Separation of Common Law Partners on or After January 1, 1987 (CPP Act ss. 55.1(1)(c) and 55.11)

To be eligible for CPP credit splitting, common law partners must:

(a) have lived together for at least 12 consecutive months during the relationship;

(b) have lived separate and apart for at least 12 consecutive months following the end of the relationship (or less if one partner dies before the expiration of the 12 months); and

(c) apply within four years of the date the couple commenced to live separate and apart.

As a result of the coming into force of the Modernization of Benefits and Obligations Act, S.C. 2000, c. 12, CPP credit splitting is now available to common law partners of the same sex who separated after July 31, 2000.

Additional Points

The CPP Act does not provide for the division of pension credits for married spouses who separated before January 1, 1987, and who have not divorced. Nor does the CPP Act provide for credit splitting for common law partners of the opposite sex who separated before January 1, 1987, or for same sex common law partners who separated before July 31, 2000.

It is important to note that in the case of a divorce that occurred on or after January 1, 1987, CPP can split pension credits even if neither spouse requests the split. Section 55.1(1)(a) provides that once the minister is "informed" of the divorce and has received the "prescribed information", CPP credits will be split unless the minister determines a split would be detrimental to both parties (s. 55.1 (5)) or the couple have signed a binding "written agreement" (ss. 55.2(3), see below). The "prescribed information" is provided in s. 54 of the Canada Pension Plan Regulations, C.R.C., c. 385 and includes the following: social insurance numbers for each spouse, original marriage certificate or certified true copy and legal documentation proving divorce. A person applying for a credit split who is not a party, or who is not authorized by a party, must indicate why the application is being made and why the information is being supplied to CPP. These requirements make it unlikely that any person other than a party or a person authorized by a party could successfully cause a credit split to occur. See, however, in Jones v. Asante (1995), 7 B.C.L.R. (3d) 122 (S.C.), where CPP received notice of the parties' divorce from the Central Divorce Registry and then requested that the wife provide the prescribed information. A credit split ensued even though neither party requested it. While CPP no longer receives information from the Central Divorce Registry owing to privacy concerns, it is possible that CPP could be informed of a divorce from a similar entity and a situation like that in Jones v. Asante could ensue.

Letourneau J.A., for the Federal Court of Appeal in Canada (Minister of Human Resources Development) v. Wiemer (1998), 42 R.F.L. (4th) 242, described ss. 55.1 and 55.2 of the CPP Act as establishing a "regime of mandatory division of unadjusted pensionable earnings" in situations where CPP has received the necessary information. The only exceptions to the mandatory nature of the "regime" are found in ss. 55.1 (5) and 55.2(3). Section 55.1(5) grants the minister the discretion not to make a division where doing so would be detrimental to both spouses. (1) Section 55,2(3) provides that when a "written agreement" signed by both spouses indicates the parties' agreement not to divide CPP credits and otherwise meets certain strict criteria, the minister will be bound by the agreement. As Letourneau J.A. stated at para. 20, "[i]t is clear under the Act that division of unadjusted pensionable earnings is the rule, non-division the exception."

The effectiveness of a written agreement executed pursuant to s. 55.2 (3) is dependent upon when it was signed, the province in which it was signed and the wording used. Written agreements entered into before June 4, 1986 that specifically give up the right to split CPP credits are binding on the minister. However, written agreements entered into on or after June 4, 1986, even if they specifically state a party gives up the right to credit split, are not binding on the minister unless the requirements of s. 55.2(3) are met. Those requirements are:

(a) the written agreement must contain a provision that expressly mentions the CPP Act and indicates the intention of the parties that there not be a division of unadjusted pensionable earnings under sections 55 or 55.1;

(b) such a provision must be expressly permitted under the provincial law governing such agreements;

(c) the agreement must have been entered into in accordance with the time limits prescribed in s. 55.2(3)(c) (which essentially provides that the written agreement must be signed before divorce or, in the case of separation, before an application for division is made); and

(d) the provision in the agreement has not been invalidated by a court order.

Currently, British Columbia, Saskatchewan and Quebec are the only provinces in which provincial law allows couples to agree not to split CPP pension credits. In B.C., the governing legislation is the Family Relations Act, R.S.B.C. 1996, c. 128 (the "FRA"). Section 62, enacted on July 1, 1995, states:

   A marriage agreement or other written agreement between spouses entered
   into on or after June 4, 1986 may provide that, despite the Canada Pension
   Plan, there be no division of unadjusted pensionable earnings under that
   Act.

Section 80(1)(c) of the FRA provides:

(1) A spouse may enter into a written agreement with a contributor respecting one or more of the following: ...

(c) a waiver by the spouse under section 62 of any right to or interest in a division of the unadjusted pensionable earnings under the Canada Pension Plan;

According to the FRA, "spouses" may enter into "written agreements" in order to prevent a division of CPP pension credits. The definition of "spouse" in the CPP Act was repealed on July 31, 2000 and remains undefined in that Act. The FRA defines "spouse" at s. 1(1) as a person who:

(a) is married to another person,

(b) except under Parts 5 and 6, lived with another person in a marriage-like relationship for a period of at least 2 years if the application under this Act is made within one year after they ceased to live together and, for the purposes of this Act, the marriage-like relationship may be between persons of the same gender,

(c) applies for an order under this Act within 2 years of the making of an order

(i) for dissolution of the person's marriage,

(ii) for judicial separation, or

(iii) declaring the person's marriage to be null and void, or

(d) is a former spouse for the purpose of proceedings to enforce or vary an order.

Common law partners may bring themselves within Parts 5 and 6 of the FRA (i.e., they can also complete "written agreements" which provide that CPP pension credits will not be split) by virtue of s. 120.1. However, it has been determined that s. 120.1 does not have retrospective application: Wiest v. Middlekamp (2001), 86 B.C.L.R. (3d) 155 (S.C.) and Johnstone v. Wright, 2001 BCSC 838, [2001] B.C.J. No. 1202. Therefore, only common law partners who signed a written agreement on or after February 4, 1998 (the date on which s. 120.1 came into force) will be able to prevent a CPP credit split.

THE EFFECT OF CREDIT SPLITTING ON CPP ENTITLEMENT

As was mentioned above, credit splitting may reduce one CPP contributor's entitlement without benefiting the other party owing to the operation of the dropout provisions. Consider the following example: Bob begins working and making CPP contributions at age 18. He works consistently until age 65. At age 35, Bob marries Sue. They are married for five years during which time they have one child. Sue also started working and contributing to CPP at age 18. She married Bob when she was 30 years old. Sue stayed home to raise their child for the five years of their marriage. At the end of the marriage, Sue returned to work but at a reduced salary as she continued to act as the child's primary caregiver. Her earnings eventually returned to normal and she continued working until age 65. Sue was successful in her application to have Bob's CPP credits split.

In this situation, credit splitting may not benefit Sue and may be a detriment to Bob. When CPP entitlement is ultimately determined, Sue will be eligible to have the five years she stayed at home to raise their child and the next two years in which she had reduced earnings dropped out under the CRDO. She will also be entitled to have 15 percent of her lowest earning years dropped out. Thus, the credits Sue receives as a result of the credit split may be dropped out as they coincide with the years in which Sue is eligible for CRDO. In this case, Sue would receive no benefit from the credit split while Bob's CPP entitlement would be negatively affected as his credits would be reduced because of the credit split.

However, what if Sue's post-divorce income was so low that the pension credits she contributed annually to CPP were less than the credits she received as a result of the credit split? In that case, CPP may not deduct the CRDO, and instead, CPP may only deduct 15 percent of Sue's lowest earning years. In this case, the credit split would benefit Sue.

As can be seen from the foregoing example, the determination of CPP entitlement is very complicated. CPP has advised that the various drop-out provisions are only utilized if they benefit the contributor (and, of course, it is difficult to imagine many situations in which the 15 percent drop-out provision would not be beneficial). If a person receives credits via a credit split which coincides with the CRDO years, and those credits benefit the contributor when CPP entitlement is determined, the credits will not be dropped and the CRDO will not be used. However, if the credits do not benefit the contributor (i.e., the credits received are less than the lifetime average), the CRDO will be applied and the credits "dropped".

Although less likely, credit splitting may also not be beneficial when a couple does not have children. For example, consider an over-achieving dot.com youth who from age 18 earns a salary that requires him to contribute the maximum to CPP each year during his contributory period. The dot.com wizard, who got married just as the tech market crashed, suffers a nervous breakdown and stays home for five years. His wife, who supports him for that five years, gets fed up and they divorce. He goes back to work and starts earning the same income as before. He applies for a credit split and receives it. This will likely be of no benefit to him as he is entitled to have 15 percent of his lowest income earning years (i.e., those years which correspond with his staying at home) deducted when benefit entitlement is determined.

At the time of divorce the parties may not be able to determine whether credit splitting is worthwhile. In situations where the couple's relationship endured for a lengthy period and there was a large disparity in earnings, credit splitting will generally benefit the lower income earner. However, in other situations, particularly where the parties were together for a short period of time at an early age, it will be very difficult to anticipate the ultimate effect of a credit split.

CPP, like other pensions, is considered an asset by the courts when determining the division of assets following divorce or separation. However, as demonstrated by the discussion above, it is unique in the sense that the equal division of the asset may not benefit either party. Therefore, for counsel automatically to request a court order to divide CPP pension credits accumulated during the marriage or common law relationship (assuming a written agreement has not been signed), and for the court to simply grant such an order would be imprudent. This is so because a credit split is final. Once a contributor's credits have been split, they cannot be added back at a later date, even if at that later date it is determined that the split did not benefit the party who received the credits.

This is a particular problem for persons in common law relationships. Unlike persons who divorced after January 1, 1987, who can request a credit split at any time (i.e., an ex-spouse can wait until he or she approaches an age when eligible to receive CPP and at that time determine whether the split would be beneficial), former common law partners must apply for a credit split within four years of the date of separation. Therefore, in the case of common law partners, again assuming a valid written agreement has not been signed, it is generally in the best interest of the lower income earner to apply for a credit split within the mandatory four years because while a split may not benefit him or her, it will not be detrimental.

Because of the operation of s. 5 5.2(2), court orders made after June 4, 1986 are not binding upon the minister for the purposes of dividing unadjusted pensionable earnings. Thus, a court order prohibiting a party from applying or requesting a credit split will not bind the minister who will perform the division assuming the statutory requirements are met. Nor is a court order apportioning one party a 100 percent interest or a zero percent interest in accumulated CPP pension credits binding on the minister. Nonetheless, in Gallant v. Gallant, [2000] B.C.J. No. 1173 (S.C.), the parties had not signed a valid written agreement. The court held it would be fair to divide the husband's CPP pension equally but, as it would be unfair to so divide the wife's CPP, she was apportioned a 100 percent interest in her pension. Such an order would not be binding upon the minister and in fact would be impossible for CPP to implement given the way in which a credit split is calculated. The effect of s. 55.2 (2) was not considered by the court.

In Coulter v. Coulter (1998), 43 R.F.L. (4th) 168, the B.C. Court of Appeal also reapportioned CPP unadjusted pensionable earnings but in the context of disability benefits in pay. CPP disability benefits are determined by a formula that takes into account a fixed amount and an amount dependent upon accumulated unadjusted pensionable earnings. Granting a credit split in favour of the partner who will not qualify for CPP for a number of years has the effect of immediately reducing the disability benefit in pay (by reducing the second component) without granting the partner of the disabled person an offsetting amount until the partner qualifies for CPP. In Coulter, the Court of Appeal reapportioned the CPP disability benefit 100 percent in favour of the disabled contributor and protected the partner by awarding support in lieu of CPP unadjusted pensionable earnings. While such an order would not be binding on the minister because of the operation of s. 55.2(2), the partner of the disabled person would be in breach of a court order by applying to CPP for a division and would likely, in accordance with equitable considerations, risk a reduction or loss of the support granted in lieu of disability benefits.

While Mackenzie J.A. explicitly held Coulter was not binding on subsequent courts (who may have the benefit of expert testimony regarding disability benefits), it provides a useful example of an effective way in which the court can remedy a situation in which it is clear that a credit split would be unfair or inequitable. However, as discussed above, this may be difficult to determine.

CONCLUSION

Because the division of CPP unadjusted pensionable earnings may reduce a contributor's entitlement without benefiting a spouse or common law partner, it is not always in both parties' interest to seek such a split. Counsel should take particular note of situations where a divorce or separation of married spouses occurred on or after January 1, 1987 and where a valid written agreement was not signed. In such situations, there is no time limit within which such spouses must apply for division of CPP. credits. For such Spouses, particularly those who have been married for a relatively short period of time, it may be less prudent to request a credit split immediately upon divorce or separation rather than to wait until later years when it may be easier to assess the impact of a credit split. It is therefore important that counsel and the court assess the effect of a credit split on the facts of each case. Of course, if a valid written agreement has been signed the point is moot as the minister will not split CPP credits unless both parties subsequently agree in writing that the credits should be split.

ENDNOTE

(1.) For example, because unadjusted pensionable earnings are not accumulated on annual incomes of less than $3,500 (called the "year's basic exemption"), a credit split will be not be performed where to do so would result in both spouses or partners being attributed with an income of less than the year's basic exemption.

Kimberley Wendel is an associate in the litigation group at Blake, Cassels & Graydon LLP in Vancouver. Prior to joining Blakes, Ms. Wendel clerked at the British Columbia Supreme Court in New Westminster.