Understanding Double Dipping in Family Law Separation Agreements
Navigating the complexities of family law during separation can be daunting, especially when it comes to dividing assets and ensuring fair financial settlements. One particular aspect that often arises in separation agreements is the concept of “double dipping.” This principle can significantly impact the division of assets and financial support arrangements between separating spouses. In this article, we’ll delve into what double dipping entails, its implications, and how it is addressed in BC family law separation agreements.
Understanding Double Dipping
Double dipping, also known as “double counting” or “double recovery,” occurs when the same pool of assets or income is considered twice, once for the purpose of property division and again for the purpose of support payments. Essentially, it involves using the same asset or income stream to satisfy multiple financial obligations, leading to an unfair or inequitable outcome for one party.
Examples of Double Dipping
Retirement Income Account
One example is when a retirement account (or pension) is divided as part of the property settlement and then the income generated from that account is also considered for spousal support calculations, which would result in the same asset being factored into both property division and support payments.
Family Business
A second, more nuanced, example arises when dividing the value of the family business and at the same time determining the business owner’s total available income from all sources (including the business) for purposes of calculating spousal support, referred to as Guideline Income.
The fair market value of a business is commonly determined by capitalizing its income (more precisely, the income in excess of a market compensation for the business owner/operator). Since the valuation of a business is prospective in nature, its fair market value is theoretically the present value of all expected future income. If spousal support is based on total income available to the owner, which includes the business income, and the spouse is also awarded 50% of the value of the business, then the spouse is effectively receiving the same income twice, which is considered double-dipping.
Some Case Decisions
Retirement Income example
A leading case with respect to responsibility for spousal support after retirement of the payor spouse is the Supreme Court of Canada decision in Boston v. Boston, 2001 SCC 43 (CanLII), [2001] 2 S.C.R. 413. The main issue in that case was that of “double recovery”, whether the payee spouse should be able to both receive the benefit of the division of the pension, as an asset, then again as a source of income from the payee spouse. Quoting from the headnote:
“There is no reason per se that spousal support cannot continue past the retirement date of the pension-holding spouse, but need, ability to pay and double recovery must all be considered. It is generally unfair to allow the payee spouse to reap the benefit of the pension both as an asset and then again as a source of income, particularly where the payee spouse receives capital assets which she uses to grow her estate. To avoid double recovery, the court should, where practicable, focus on the portion of the payor’s income and assets which have not been a part of the equalization division when the payee spouse’s continuing need for support is shown. This would include the portion of the payor’s pension earned after separation and not subject to equalization. Double recovery cannot always be avoided, and a pension previously divided can also be viewed as a maintenance asset, where the payor has the ability to pay, where the payee has made a reasonable effort to use equalized assets in an income-producing way and despite this, economic hardship from the marriage or its breakdown persists. Double recovery may also be permitted in spousal support orders/agreements based upon need as opposed to compensation.”
Business Income example
In Lazorek v. Quinn 2010 BCSC 668, Justice J.S. Harvey stated, in his Reasons for Judgement, at paragraphs 46, 47 and 48;
46. The defendant resists the adding of some or all of (the company’s) pre-tax profits to his annual income for spousal support purposes and says, in effect, that to do so would mean he must continue to share the profits of the company in the future, despite buying it at its fair market value, including an allowance for future profits and goodwill.
47. The logic of such argument is, in my mind, irrefutable. In purchasing the plaintiff’s share of Whistler Air, the defendant, in effect, prepaid the plaintiff for one half the capitalized value of the future profit of Whistler Air.
48. Lamentably, for the defendant’s standpoint, his position does not accord with the law (citing commentary from Stromberg-Stein J. in Bozak v. Bozak, 2008 BCSC 1458).
Double-dipping is acknowledged (per Justice Harvey, it is “irrefutable”), but apparently based on case law it is not always considered to be unfair. The decision as to whether double-dipping is permitted or not rests on the specific facts and circumstances of each case.
Addressing Double Dipping in BC Family Law
The above scenarios can lead to an unfair distribution of resources and may not align with the principles of fairness and equity that underpin family law. Moreover, double dipping can complicate the negotiation process and prolong the resolution of financial matters in a separation agreement.
In British Columbia, family law aims to achieve fair and equitable outcomes for separating spouses while considering the unique circumstances of each case. When it comes to addressing double dipping in separation agreements, the courts apply certain principles and guidelines to ensure fairness and avoid unjust outcomes.
One approach to addressing double dipping is to expressly exclude certain assets or income streams from being considered twice in the division of property and determination of support payments. This can be achieved through clear and precise language in the separation agreement, specifying which assets or income sources are exempt from double counting.
Another method is to differentiate between capital assets and income generated from those assets. By making this distinction, it becomes possible to allocate the capital asset itself during property division while treating any income derived from that asset separately for the purpose of support calculations. For business owners, that might involve imputing a level of income that is limited to the market compensation assumed in the business valuation, and not the actual income extracted from the business.
Furthermore, the courts may apply various legal tests and precedents to determine whether double dipping has occurred and to what extent it should be remedied. Factors such as the nature of the assets involved, the financial needs of each spouse, and the overall fairness of the arrangement are taken into account when evaluating double dipping claims.
It’s important for separating spouses to seek legal advice from experienced family law practitioners who can provide guidance on how to address double dipping issues effectively in their separation agreements. By understanding their rights and obligations under BC family law, spouses can work towards achieving a fair and equitable resolution that considers the principles of fairness, transparency, and respect for each other’s financial interests.
Conclusion
Double dipping in BC family law separation agreements presents a complex issue that requires careful consideration and negotiation by separating spouses and their legal representatives. By understanding the concept of double dipping, its implications, and the ways it can be addressed within the framework of BC family law, spouses can strive to reach fair and equitable settlements that reflect their respective financial circumstances and needs. Clear communication, transparency, and legal expertise are essential in navigating the complexities of double dipping and achieving a satisfactory resolution in separation agreements.
