What is notional tax or disposition costs?
When dealing with your Net Family Property, there may be assets that have a cost associated with withdrawing or “realizing” those assets. The simplest comparison would be a tax-free savings account and a registered retirement savings plan.
If your net family property includes a tax-free savings account, there will not be a cost associated with withdrawing those monies. Therefore, there would be no “notional tax” or “disposition costs”.
Conversely, if your net family property includes a Registered Retirement Savings Plan, there is a cost associated with withdrawing those funds that would need to be accounted for. If there is an RRSP in your net family property it is deceiving to simply put that value on your net family property statement because it does not take into account, the cost that one spouse would have to pay in taxes to withdraw those funds.
Therefore, disposition costs or notional taxes consider the anticipated cost that a party will have to pay to withdraw those funds.
Is This Accounted for Under the Appropriate Family Law Legislation?
A common question that is asked of lawyers when dealing with notional tax or disposition costs is whether or not a party can actually claim this expense or this cost.
Section 4(1) of the Family Law Act specifically provides the definition for net family property and is as follows “the value of property, except property described in subsection (2), that a spouse owns on the valuation date after deducting the spouse’s debts and other liabilities, including for greater certainty, any contingent tax liabilities in respect of the property”.
In the majority of separations, disposition costs are logical. Most parties who have an RRSP or a pension that will incur some form of tax consequence is included in a Net Family Property Statement as a debt. However, the courts have provided for the following considerations when determining notional costs and they are:
- The likelihood of changes in income tax legislation impacting estimated income tax.
- The expectation of change in future income tax rates.
- The expectation of change in disposition costs, for example, commission rates.
- The expectation of change in spouse’s future income tax position.
- The expectation of change in interest and inflation rates.
- The circumstances under which the assets may be sold prior to the anticipated date of this division.
- The age and health of the spouse and his or her financial plans.
What are typical disposition costs or notional tax costs?
Typically, on a Net Family Property Statement there will be notional tax consequences for the following:
- Pension
- RRSP
- Locked-in Retirement Account (LIRA)
However, there are other assets that typically appear on a Net Family Property Statement that would have “disposition costs”. For example, if the parties own a jointly held property that must be sold in order to satisfy an equalization payment, the costs associated with disposing of that property would be included in “disposition costs”. These costs would likely include:
- Real estate commissions.
- Reasonable lawyer fees for the transfer of property.
- Costs of repairs that are included in the Agreement of Purchase and Sale (for example, if the purchasers of the property request an undertaking to fix a broken door).
How to determine notional tax or disposition costs?
Typically, notional tax is a negotiable instrument. The parties can either negotiate a notional tax rate that they are comfortable with. If parties wish to have a more specific notional tax cost, they can hire an accountant or professional that can tell them what the likely tax consequence would be on a given asset.
If you and your spouse are considering negotiating notional tax on your own, here are some helpful cases that identify where the courts go:
- In the Ontario Court of Appeal decision of Perry v. Perry, the court found that the husband’s RRSP would have a disposition rate of 25 percent. In determining this rate, the court found that the disposition rate for the RRSP after separation would have been approximately 33.15 % and the rate of disposition at retirement, age 65, would have been approximately 10%.
- In the case of Ouslis v. Ouslis 2016 Ontario Superior Court decision, the court found that the notional disposition cost of 29% on the disposition of a husband’s RRSP was applied. Note, in this case the parties had agreed to the 29% notional disposition costs.
In the event that you are not going to have to liquidate your RRSP’s and or pension in order to satisfy an equalization payment, you will not need to include speculative disposition costs.
Therefore, in the event that the equalization payment can be managed by the party who owes it without having to cash in RRSP’s or their pension, the disposition costs of those assets will not need to be included.