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The equalization of net family property is intended to ensure a fair division of the value of property acquired during a marriage. This requires the spouses to list their assets, debts, and liabilities upon separation. But when an asset may be transferred or sold, various disposition costs may be triggered. These can include capital gains taxes, commissions, and other fees, which will eventually reduce the proceeds of a sale. How can these costs be accounted for in the net family property calculation?
Party Seeks to Deduct Capital Gains Tax
In Sundberg v. Sundberg, the parties were married but had since separated. One of the outstanding issues involved the equalization of net family property. Both parties claimed an unequal division. But first, each spouse’s net family property had to be determined, and there were also questions regarding the impact of taxes and the costs of disposition of assets. In particular, the husband had purchased a property that he jointly owned with his mother. The property had always been rented to tenants, but the husband sought to deduct disposition costs of $19,600 from his net family property, comprising a 4% real estate commission, legal fees estimated at $2,000, and a 20% capital gains tax.
The issue was previously considered in Bortnikov v. Rakitova. In that case, the respondent listed debts and liabilities that consisted of capital gains and real estate fees as disposition costs for a property, which she sought to include in her calculation of net family property. The judge did not deduct the notional capital gains on the basis that there was not enough information to determine that those fees were reasonably likely. However, the judge agreed that notional real estate fees of 5% of the property’s value as of the separation date should be deducted, as it was clear that the respondent would eventually sell the property. The trial judge also decided “the prospect of a sale [was] sufficiently likely within the foreseeable future”.
Courts Consider the Timing of the Disposition of the Assets
Bortnikov proceeded to the Ontario Court of Appeal. The 1994 case of Sengmueller v. Sengmueller provided guidance. There, the Court of Appeal indicated that it is appropriate to account for the tax consequences arising from the disposition of assets “if there is satisfactory evidence of a likely disposition date and if it is clear that such costs will be inevitable when the owner disposes of the assets or is deemed to have disposed of them”. Courts have also suggested that disposition costs should not be deducted if it is not clear when, if ever, a sale of property will be made. However, Buttar v. Buttar held that judges need not determine whether the sale or transfer of assets is inevitable; instead, they should consider whether it is more likely than not that the assets will be sold, at which point disposition costs would be incurred.
Based on these cases, in Bortnikov, the Court of Appeal agreed that judges must take into account evidence of the “probable timing of the asset’s disposition” when deciding whether disposition costs should be deducted from an asset’s value. But the Court found no clear evidence that the respondent was considering selling the property in the foreseeable future. Instead, the respondent’s own submission suggested the opposite. In fact, the respondent indicated that she could finance the equalization payment to the appellant without selling the property. The Court determined that the judge erred in concluding that a sale was likely in the foreseeable future when there was no evidence to support that finding.
Consequently, it was an error to deduct notional real estate fees of 5% from the respondent’s net family property. Those fees totalled $80,000, which was a material amount and needed to be added back to the equalization calculation.
In Sundberg, it was significant that the husband did not discuss the basis for his proposed disposition costs. The judge found it impossible to determine whether his calculated costs for fees and capital gains were reasonable estimates of future costs. Moreover, during cross-examination, it became clear that the property was not currently listed for sale and that there had been no notice to tenants that they would be required to vacate the property. Ultimately, there was no evidence of any concrete plans to sell the property. Since there was nothing to suggest it was going to be sold in the near future, the judge did not accept that there should be a deduction in the husband’s net family property for the proposed disposition costs.
RRSPs Incur Tax Consequences Which Can Justify a Reduction
The husband also claimed that the value of his RRSPs at the separation date should be reduced by 20%, representing notional tax. In Sengmeuller, the Ontario Court of Appeal concluded that RRSPs are “taxable in full, regardless of the time of realization and regardless of whether they are cashed in full or taken by way of annuity”. The judge looked to M.A. v. J. M., where it was held that it is generally accepted that RRSP funds, like pensions, can be “reduced by a reasonable amount to account for the income tax ultimately payable when brought into income”.
However, once again, the difficulty for the husband was that he did not provide any evidence of the calculation of the notional tax rate, and merely suggested that 20% was the appropriate rate. There was also no evidence of when he would retire, what the marginal tax rate would be on retirement income, or what the present value of that future discount was.
This was similar to M.A., where the parties also failed to produce evidence of the appropriate rate to be deducted from their RRSPs. There, Justice MacPherson reviewed prior cases dealing with the lack of evidence. For instance, in Virc v. Blair, the judge acknowledged that courts are not always consistent in dealing with the issue; in some cases, a deduction may be permitted without any further discussion regarding the appropriate percentage to apply. Yet in other cases, a deduction may be disallowed for lack of evidence.
Judicial Approaches to Notional RRSP Tax Rates in Equalization Calculations
In Hawkins v. Huige, one of the parties proposed a 30% tax rate in connection with their RRSPs. The judge admitted that while that rate may appear reasonable, it did not take into account “future contingencies and the present values given the age of the parties”. But neither party provided evidence of the likely disposition dates or the present value of any possible future disposition. Instead, the judge permitted a 23% notional tax reduction on all potentially taxable assets, which was half of the current top marginal rate of 46%. In that case, the judge felt that was the fairest way to deal with the issue for both parties.
Additionally, in Ali v. Williams, the judge followed the Court of Appeal’s decision in Sengmeuller, noting that disposition costs should be calculated for RRSPs, as they will eventually be subject to tax. This time, the judge used a 25% tax rate for both parties. For Sundberg, the judge followed the general rule that notional tax costs of RRSPs should be deducted and found the 20% rate proposed by the husband to be appropriate.
Navigating Equalization and Asset Valuation in Windsor-Essex? Johnson Miller Family Lawyers Can Help.
Disputes over equalization payments often turn on complex asset valuation issues, including whether capital gains tax, real estate commissions, and RRSP tax consequences should be deducted from net family property. If you are facing separation or divorce and questions have arisen about equalization, asset valuation, capital gains, or RRSP tax treatment, the experienced family lawyers at Johnson Miller Family Lawyers can help protect your financial position. Contact us online or call 519-973-1500 to schedule a confidential consultation and obtain strategic advice tailored to your circumstances.
