NEWMARKET COURT FILE NO.: FC-10-035129-00

DATE: 20120416

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: CHERYL DUNHAM, Applicant

AND:

SCOTT DUNHAM, Respondent

BEFORE: McDERMOT, J.

COUNSEL:
S. L. Deseron Counsel, for the Applicant
D. Cohen Counsel, for the Respondent

HEARD: January 24, 2012

ENDORSEMENT

INTRODUCTION

[ 1 ] Mr. and Mrs. Dunham are both financial advisors and during the last years of their marriage, they operated a company known as Dunham Financial Services, Inc. (“DFS”). They separated on April 30, 2008. They are childless.

[ 2 ] When the parties were married on May 12, 1990, the Applicant, Cheryl Dunham, worked as a financial advisor selling insurance products for Clarica Financial Services Inc. (“Clarica”), which has now been absorbed by Sun Life Financial Distributors (Canada) Inc. (“Sun Life”). She worked there a number of years prior to marriage. The Respondent, Scott Dunham, ran and owned DFS. In 2004, Ms. Dunham left Clarica to work in partnership with her husband at DFS.

[ 3 ] Ms. Dunham had a portfolio of insurance policies sold to numerous clients for which she received ongoing commissions; under her Advisor’s Agreement, upon termination, she became eligible for Clarica’s “commissions on release” program (“CORe”). This program capitalized Ms. Dunham’s future commissions on the policies that she had negotiated for Clarica and paid out that capitalized amount over a ten year period by 120 monthly payments. In Ms. Dunham’s case, she was to receive payments of $4,066.03 monthly for that ten year period.

[ 4 ] The parties disagree as to the characterization of Ms. Dunham’s entitlement to the CORe payments: Mr. Dunham posits that the program is property owned by Ms. Dunham on the date of separation, and is subject to equalization. Ms. Dunham states that it is income. As set out in the endorsement of Graham J. dated June 14, 2011, the parties consented to argument of a motion pursuant to Rule 16(8) of the Family Law Rules , O. Reg. 114/99, in order to determine the issue of whether the CORe payments are property or income.

[ 5 ] The Respondent also requested in his motion an order that the Applicant pay $142,500 for his shares in DFS pursuant to a business valuation and an earlier order; that issue was not argued before me and is the subject matter of a subsequent motion in this proceeding.

[ 6 ] There was also an issue as to the admissibility of Mr. Dunham’s affidavit pursuant to Rule 16(13); the Applicant filed a reply affidavit, and this issue was not argued.

[ 7 ] Ms. Deseron asked for an adjournment of the motion; she stated that she had received the motion and affidavit well after she had requested that it be served. She had requested that the motion and affidavit be served no later than December 15, 2011; the affidavit was served on December 23, 2011 and the motion on January 16, 2012. She stated that the late service of the motion prevented her from adequately preparing for argument of the motion. Ms. Deseron also stated that she had not had time to prepare and serve a factum.

[ 8 ] However, it appears that the disclosure upon which the motion was based was only provided by the Applicant to the Respondent on November 30, 2011, and this was the explanation for the delay in preparing the motion materials. In other words, the Applicant bore some responsibility for the late service of the motion materials. Moreover, the Applicant had served and filed a full reply affidavit on the morning of the motion; the Respondent did not wish to file reply materials and was content to proceed.

[ 9 ] The parties agreed to argue this issue by way of motion in June 2011, and the parties were aware of the issue to be argued at that time. The motion for determination of the nature of CORe was no surprise and service of the motion on January 16, 2012, was only a formality to place this matter before the court. This was a fixed long motion date which had been scheduled since October 2011. On the basis that the Applicant was permitted to file written argument subsequent to the motion being argued, I ordered that the matter proceed; the Applicant did not appear to be prejudiced by forcing the matter to argument at that time and it was not in the interests of justice that resolution of this particular issue be further delayed.

[ 10 ] For the reasons set out below, I have determined that the Applicant’s CORe entitlement is property within the meaning of s. 4(1) of the Family Law Act , R.S.O. 1990, c. F.3, and as such is subject to equalization of property herein.

BACKGROUND FACTS

[ 11 ] It appears that, both prior to and during marriage, these parties were successful financial planners. When the parties married on May 12, 1990, the Applicant had already worked for Clarica for seven years. Mr. Dunham was a financial planner operating his own company, DFS. In February 2004, Ms. Dunham left Clarica to work with Mr. Dunham at DFS. She was, on the date of separation, a joint owner of that corporation, and presently continues to operate it and is buying out her husband’s interest in DFS; the parties are litigating the buyout price. Clarica was purchased by Sun Life and has now been absorbed by that company.

[ 12 ] Ms. Dunham was a commissioned sales person and financial advisor for Clarica and earned commission income based on premiums from life insurance policies and other products sold by her. She had a long standing record with the company and a large clientele. The policies were, of course, the property of her employer, Clarica, but Ms. Dunham was entitled to ongoing commissions from renewals and annual premiums on these policies so long as she worked for Clarica.

[ 13 ] The argument in this matter surrounds CORe, which was a program for agents who decided to leave the Clarica organization. That program arose from the Advisor’s Agreement under which Ms. Dunham worked for Clarica, and provided for a quantification and payment of the commissions that Ms. Dunham was entitled to upon her departure from Clarica. After Ms. Dunham terminated her relationship as an advisor in 2004, she received correspondence from Clarica dated March 3, 2004, which advised her of the ongoing income payable to her through the CORe program:

On March 1, 2004, the balance of your business was released to your Agency force-assignment at a later date. This release generated your final Commissions on Release payments, which will amount to $4,066.03 commencing the first pay period following your termination. Please note that for the next few months some adjustments may have to be applied which may result in a reduced amount deposited to your bank account.

[ 14 ] The characteristics of CORe were debated extensively by both counsel at the motion. It is important to note how Clarica described the program to their financial advisors; that was set out in an undated printout provided by Clarica to its agents and provided by both parties in their materials:

What is it?

CORe is used to compensate agents for future commissions on their insurance and retail wealth accumulation business. The CORe value for each contract is approximately 60-75% of the value of future commissions. When an agent retires or terminates, we use their total years of service to determine how much they should receive for their entire block of business.

Because CORe is commission, income taxx ( sic .) is paid only on amounts received. This allows the agent to retire without the burden of paying tax on the whole amount at retirement. Also, because it’s not an asset, it isn’t subject to creditor claims or made part of family assets, in the event of a marital breakup prior to retirement.

CORe is not a pension income. Because it’s commission, direct transfers to annuities, RRIFs or other registered products are not permitted. Nor can agents claim the $1,000 pension income deduction for CORe payments. Investments into registered products should be made as you would from any income. A group RRSP exists for agents who wish to participate.

[ 15 ] This statement was clarified by correspondence dated June 23, 2010, from Sun Life, the successor to and owner of Clarica. In that correspondence, Bonnie Gaudet, a payroll specialist at Sun Life, stated:

Commissions on Release (CORe) is income. CORe is payable according to the terms of Schedule VI of the Advisor’s Agreement. In essence an advisor will be paid 120 months of income upon termination of the Advisor’s Agreement with Sun Life Financial Distributors (Canada) Inc. (formerly Clarica Financial Services Inc.) The amount of that monthly income will depend on the present value of CORe at the date of termination of the Advisor’s Agreement.

There is no value to CORe until monthly payments begin. The present value cannot be viewed under any circumstance as a lump sum or an asset. Sun Life Financial will not pay a lump sum (please review Schedule VI of the Advisor’s Agreement).

[ 16 ] Schedule VI of the Advisor’s Agreement, which would have been helpful in determining the nature of the CORe entitlement, was not provided in evidence by either party.

[ 17 ] Later in the correspondence, Ms. Gaudet modifies, to some extent, the position taken in the 2004 memo which stated that, in the view of the employer, the CORe entitlement was not an asset for family law purposes:

Whether or not CORe is viewed as an asset under provincial family law division of property laws is a question for the courts, but Sun Life Financial will only payout CORe as monthly income upon termination of the advisor’s agreement.

[ 18 ] It is apparent that the need for CORe arose from the fact that an advisor is not only paid a commission when he or she places a life insurance policy or product; the advisor is also entitled to future commissions as the policy or product is either renewed or as annual premiums are paid by the life insured. The memo makes it apparent that CORe is a program whereby a departing agent is paid outstanding future commissions for life insurance contracts which the agent has presumably placed with Clarica throughout his or her employment with that organization. From the memo, as well as other evidence filed in this proceeding, it appears that the essential characteristics of CORe are as follows:

a) Under the agreement, any right of the agent in her book of business (called the “block of business” in the memo noted above), is force-assigned to Clarica upon termination;

b) In consideration, CORe quantifies the advisor’s future commissions based upon years of service and the block of business, which amount is paid for ten years through 120 equal monthly payments;

c) The payments are constant throughout the ten year period and do not change;

d) The payments are treated as commission income, and income tax is deducted at source from the payment as with any income source;

e) The right to CORe payments cannot be assigned;

f) Payments under CORe cease if the agent either dies or breaches the non-competition clause in their Agent’s Agreement; and

g) It is not a pension and the agent is not entitled to the pension income credit in respect of the CORe payments; nor is it a severance payment entitling the agent to transfer portions into a retiring allowance or RRSP.

[ 19 ] As Ms. Dunham commenced receipt of payments in March, 2004, just over four years of the CORe entitlement had been paid out to Ms. Dunham by the date of separation and Ms. Dunham then had six years of payments owing. She now has less than two years of payments owing under CORe. She presently receives just over $3,000 per month net of taxes in CORe payments.

[ 20 ] As correctly pointed out by Applicant’s counsel, a portion of the CORe entitlement would not form part of the Applicant’s net family property as the Ms. Dunham had worked as an advisor and had accumulated commissions with Clarica for seven years prior to marriage.

[ 21 ] The fact that this is a program which is advantageous to retiring agents was confirmed in a blog by Aaron Broverman, who apparently is an internet writer on insurance and disability issues. Although his opinion as to the nature of CORe is both irrelevant and inadmissible (he was not qualified as an expert), what is important is his confirmation that the CORe program gave Sun Life a “survey-best performance in the succession planning category” because of CORe. This apparently is because the CORe program allows for a payment of tail off commissions over ten years rather than a large taxable lump sum payment upon retirement with lessening amounts after that. Notably, the article or blog seems to imply that an advisor may be able to otherwise sell his or her own book of business when it states:

Alternatively, Sun Life’s business organization team, which is composed of business-development managers across the country, aids senior advisors in structuring their businesses to bring in new agents to buy their books. The value of the business is again determined by the level commission structure.

[ 22 ] Although Clarica or Sun Life or, for that matter, Mr. Broverman have offered opinions as to the nature of the CORe program, these statements do not actually determine what the program actually is. For the purposes of this family law litigation, it is obviously up to the court, and not the employer, as to the interpretation of the CORe program and its characterization.

ANALYSIS

[ 23 ] The issue that counsel have agreed to be argued before me is whether the CORe program is an asset, subject to equalization, within the meaning of s. 4(1) of the Family Law Act which defines property subject to equalization as follows:

“property” means any interest, present or future, vested or contingent, in real or personal property and includes,

(a) property over which a spouse has, alone or in conjunction with another person, a power of appointment exercisable in favour of himself or herself,

(b) property disposed of by a spouse but over which the spouse has, alone or in conjunction with another person, a power to revoke the disposition or a power to consume or dispose of the property, and

(c) in the case of a spouse’s rights under a pension plan that have vested, the spouse’s interest in the plan including contributions made by other persons;

[ 24 ] The case law is wide and varied; there are no cases brought to my attention which have specifically considered the CORe entitlements paid out to Sun Life or Clarica advisors. The general tendency of the cases is to give property a wide definition: see T. Hainsworth, The Ontario Family Law Act Manual , 2nd ed. (Toronto: Canada Law Book, 2004) at p. 1-24.29, as cited in McLean v. McLean , 2004 CarswellOnt 4234 (S.C.) at para. 34 , where he states that the “general definition of property in s. 4 is extremely wide.”

[ 25 ] Ms. Deseron states on behalf of her client that the CORe payments are income, and are not property within the meaning of the Family Law Act . She notes that there are essential characteristics of CORe which mean that it cannot be classified as anything other than income. These include the following:

a) She notes that CORe is not a pension; this is confirmed by the memorandum noted above which states that it is not a pension and is not subject to the $1,000 annual pension deduction;

b) She states that CORe is not an annuity. She notes that an annuity is an investment specifically purchased with a lump sum of money, which she states is not the case here;

c) She states that the CORe entitlement is not a book of business in the traditional sense; it is non-assignable, and, under the agreement, is subject to a “force-assignment” back to Clarica upon retirement; the policies of insurance themselves were owned by Clarica;

d) She states that because CORe was in pay when the parties separated, it is income only; it is incapable of valuation.

e) She notes that Clarica specifically told its advisors that this asset was income and was not divisible under provincial family law legislation; she states that it would be unfair to equalize the asset in the face of Clarica’s assertions and representations to its agents that it is not property; and

f) She notes that there are difficulties in valuation insofar as much of the CORe entitlement is excluded as being earned prior to marriage. She also notes that the payments are also taxable at source as would be any other income from employment.

[ 26 ] She states that the CORe entitlement is personal in nature and nothing other than “deferred income” which was “purely a condition of contract.”

[ 27 ] In the McLean case, Vogelsang J. examined in detail a number of cases considering whether certain rights or choses in action were assets for equalization purposes. It is apparent from that case that there is no fixed list of items which are and are not property for equalization purposes; the real issue is whether the item should be considered to be property considering the intent of the legislation to share the fruits of the marriage relationship between the parties. At paragraph 35, the court quoted Misener J. in Pallister v. Pallister (1990), 1990 12272 (ON SC) , 29 R.F.L. (3d) 395 (Ont. Gen. Div.) at pp. 404-405, as follows:

It seems to me, therefore, that when the word [property] appears in legislation, defined in the broadest possible way, the limits are to be found through a consideration of the scope of that legislation and the objects it seeks to accomplish. If the definition of the right or rights as property is consistent with the scheme of the legislation and advances its objects, then it should be so defined. If either of those attributes is absent, then, unless the right or rights under consideration fall within a category that has been legally recognized as property heretofore, it should not be so defined.

[ 28 ] Accordingly, the issue of whether the CORe payments constitute property has to be reviewed in light of the intention of the legislation to equalize the parties’ property as accumulated by each of them during the marriage. The court also needs to determine whether the CORe payments are “consistent with the scheme of the legislation.”

[ 29 ] Ms. Deseron is correct that the CORe entitlement is a right which arises from contract, specifically the Advisor’s Agreement under which Ms. Dunham was employed by Clarica. Under that agreement, the nature of the CORe entitlement is a non-assignable chose in action. It is the right of a retiring investment advisor to be paid his or her future commissions pursuant to policies in the advisor’s block of business, which policies are themselves the property of Clarica. If it were not for CORe, presumably the advisor would be entitled to future commissions on the policies as premiums were paid on the policies subsequent to retirement or alternatively the agent would have to be paid a lump sum for the anticipated commissions; CORe provides advantages to the retiring advisor insofar as it provides for a fixed and certain source of income to be received over ten years on retirement or termination subject to a non-competition agreement (presumably part of the Advisor’s Agreement), and for Clarica the program caps its liability to the advisor, allowing for tail off payments while transferring the block of business (the policies and client list) for administration by a new advisor within the organization.

[ 30 ] There are a series of cases where certain types of property have been held not to be property within the meaning of s. 4(1) of the Family Law Act , and as such are not subject to equalization. These include professional licences and the income derived from them, as well as disability pensions, such as an entitlement to Worker’s Compensation payments. These cases are useful for an analysis of the types of property that are excluded from the definition of property under the Family Law Act . As part of my decision, I will review these cases; once I have analyzed them, I will specifically assess cases which have determined other similar rights to be property and determine whether the CORe payments are included under the general principles governing these types of cases.

[ 31 ] Professional licenses have often been put into issue in family law proceedings; the right of a doctor or lawyer or other professional to practice in their profession allows for an income stream which logically may be analogous to the present situation. As the obtaining of a professional license gave rise to the right to that income stream, so might the accumulation of insurance policies in her portfolio by the Applicant in the present case give rise to her right to the CORe payments which are in issue in the present case.

[ 32 ] This issue was examined by our Court of Appeal in Brinkos v. Brinkos (1989), 1989 4266 (ON CA) , 69 O.R. (2d) 225, which examined whether the income portion of a trust was property within the meaning of the Family Law Act . In the consideration of that issue, the capitalization of the income stream from a professional license was differentiated from the right of the income from the trust based upon the following:

13 I cannot accept that the entitlement to earn income as a judge, or under a licence, is a contingent interest in the pool of money which may be earned in the future. There is no identifiable property, except perhaps the licence itself. If it is property, and if it has a value (and no opinion is here expressed), that value cannot be a capitalization of the future income stream. The licence will earn nothing without the services of the licensee and the earnings are based upon the value of the services provided, not upon the mere existence of a licence to perform.

[ 33 ] At paragraph 18 the court decided that the entitlement to income from the trust was property within the meaning of s. 4(1) of the Act based upon the fact that the “income entitlement had value within the marriage” and accordingly had value after separation, notwithstanding the inalienability of the trust interest.

[ 34 ] Disability benefits, too, have been excluded from the definition of “property” under s. 4(1) of the Family Law Act ; again this is because of the fact that these benefits are related to personal services to be provided by the spouse holding the asset. This issue was considered, again by our Court of Appeal in Lowe v. Lowe (2006), 2006 804 (ON CA) , 78 O.R. (3d) 760. The impugned asset in that case was Worker’s Compensation benefits payable to the husband. In deciding that such benefits were not property within the meaning of s. 4(1), Sharpe J.A. stated, at para. 17 of the report, again following Pallister , supra , that “disability benefits [are] ‘more comparable to a future income stream based on personal service’ than to either a retirement pension plan (explicitly included in family property by s. 4(1)), or to a future stream of payments from a trust (held to constitute property in Brinkos ).”

[ 35 ] The rationale of both of these cases appears to be the personal nature of the services to be provided in the future. In such a case, the property is incapable of valuation, as the value of future personal services, or the replacement thereof through disability benefits, is unknown due to the personal nature of these services. Moreover, the personal nature of the asset, if it is indeed an asset, makes it plain that to equalize such an asset does not advance the intention of the legislation, which is to equalize assets accumulated throughout the marriage; the right to this type of income is in futuro and based upon future work and services, and not an asset accumulated throughout the marriage.

[ 36 ] That is completely different from the present case, where the quantum of the income is based upon commissions earned during the marriage (excluding, of course, those earned prior to the date of marriage) which were quantified in 2004 when the CORe payments began: see the correspondence to the Applicant from Clarica dated March 3, 2004. Moreover, the Applicant has filed evidence showing what commissions were earned prior to marriage: this indicates that the asset is eminently capable of valuation for equalization purposes.

[ 37 ] Numerous assets similar to the CORe have been found to be property within the meaning of s. 4(1) of the Family Law Act . Included in these assets are books of business of an investment advisor (see McLean, supra , and Mavis. v. Mavis (2005), 2005 14002 (ON SC) , 15 R.F.L. (6th) 369 (Ont. S.C.)); a right to income under a trust (see Brinkos , supra ); a non-transferable entitlement to payments under a non-competition agreement arising out of a sale of a business (see Clegg v. Clegg (2000), 2000 22636 (ON SC) , 188 D.L.R. (4th) 365 (Ont. S.C.)); and a pension which is in pay (see Boston v. Boston , 2001 SCC 43 () , [2001] 2 S.C.R. 413, and Bennett v. Bennett (2004), 9 R.F.L. (6th) 242 (Ont. S.C. (Div. Ct.))).

[ 38 ] Although the CORe program is distinctive in nature, there are also marked similarities to these types of assets. CORe is not a book of business; the insurance policies belonged to Clarica and obviously could not be transferred to another agency or employer and there was a “forced-assignment” of the book to Clarica. However, CORe was compensation for a “block of business” which was considered to have value and which was quantified under CORe and under the Advisor’s Agreement. In the correspondence from Sun Life dated June 23, 2010, the writer states that the payments under CORe are based upon “the present value of CORe at the date of termination of the Advisor’s Agreement.” This confirms that for Sun Life’s representative at least, CORe was acknowledged to have value based upon the block of business being left behind by the retiring advisor.

[ 39 ] CORe is also not, strictly speaking, an annuity; Ms. Deseron in argument defined an annuity as “an investment specifically purchased with a lump sum of money.” However, CORe is a capitalized amount determined through the advisor’s years of service and portfolio which is payable through an income stream; the only difference between Ms. Deseron’s definition of an annuity and CORe is that CORe entitlements were not purchased but earned through the accumulation of the block of business. As well, although the CORe program was in pay on the date of separation, this does not exclude it as being an asset for equalization purposes as set out in Boston and Bennett, supra . The fact that it is payable through income rather than as a capitalized amount is not fatal as was demonstrated in Brinkos , supra.

[ 40 ] I can state no more about CORe than as was stated by Vogelsang J. in McLean , supra , when he spoke of the husband’s book of business:

31 Throughout the marriage, the husband and the wife performed roles which created an economic product. The philosophy of the governing legislation requires that product to be shared equally by them after separation as indicated by the “partnership” approach specifically referred to in the preamble. Part of the product at valuation day was the husband’s book of business.

[ 41 ] Similarly, in the present case, part of the “economic product” that the parties had created during this marriage was the Applicant’s CORe entitlements as accumulated during marriage.

[ 42 ] Ms. Deseron states, however, that it is unfair to equalize the asset due to the representations made by Clarica to its advisors: as noted above, in a memo to its advisors, Clarica stated that CORe “isn’t ... made part of family assets, in the event of a marital breakup prior to retirement.”

[ 43 ] I suspect that part of the motivation of Clarica in making this statement was to protect the program from any liability for it being divided at source by way of a lump sum (see the partial retraction made from this position in the correspondence from Sun Life dated June 23, 2010, where the writer states that it is up to the courts as to the characterization of CORe under the Family Law Act , “but Sun Life Financial will only payout CORe as monthly income upon termination of the advisor’s agreement”). In any event, it is trite to state that Sun Life’s opinion as to the characterization of CORe is as irrelevant to these proceedings as is the opinion as to the nature of CORe by Mr. Broverman; there was no qualification of the writer of either the memo or the later correspondence as experts in this proceeding. As well, the statement made does not refer to the valuation of CORe after retirement or termination as in the present case; the statement made refers to the issue of whether CORe is divisible “prior to retirement.” That may very well be the case; in fact the issue prior to retirement may be the equalization of the block of business itself having reference to CORe on which I need express no opinion. Here we are dealing with CORe subsequent to termination, which the memo did not refer to. Moreover, as noted above, in the letter dated June 23, 2010, the writer referred to the payments being based on the “present value of CORe” on the date of termination. I do not find that there is any representation by Clarica which is inconsistent with a finding that the CORe entitlement in this matter is property as defined by s. 4(1) of the Family Law Act .

[ 44 ] Finally, Ms. Deseron states that there are difficulties regarding valuation due to the fact that taxes are deductable from the income from CORe, and because there are portions of the asset accumulated prior to marriage.

[ 45 ] As stated above, I have already determined that CORe entitlements are entirely capable of valuation, unlike a right to future undetermined income. The fact that there is a pre-marriage portion of earned commission income does not make this incapable of calculation; this is often a feature of pension, trust or annuity valuations (see Mavis , supra , where a book of business was valued based upon accumulation in the asset during the eight years of marriage). Moreover, there would be little difficulty in a valuator applying a notional tax rate to the ultimate value of the CORe entitlement to arrive at a net of tax figure; again, this is often done in the case of pension valuations and valuations of books of business (again see Mavis , supra ). These factors are admittedly a part of the valuation process and would be accounted for by a valuator in coming to an opinion as to the value of the asset; they do not make the asset incapable of valuation.

[ 46 ] Accordingly, there shall be an order declaring the Applicant’s CORe entitlement in this case as accumulated during marriage to be property subject to equalization within the meaning of s. 4(1) of the Family Law Act .

[ 47 ] In the event that the parties cannot agree on costs of this motion, the parties may schedule a hearing before me to speak to the question of costs through the trial coordinator in Newmarket. In the event that such a hearing is scheduled, the parties shall provide written submissions respecting costs, with the Respondent to provide his written submissions 20 days prior to the hearing, and the Applicant to provide her written submissions ten days prior to the hearing. Submissions as to costs shall be no more than three typewritten pages in length, excluding any offers to settle or bills of costs.

McDERMOT J.

Date: April 16, 2012