Under s. 15.2(1) of the Divorce Act, the court may "make an order requiring a spouse to secure or pay, or to secure and pay, such lump sum or periodic sums, or such lump sum and periodic sums, as the court thinks reasonable." The Family Relations Act says almost the same thing at s. 93(5).
Periodic payments are the most common form of spousal support. Periodic payments allow the payor and the recipient to make stable financial plans, and have the benefit of being tax-deductible for the payor. Periodic payments are also usually more affordable for the payor since few people have the cash lying around to make a large lump sum payment.
On the other hand, lump sum payments are attractive to payors who want to have done with their obligation and don't relish the thought of cutting a cheque each month to someone they're no longer very fond of. Recipients sometimes like the idea of a lump sum payment if the money will allow them to invest in a business or pay for education that will help them get back on their feet. Although lump sum payments aren't tax-deductible for payors, they're also not taxable income for recipients.
In the case of the Robinson family, by the time the case came to trial the husband was in his fifties, with a good income in the low six figures and living overseas with his new partner, and in recent years had suffered a number of heart attacks and a stroke requiring hospitalization. Quoting from the judgment, the wife sought a lump sum for the following reasons:
" The wife is now [in her fifties]. She is unable to become and remain economically independent and self-sufficient without ongoing financial assistance from the husband. She seeks an order that the husband pay ongoing spousal support for an indefinite period. However, because of his past behaviour, and in order to terminate all contact with the husband, she seeks an order that the spousal support be paid in a lump sum.
" The wife submits that both parties would benefit from a clean break, since they continue to have a difficult, stormy relationship and poor communication, which has not improved after many years. ...
" She cites a number of other incidents of miscommunication and discord between the parties regarding financial matters, including: the withdrawal of funds from the parties’ joint account; the concern over the payment of ___ funds; and the situation regarding the purchase of the ___ condominium.
" It is the submission of the wife that as the relationship between the parties has been strained since 20__ and became increasingly more difficult until the separation in 20__, and since the communication between the parties remains minimal and difficult, the clean break afforded by a lump sum payment is the appropriate form of spousal support in her circumstances.
" The wife deposes that the wait each month to see whether funds will be forthcoming exacerbates her [illness], and she believes the stress and anxiety have a negative impact on her [illness]. A lump sum will alleviate this concern."
The husband sought to pay on a periodic basis and said that a lump sum would be inappropriate for these reasons:
The trial judge began her analysis by quoting from an appeal case out of Ontario released earlier this year, Davis v. Crawford (I've put the important bits in bold):
" The husband submits that periodic payments of spousal support are appropriate in these circumstances since a lump sum payment is made only in exceptional circumstances.
" ... The husband is aware of no medical condition which would preclude the wife from taking employment, either in the past or currently. She has means, including her ability to earn income. The husband has consistently encouraged the wife to take either course work or find employment, but she has refused to do so.
" On the basis of the circumstances of this case and the case law submitted, the husband submits that the wife should use her capital to generate income, as that capital is already available as a result of a reapportionment of the family assets. Means includes the ability to earn an income both personally and from one’s capital.
" This is not a case where the husband can make back the capital [which a lump sum payment would require him to spend], since his income is now reduced from previous years’ income. ... She does not have a one-time need for additional capital.
" Enforceability is not an issue in this matter, as the husband has an excellent record of [paying] spousal support."
Considering these factors, the judge concluded that the wife should receive the lump sum she sought: "lump sum spousal support will assist the wife to be self-sufficient and meet her needs to maintain her standard of living with use of the capital from the lump sum together with the capital achieved in the division and reapportionment of the family assets " and "the advantages of a clean break outweigh the minimal tax benefit of periodic payments in addition to a lump sum."
" Most importantly, a court considering an award of lump sum spousal support must weigh the perceived advantages of making a lump sum award in the particular case against any presenting disadvantages of making such an order.
" The advantages of making such an award will be highly variable and case-specific. They can include but are not limited to: terminating ongoing contact or ties between the spouses for any number of reasons (for example: short-term marriage; domestic violence; second marriage with no children, etc.); providing capital to meet an immediate need on the part of a dependant spouse; ensuring adequate support will be paid in circumstances where there is a real risk of non-payment of periodic support, a lack of proper financial disclosure or where the payor has the ability to pay lump sum but not periodic support; and satisfying immediately an award of retroactive spousal support.
" Similarly, the disadvantages of such an award can include: the real possibility that the means and needs of the parties will change over time, leading to the need for a variation; the fact that the parties will be effectively deprived of the right to apply for a variation of the lump sum award; and the difficulties inherent in calculating an appropriate award of lump sum spousal support where lump sum support is awarded in place of ongoing indefinite periodic support.
" In the end, it is for the presiding judge to consider the factors relevant to making a spousal support award on the facts of the particular case and to exercise his or her discretion in determining whether a lump sum award is appropriate and the appropriate quantum of such an award."
The question then turned to the calculation of amount, one of the main problems with lump sum orders identified in the Davis decision. After restating the relevant provisions of the Spousal Support Advisory Guidelines (ss. 3.4.2, 7.1, 10.1 and 10.2), the court reviewed a number of of the more important cases on the subject. Again quoting from the judgment:
- As stated in Smith v. Smith [a 2006 case of the B.C. Supreme Court] ... "the present value of a periodic support stream in favour of Mr. Smith until Ms. Huntley attains age 65 would approximate $105,000, $123,000 and $140,000 at the low, mid and high points, respectively, of the range suggested by the draft guidelines. Allowing for income tax at an average rate of 30%, the after-tax present value amounts would approximate $70,000, $82,000 and $93,000, respectively. The reapportionment I have ordered, based as it was on markedly different income-earning capacity, accounts for approximately $50,000 of the present value of the future support stream."
- In Wilson v. Wilson ... a 1997 decision of the B.C. Court of Appeal, the lump sum award was in an amount "equal to the present value" of the monthly payment.
- In the case of Raymond v. Raymond ... decided by the Ontario Superior Court of Justice in 2008, the calculation of lump sum spousal support took into account the net amount of the mid-range figure from the SSAG, less 6% to represent the present value of the lump sum payment, and less 50% to take into account future contingencies.
- In Durakovic v. Durakovic, ... also a 2008 decision of the Ontario Superior Court of Justice, the lump sum entitlement was calculated by using a monthly figure extrapolated for the number of months remaining in entitlement, less 30% for income tax payable, less 3% for present value, less 25% for negative contingencies which was noted to be "lower than other cases as there are only two years left to run on the calculation of the lump sum."
- the ranges proposed by the Spousal Support Advisory Guidelines formulas;
- the tax consequences periodic payments would have attracted (a deduction to account for the tax the recipient would have owed on periodic payments);
- the decreasing value of the dollar over time (another deduction); and,
- the possibility of future changes which would have reduced the amount of the periodic payment (another deduction).
I expect this will be required reading for some time for cases involving not just the payment of spousal support as a lump sum, but the calculation of the lump sum when such an order is made.
" An appropriate amount of monthly support is a starting point in the calculation of the lump sum.
" With income of the wife of ___, support payable for 9 and one-half years, and the husbands’ accurate income and age of ___, the SSAG range of monthly payments provided by the computer application is $5,156, low, $6,016, mid, and $6,875, high.
" The Without Child Support Formula ... provides for a range from 1.5% to 2% of the difference between the spouses’ gross incomes for each year of marriage up to a maximum of 50%. Taking 1.5% to 2% of the income difference results in a range of $5,755 to $7,633.
" However, the maximum under the Formula is 50% of the income difference, which is $6,851.
" Taking into account the Formula and the maximum, and the computer application of the Formula, the range is $5,156 to $6,851 per month. Taking into account the totality of the circumstances, I would determine monthly spousal support at the mid-point of this range or $6,000 per month as a starting point for calculation of the lump sum.
" The lump sum calculations provided by the computer application of the Formula do not provide an appropriate result in this case where there is a restructuring of support ... to arrive at a lump sum. This is an example of an exception ... where the 'formula outcomes, even after consideration of restructuring, will not generate results consistent with the support objectives and factors under the Divorce Act.' ... [The] computer applications provide a reference point but an award that meets the requirements of the Divorce Act and Family Relations Act requires another method of calculation.
" I prefer the method illustrated by the cases of Wilson, Durakovic, Raymond, and Smith, which take into account in various manners the factors of relative tax situations, an appropriate discount rate for the present value, and a contingency rate where necessary. In this case where the health of the payor spouse is subject to a heart condition which has required quadruple bypass surgery and continues to require medication, a significant contingency adjustment is required as there is a real possibility that the husband will not be able to continue to work until his planned retirement date.
" There are 9 and one-half years or 114 months remaining for the payment of spousal support from December 2011, for a total of $684,000. From this gross amount, I would deduct tax which would be payable by the wife at an assumed rate of 35%. The discount rate for present value is 7%. To that amount I apply a contingency discount of 20%. The net amount is $330,782.
" I find that the wife is entitled to lump sum spousal support in the amount of $330,000."
I also appreciate and ask readers to note the judge's careful reading of the Advisory Guidelines. The Advisory Guidelines is very detailed and offers a nuanced range of exceptions and restructuring opportunities intended to help the formulas adapt to better suit complicated and unusual situations; too often lawyers overlook that deeper analysis and churn out calculations that don't consider these other options.