A lump sum transfer of pension entitlement from a plan will occur in five situations:
- when the division is of funds in a defined contribution account [see Chapter 3];
- when the division is of benefits determined under a benefit formula provision, the pension has not yet commenced, and the spouse chooses to take a lump sum transfer (if permitted by the plan) at some time after the member becomes eligible for the pension to commence [see Chapter 2];
- when the administrator requires the spouse to accept a transfer (for example, because the share is beneath a prescribed threshold, under FLA, s 139(b)];
- when a limited member dies before the benefits are divided, under FLA, s 124(4) (see para 8.12); and
- in other special cases where a plan is prepared to make the transfer option available to the spouse.
In most cases, the pension entitlement will be “locked-in” (see para 10.4) and must be transferred from the plan (to, for example a LIRA, LIF or another pension plan or be used to purchase an annuity). [Reg., s 26; PBSA, s 88]
Where the pension entitlement is not locked-in, it may be paid directly to the spouse as cash (although such a payment would trigger income tax consequences).
With respect to division of LIRA/LIFs, the law in B.C. has recently changed regarding the divisibility of LIRAs under the FLA. The BCLI Report on Pension Division: A Review of Part 6 of the FLA proposed that LIRAs, which have historically been divided under Part 5, should instead be divided under Part 6. The funds in these accounts are comprised of benefits transferred on a locked-in basis from a pension plan. LIRA accounts have similarities with pension benefits that support the application of Part 6 rules.[SN1]
The Family Law Amendment Act, 2023 implemented this policy change into the FLA, such that RRSPs (with no locked-in pension money) remain family property divisible under Part 5 of the FLA. [FLA, s 84(2)(e)]; however, Part 6 now applies to benefits in LIRAs.
| 10.1 Valuing the transfer | The separation agreement gives the spouse a share of the member’s unmatured benefits. They are determined by a benefit formula provision. The administrator has offered to make an immediate transfer of a sum of money to a LIRA to satisfy the spouse’s entitlement. How does the spouse know if it’s a fair share? |
| Such a transfer will be treated as a compensation payment in lieu of a proportionate share of the benefits. The spouse is not obliged to accept the trade-off. Reg., s 27 sets out some of the rules for calculating a transfer value in this situation. The valuation must make reasonable allowance for projected increases in the value of the benefits. Most plans that are prepared to make an immediate transfer, however, are structured to value the transfer on the assumption the member terminates employment immediately and does not commence receiving the pension until the normal retirement age (often 65). This usually places a smaller value on the benefits than is required under the Division of Pensions Regulation. A person who has doubts must either retain an actuary to verify the calculation or consult a lawyer. Note that most benefit formula plans will not accept a specified dollar amount as the transfer value but instead require the parties to specify a proportionate share (so the parties will need actuarial assistance to determine the proportionate share to specify in the agreement to generate a lump sum transfer amount). As to the impact of tax on a valuation, see para 11.24. |
| The legislation does not stipulate how to adjust the member’s benefits in this situation. Before offering this the option, a plan administrator should seek the member’s consent. | |
| 10.2 Can the spouse require the plan to transfer immediately? | The member’s pension has not yet commenced. The benefits are determined by a benefit formula provision. Under Part 6, the spouse is entitled to have the administrator transfer a share to a LIRA, LIF, annuity or another pension plan at any time after the earliest date that the member could elect to have the member’s pension commence [FLA, s 115(2); PBSA, s 88]. Can the spouse require a plan administrator to make a transfer before the member becomes eligible for pension commencement? |
| No. [See the Introduction to this Chapter for times when the transfer can be made.] Even after the member becomes eligible for pension commencement, the limited member will not be able to require a plan administrator to make a transfer if the member does not have the right to receive a lump sum transfer. [FLA, s 115(2)(b)] | |
| 10.3 Transfer to same plan | One of the transfer options available to a spouse is to transfer the share of the benefits to an account in the same plan. Can the spouse require the administrator to do this? |
| No. This is available only with the consent of the administrator. [See paras 2.42-2.43] | |
| 10.4 “Locked-in” benefits | What are “locked-in” benefits? |
| “Locked-in” benefits must be used to provide lifetime retirement income for the owner. If B.C. law applies, the life income can start when the person reaches age 50, [PBSA Reg., s 120 (2)(c)] If the member’s benefits are locked-in, a transfer of a share of them to the spouse must also be on a locked-in basis (that is, they cannot be cashed out and can only be used to produce a life income, subject to exceptions specified under the PBSA, s 69 for unlocking benefits). The lock-in rules that apply to the spouse’s transferred funds are the same as those that apply to the member: the former spouse becomes a “spouse owner” of the account. and may use the locked-in funds to produce a life income when the spouse owner reaches age 50. |
Another option is available where the funds are subject to the lock-in rules under the federal PBSA. In that case, funds transferred into a LIRA can be converted into a LIF for which there is no minimum age for the commencement of the life income. [See para 10.5]
Locking-in rules are determined by the pension benefits standards legislation of the territory having jurisdiction over the plan. The rules vary, so it is important to confirm the applicable legislation. For[SN2] more information, see PBSA,s 69, and also refer to the excellent resources on the B.C. Financial Services Authority website at:
www.bcfsa.ca
Unlocking pension benefits
The B.C. PBSA permits benefits in a pension plan to be unlocked in the following cases:
- small amounts: a deferred member, a retired member receiving life income type benefits and the surviving spouse of a deceased member can unlock the benefits if they do not exceed the prescribed amount, which is 20% of the Year’s Maximum Pensionable Earnings (established by the Canada Revenue Agency) for the calendar year in which the most recent determination of the commuted value of the benefits was made (PBSA, s 69(1); PBSA Reg., s 72(1));
- a terminal or life-shortening illness or disability: a plan member or other person who is currently entitled to benefits, other than a person receiving a defined benefit or target benefit pension, may unlock the benefits as a series of payments or a lump-sum if the person is suffering from an illness or disability that is certified by a medical practitioner to be terminal or likely to shorten the member’s life considerably (PBSA, s 69(3(a)); and
- non-residency: a plan member or other person who: is currently entitled to benefits may unlock those benefits if the person has been absent from Canada for 2 or more years and provides Canada Revenue Agency confirmation of non-residency in Canada; (PBSA, s 69(3)(b); PBSA Reg., s 72(3)).
| Unlocking benefits in a locked-in retirement account (LIRA) or life income fund (LIF) The B.C. PBSA permits benefits in a LIRA or LIF to be unlocked in the following cases: small amounts: if the value in the LIRA or LIF does not exceed 20% of the Year’s Maximum Pensionable Earnings (established by CRA) for the calendar year of the application (applying the test to individual plans, and not cumulatively to all of the owner’s LIRAs and LIFs). [PBSA, s 69(2), PBSA Reg., ss. 107, 126] A LIRA or LIF, however, cannot be split into smaller amounts to allow for unlocking. [PBSA Reg., ss 107(2), 126(2)] 65 or older: if the value in the owner’s LIRA or LIF does not exceed 40% of the Year’s Maximum Pensionable Earnings (established by CRA) for the calendar year of the application (applying the test to individual plans, and not cumulatively to all of the owner’s LIRAs and LIFs, as was required under the former PBSA). [PBSA, s 69(2), PBSA Reg., ss.107, 126]terminal or life-shortening illness or disability: PBSA, s 69(4)(a); PBSA Reg., ss 108, 127.non-residency: PBSA, s 69(4)(b); PBSA Reg., ss 109, 128. Andspecified circumstances of financial hardship: which include low income, medical expenses, rent arrears or mortgage arrears for a principal residence and rental payments needed to obtain a principal residence. [PBSA, s 69(4)(c); PBSA Reg., ss 110, 129—an option introduced in the new PBSA] | |
| 10.5 Federal locking-in rules | When may a former spouse use funds transferred to a Locked-In Retirement Account from a federal public sector plan (such as the RCMP Superannuation Plan) to produce a life income by a transfer to a Life Income Fund? |
| The Pension Benefits Division Act Regulation [s 17(1)] provides that a transfer of vested benefits is governed by the federal PBSA locking-in rules. Under the federal PBSA, the transfer to a LIF can be made at any age. The federal locking-in rules differ in some respects from the B.C. rules, and there are additional opportunities available to the LIF owner to unlock benefits (such as a one-time transfer of 50% of the funds, after the owner turns 55). |
| If the benefits are not vested, they are transferred to an RRSP or RRIF for the former spouse on a non-locked-in basis. | |
| 10.6 Unlocking—terminal illness | We have a former spouse registered as a limited member of our plan. The member is still some years from reaching retirement age. We have been provided with documents that establish that the limited member has a terminal illness. Our plan provides for unlocking benefits in that case for plan members. Can the limited member make this election as well? |
| Yes. A limited member has the rights of a member. The PBSA provides for unlocking in these circumstances. [PBSA, s 69(3)(a)] See paras 2.39 and 10.4. | |
| 10.7 Maximum transfer and treatment of the excess | When a member transfers benefits from a plan, the Income Tax Act specifies a maximum transfer value that can be rolled over into a LIRA or LIF, and any amount over the maximum transfer value must be paid out in cash to the member (less tax withholdings). [ITA, s 147.3(4)(d); ITA Reg., s 8517] Do the same rules apply to a transfer of funds from a plan to the credit of a former spouse when their relationship breaks down? |
| No. ITA, s 147.3(4)(d) applies only if the transfer amount does not exceed a prescribed amount. [ITA, s 147.3(4)(c); the prescribed amount is determined under ITA Reg., s 8517] The transfer to the credit of a former spouse when a relationship ends is under ITA, s 147.3(5), which does not contain a provision similar to subparagraph (d), meaning that there is no maximum limit on what may be rolled over into registered savings or income plan for the former spouse. The Registered Plans Directorate Technical Manual (in Chapter 4, at para 4.6) confirms that “transfers under subsection 147.3(5) of the Act are not subject to the prescribed amount limit in section 8517 of the Regulations”. If the member terminates employment, applies to transfer benefits from the plan to a LIRA or LIF, and a portion of the benefits in the plan exceeds the maximum transfer amount, a limited member would be entitled to a share of the excess. A limited member is entitled to a share of “benefits” in the plan, which includes, in addition to a pension, any “other monetary amount a person is or may become entitled to receive under the plan” (other than a refund of actuarial excess or surplus). [FLA, ss 113 and 110, definition of “benefit”). The amount that exceeds the maximum transfer amount comes within this definition (it is a “monetary amount” a member becomes “entitled to receive under the plan” even though the member cannot roll it over into a registered savings or income plan). As such, the limited member is entitled to a proportionate share of it. |
A spouse is the owner of a LIRA that was transferred from a defined benefit pension plan. The funds held in the LIRA were transferred to the owner spouse during the relationship, but the owner spouse accrued part of their benefit in the pension plan prior to the relationship. What portion of the LIRA is the non-owner spouse entitled to?
The non-owner spouse is entitled to their proportionate share of the LIRA (or LIF) benefit determined using the same formula that applies to the division of a benefit under a benefit formula provision. [FLA, s 117.1(4); Reg., s 17(1.1)] The parties are responsible for determining the non-owner spouse’s proportionate share of the LIRA (or LIF) benefit using information, including the period of time in which the pension was earned, from documents in the parties’ possession (for example a statement provided by the plan at the time that funds were transferred to the LIRA) or information obtained from the plan.
- LIRA/LIF transferred from a defined contribution account
A spouse is the owner of a LIRA that was transferred from a defined contribution account. The LIRA was transferred to the owner spouse during the relationship but some of the owner spouse’s contributions to the pension were made prior to the relationship. Is the non-owner spouse’s share of the LIRA determined based on the dates when the owner spouse contributed to the pension?
No. The non-owner spouse is entitled to their proportionate share of the LIRA (or LIF) benefit determined using the same formula that applies to the division of a benefit in a defined contribution account. [FLA, s 117.1(3); Reg., s 20(1.1)] In this case, the non-owner spouse’s proportionate share would be determined based on the balance of the LIRA account as of the entitlement date (the date the non-owner spouse became entitled to benefits), less the pre-relationship contributions together with the investment returns on the pre-relationship contributions. The parties are responsible for determining the non-owner spouse’s proportionate share of the LIRA benefit using information about the pre-relationship contributions obtained from documents in the parties’ possession (for example a statement provided by the plan at the time that funds were transferred to the LIRA) or information obtained from the plan.
- LIRA/LIF transferred from a hybrid plan
One spouse owns a LIRA that was transferred from a hybrid plan. How do the parties determine the non-owner spouse’s share of the LIRA?
The formula that applies for determining the non-owner spouse’s share of the LIRA (or LIF) will depend on the option or options that were available to the owner spouse under the pension plan text prior to the transfer.
If the plan text provided that the owner spouse would have received benefits under only one of the benefit formula provision or the defined contribution provision, then the non-owner spouse’s share of the LIRA (or LIF) will be determined based on the formula for proportionate share that applies to the division of those types of benefits. [FLA, s 117.1(8)] See paras 10.8 and 10.9.
If the plan text provided that the owner spouse was entitled to choose whether to receive benefits under either the benefit formula provision or the defined contribution provision, then the non-owner spouse is entitled to elect whether their proportionate share is determined using the formula that applies to the division of benefits under the benefit formula provision or the defined contribution provision. [FLA, s 117.1(7)]
- LIRA/LIF transferred from plan with no contributions during the relationship
A spouse stopped contributing to a pension plan prior to the parties’ relationship but the funds were transferred from the pension plan to a LIRA during the relationship. Is the non-owner spouse entitled to a portion of the LIRA?
No. If all of the contributions to or benefit accrual within the pension plan from which the LIRA (or LIF) originated were made prior to the parties’ relationship, then the non-owner spouse is not entitled to any portion of the LIRA under the FLA. This applies regardless of whether the LIRA was transferred from a plan under which benefits were determined under a benefit formula provision, a defined contribution provision, or a hybrid of the two.
- Unable to obtain information about the pension from which LIRA was transferred
A spouse is the owner of a LIRA that was transferred from a defined contribution account. The owner spouse was a member of the pension plan prior to the parties’ relationship but cannot obtain documents showing the amount of their pre-relationship contributions. How do the parties determine the non-owner spouse’s share of the LIRA?
If the owner spouse cannot obtain documents showing their pre-relationship contributions, then the parties may agree to use an alternative method for determining the non-owner spouse’s share of the LIRA (or LIF). [FLA, s 127] For example, if the owner spouse can establish the dates within which they contributed to the pension, then the parties may agree to use the formula that applies to the division of benefits under the benefit formula provision even though the LIRA was transferred from a defined contribution account. FLA sections 129 and 130, which allow the Court to reapportion or clarify the division of benefits, also apply to LIRAs and LIFs. [FLA, s 110.1] If a spouse owns a LIF and has been withdrawing from it during the parties’ relationship, then reapportionment may be necessary to fairly divide the balance remaining in the LIF between the spouses.
[SN1]Updated by Cynthia Callahan-Maureen (Min. of Finance)
[SN2]Adrian Rockwell (BC Pensions) – There is no corresponding closing parenthesis.