Asset/Debt Division – Discounts on Family Assets

Family assets are, for the most part, valued based on their fair market value.  There are a few assets however that receive special treatment and are discounted to account for the cost of disposition if they are being retained by one party alone.

Pension plans, including LIRAs, and Registered Retirement Savings Plans (RRSPs), for example, are routinely discounted by 30 – 33% to account for the tax consequences on their withdrawal.  Sometimes a lower percentage is justified but 1/3 is the most common discount. 

Whether a discount should be applied to account for disposition costs such as capital gains taxes on shares held in a corporation or for realtor commissions on the fair market value of a family home is less defined. 

The case law, for the most part, says that in circumstances where it is not clear when, if ever, a property will be sold and taxes incurred, entirely speculative disposition costs need not be taken into account in calculating an equalization payment, especially where there is no evidence as to the likelihood or date of an eventual sale. While it is true that at some point capital gains tax or realtor commissions may become payable, in the absence of evidence of an imminent or eventual sale so as to justify any deduction, courts are unlikely to make a deduction.

Notwithstanding the case law, there is support among academics that, for capital gains at least, there should be a deduction of eligible income taxes on all accrued net gains to the valuation date preferably using present values.  The argument in favour of this train of thought is that since an equalization payment is not taxable in the hands of the recipient, the basis upon which the equalization payment was calculated should take into consideration any taxes payable or other inevitable costs of disposition otherwise the payor is left with less of the family property once costs of disposition are paid.  This argument could be extended to realtor commissions.

A family’s assets and debts are many times unique and a “one-size-fits-all” approach should not be taken to property division.  Our lawyers have had extensive experience in analyzing family assets and debts and crafting well-considered property settlements; 75% of our firm’s files relate to managing breakdowns in family relationships.  Contact us today for a consultation to see how we can assist you in dividing your family’s property.