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  • When an asset becomes income

    My soon to be ex-wife and I went through the mill that is known as Canadian Divorce Law and by the time it is all said and done (which is never) she will have received over one million from me (thus my online name).

    I will keep the emotional part out of this message and describe my situation. I am a government employee. When I became a government employee (before I met her) I apparently became entitled to one week of severance pay for each year I worked. This is a very generous amount and the government has recently started the process of ending severance as an entitlement as part of recently negotiated contracts. Yes, I am fortunate to have this benefit and yes it is out of whack with other contracts outside of government and yes it is time for it to be over. I now have the option of pulling a portion or all of this amount out now (before the end of January) or waiting until I retire or end my service with the government (eleven years from now).

    When we entered into the process of disclosing and settling on assets I was quite surprised to have to disclose the amount of severance pay that had accumulated during our time of marriage. I really had no expectation to see this money until I retired and thought it was simply an extension of my employment period. I thought that when I retired I would just continue to get 28 weeks of salary, every two weeks, and then go on pension. This is not the case. Government severance, at the time of our settlement, was paid as a lump sum on retirement.

    I considered severance as a theoretic asset as I could not access the money or transfer it out as I could with my pension. Living in a government town, all local family law experts are well versed in the Pension Benefits Division Act (PBDA), and how to access accumulated pension and how to divide it on divorce. Severance pay is not considered as part of pension and was not accessible to me; in other words, my ex was about to receive a cash advance on money which, at the time, I would not be able to touch or see for well over a decade. Based on the advice given to me by my lawyer I really had no argument to hold onto her portion of my severance until I actually received it and therefore listed it on the Net Family Property Statement. Her portion of the after tax value was determined to be valued at more than $10,000 and she got it, as a cash advance in my view, and it hurt me financially and I carry current personal debt as a result.

    The asset has now turned into potential income.

    Our agreement bases child support payments on my annual income. If I pull all of the severance pay out before the end of this year I am obligated to pay close to an additional $10,000 in after tax child support next year. Read this again if you like – additional. I presented, as my position to her, that since we had agreed to my severance as an asset, rather than income, she should not have access to any portion of it as the issue is settled. There was accrual of this asset prior to marriage, there was accrual of this asset after marriage, and there was an increase in value since the settlement. Our final agreement states that each of us may dispose of property (assets) as if “he or she were unmarried”. She very graciously will allow me to not include the portion we settled on (in 2008) for purposes of child support next year, however she will not consider the pre or post marriage portions as an asset and will not consider the increase in value since the time of separation. She wants any amount over what is listed on the property statement to be considered as income and wants this amount to be used in the calculation of child support.

    Based on what she is allowing me, I will only have to pay an additional $5,000 in after tax child support next year. Read this again if you like – additional.

    OK, so yes, based on the current views of the courts severance is income and income is relative to the standard of living the children should expect and the recipient (in this case the mother) who has them more than 60% of the time is entitled to these payments for the benefit of the children.

    I of course have no control over how this additional money will be spent and must, based on the good judgment of the Canadian legal system, expect that she will do what will be right for the children. That is to say she would never consider taking an out of country winter vacation (without the kids), replenish the never ending flow of wine from the box in her fridge, continue to have my daughter pay for her own clothes and shampoo, have my daughter pay for her driving lessons. It would be unimaginable that she would buy a round of shooters for her friends at the local bar in celebration of yet another success story in fleecing her evil ex husband. But I digress.......

    So, although I am not a lawyer I do think there are others that can benefit from my experience. First, for government workers, if you are listing severance as a shared asset on your Net Family Property Statement, you should also include the accumulated portion of severance as an asset at time of marriage. By listing it as an asset, it is harder for the other party to argue it as income. Second, in consideration of severance as an asset, there should be a clause written into your agreement effectively agreeing that severance is an asset, and as such should not be considered as income in the future, and like many assets, it is likely to increase in value over time. My ex has in essence agreed to some of this, but she is still willing to mix asset and income for the non-listed portions as interchangeable commodities (which are interchanged to her advantage of course). Third, for other assets that have future liquidity that may land on line 150 of your tax return, a separate clause for exclusion from income should be written into the agreement, as, in consideration of this being an asset, it should not be considered as an asset and income at the same time.

    After losing my yard, my deck, my pool, my garage, my car, my furniture, my house, my severance, my pension and the proper access I deserve to my children I am simply unable to fight this in court. It is a flaw that needs attention and maybe someone who can afford a good lawyer can move this forward to set a precedent. I cannot.

  • #2
    I am in a similar boat except not as humiliating. Not many people have the intelligence nor education to understand the double-counting you are talking about. Get ready to keep paying out the ying yang.

    Welcome to our modern world, governed by lawyers and accountants who know nothing about economics and yet, pretend they know it all. What little they do know is poison.
    Last edited by AnarX; 10-17-2011, 11:06 AM.

    Comment


    • #3
      I don't think the double counting is so hard to understand, although in this case, maybe I'm wrong, because I'm not sure I agree with Justoveramillion's assessment of the unfairness.

      As part of the asset division, the severance was divided in half and equalized, much like a pension. So she technically has her half of the severance already, while he would have no access until retirement. This is unlike a pension for her.

      Now, due to the system being discontinued, the severance is being paid out early, instead of being an income bridge between end of work and retirement. It will show up on his tax as a lump sum of income. This will raise the amount of CS he is required to pay next year by a not insignificant amount, with the end result that his ex has now received more than half of the original asset instead of her fair share. This is the unfairness he perceives. It's much like the classic unfairness of people who have indefinite spousal support: the ex gets half the pension up front, and then when retirement happens, the spousal support obligation is being paid from the pension income. Net result is that the ex gets more than half the pension, when you add it up. This unfairness has been in the system for years, and it is unlikely judges don't understand the math.

      However, I think the key thought here is that upon separation, the severance asset was not going to be paid out until his retirement, at which point he would not likely, depending on the ages of the children, still have a child support obligation. So had it been paid out as planned at the time of separation, he would have been able to keep his full half. On the other hand, if the children were still in school, he'd have been paying from his share that way too, it just wouldn't be as noticeable because he wouldn't be getting salary income anymore at that point, just the severance before his pension kicked in. So, likely his income from the severance asset would have been less, and his CS obligation would be reduced. This means his ex wouldn't be getting as large an extra share of the severance as she gets now with the early payout.

      But I think a bit of bitterness at his ex is creeping in, as perhaps she does things with the CS money that he does not approve of, and he perceives it as not to the benefit of the children. That's a completely separate flaw of the divorce and child support system, unrelated to severance.

      Say you had a conscientious ex who DID use any bonus money to benefit the children somehow. Bought them new bedroom furniture or new bikes or a piano and lessons or whatnot, that would not ordinarily have happened without the 'windfall.' Would you be as upset? So your problem is as much with your ex's behaviour as it is the severance system, and you are confounding the two.

      Lastly, as I had it explained to me, government employees have a choice about how to receive their severance. They can take it in a lump sum now, defer it to retirement as before with the difference that it won't be increasing anymore, or a combination of the two. Why not just keep it as an asset that turns into income at retirement instead of taking the lump sum now? Maybe by then you won't have a CS obligation. Or maybe negotiate with your ex to do something with the lump sum that you know will benefit the kids, such as their RESP, or new bikes x2 for both homes, or a piano for each home, or cover the big school trips this year, or sign them up for riding lessons, or whatever is in line with your children's interests. An extraordinary expense that you would both have not been able to afford otherwise.
      Last edited by Rioe; 10-17-2011, 11:36 AM.

      Comment


      • #4
        I actually had a hard time following the flow but it did finally click in....

        This severence type accumilation benefit is definately an asset - no different than a retirement pension. Ass such it will be added to the holders net worth for equalization purposes. This will be if the benefit is left there or it is actually cashed in to cover the eventual liability when the equalization payment must be made at the end. This is common, if you also have a good retirement pensionthe first will be nothing coompared to the obligation to divide the accumilated pension during the marriage - this often can be the most significant asset, even larger than any equity some people have in the matramonial home.

        So there is the option of leaving the severance there intact and finding another asset of equal value to transfer that will be equal in value. Equalization is about money - a straight dollar amount so an option in this case would be to allow the unequal distribution of the equity within the home - enough to cover the equalization payment which I am sure can be one of the last nails coffin of perpetual poverty for some payors.

        To the issue of taking the super holiday, without the kids. Fact - I posted the full story of my friend here in Ontario, who found himself in arrears with an ex who was financially doing ok. Point was he managed to get his 20K back payment when he got a lump sum. His Ex went and bought a new car the next day in cash. My friend went back to court and the decision was for the EX to RETURN my friends CS payment in full. The judge then set a new amount for future payments (as my friend's income had drastically lowered to no fault of his own - he did not do anything aboiut it because he wanted to do right by his daughter which by now his EX had figured every way possible to deny him access) put an order for access to begin imediately or be in contempt and as far as the lump payment....... the judge said that she obviously did not understand the concept of CS and since it will stay with the father he looks to be a father that understands then requirement to support his child is a serious one and the funds are indeed intended to be channeled directly to benefit the child. His daughter was 4 at the time - he kept the 20K in a seperate account and when it came time to pay for her school, she was then 18 and he gave the 20K and the accumilated interest directly to his daughter to pay for her education.

        This happened almost 30 years ago and perhaps the laws have changed since then but is there still a recourse in a similar situation where the payee has without a doubt used CS in a way that was not to the benefit of the child???

        I also agree with Rioe in adopting a truely unique way of resolving a dispute of this nature by remembering that, as it should be, both parents have thier own idea of what is right. This idea truely brings the spirit of good parenting for the sole benefit of their chilren...... again what this is really all about.

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        • #5
          She can't double dip. If she already got half the severance pay as property, she cannot now claim it as a result of increase in income.

          Do not take the severance out if you don't have to.

          But if you do have to, talk to a lawyer or get an Order that sets your income minus that payout.

          Comment


          • #6
            It's not a flaw in the system. This happens lots and the Court knows how to deal with it. Go to your local law library and look it up or something.

            Comment


            • #7
              Originally posted by ddol1 View Post
              I
              This happened almost 30 years ago and perhaps the laws have changed since then but is there still a recourse in a similar situation where the payee has without a doubt used CS in a way that was not to the benefit of the child???
              It is not so much that laws change as it is the trend of case law. A decision from 30 years may or may not carry weight today. There are thousands of decisions since then, and each will have had an incremental effect on case law.

              I have read recent cases where a judge will consider a large payment of retroactive CS to be "a transfer of capital", meaning just a windfall for the receiver, and not support for the child. This is usually found when the child is at or near 18 and CS would end and it is obvious the money will not go to the child's benefit.

              The opposite argument is that the custodial parent has been struggling to support the child with insufficient CS paid over the years and perhaps went into debt so the lump sump payment is certainly money owed. It can be argued both ways and depends on the circumstances.

              Comment

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