Family law is filled with items that cause confusion to people as they go through their separation. One reason for this is the misunderstanding that because something gets a certain treatment under the Income Tax Act, that it will receive the same treatment under family law. This is not always or even often the case. One of these items is severance. While treated as income under tax legislation, severance monies may be treated as property in the breakdown of a relationship. If severance is treated as property, it then becomes become divisible under the Matrimonial Property Act.
It is important in making this determination that the severance is treated one way or another. While being creative with apportioning the severance to either income or property may be appropriate, it is important to remember that the same amounts should not be treated as both income and property. This is to prevent any problems of double dipping.
When looking at whether severance will be treated as property, the following questions become important:
When was the severance received?
The date the severance is paid is critical. If the severance was paid ten years before separation and not used as an income supplement at the time, it becomes saved income during the marriage and weighs to the severance being divisible as property. If the severance is paid after the separation of the parties or very close to the separation, whereby the purpose of the severance is replacement of income which will take place outside of the relationship, this weighs to it being income and not divisible as property.
What was the severance package comprised of?
When the severance was received feeds into the second question of what comprised the severance. There are often multiple components of severance which can change the characterization. Monies for past service, such as a certain amount of severance for each year the job was held, can be seen as money that was earned within the marriage (for whatever part of that service took place in the marriage) and weighs towards it being treated as property. Severance for future income replacement which will be outside of the time frame of the marriage should be rightly treated as income as it may have to be used as such.
What was done with the severance once it was received?
Again tying into the above, the courts have determined that it is important to see how the severance was treated. If it was treated as income, and used to support the parties or family, likely it is of no consequence because it has already been spent. However, if these monies were taken and put into a savings account, this suggests that these monies were treated as property by the parties, regardless of the purpose of the severance originally was. Income saved eventually becomes property; it does not stay income forever.
If you have determined that a severance you are dealing with is likely property, remember that there is also the ability to distribute property in an unequal way taking into account numerous factors under s.8 of the Matrimonial Property Act. There is case law to support the unequal division of a severance, where it was found that the other party’s contribution was minimal.
At Soby Boyden Lenz, we have significant experience dealing with complex matrimonial matters including property and income. If you have any questions dealing with how certain items in your matter may be dealt with, or any other questions regarding the breakdown of your marriage or relationship, please contact us for a consultation with one of our associates or partners.