Deferred Tax and Selling Costs in Equalization Ontario

If you hold a house, an RRSP or an investment account, you may have heard that the real value is lower than the balance because tax or realtor fees will be owed if the asset is sold or cashed out. Those future costs are often called deferred tax and disposition costs. People disagree about whether they should reduce what an asset is worth when spouses equalize.

This article explains why the question matters, how it fits into the equalization formula, and what to ask a lawyer or accountant. Whether a future cost is deducted depends on the asset and the evidence, so it does not offer a one-size answer.

Why the question matters

Net family property is the value of all the property you own on the valuation date, except excluded property, less your debts and liabilities. Each asset is therefore given a value, and the total drives the result.

The spouse with the lesser net family property is entitled to one-half the difference between the two net family properties. If a value is lowered because of expected tax or selling costs, the difference between the spouses changes, and so does the payment. A change to a large asset can matter a great deal.

Deferred tax and selling costs in plain words

Deferred tax is tax that is not payable today but may become payable later, for example when a registered account is cashed in or an investment is sold at a gain. Selling costs are expenses such as realtor commissions and legal fees if a home is sold.

The argument for reducing value is that you cannot actually keep the full balance. The argument against is that nobody has sold anything, and the costs may never arise if the asset is kept. Which argument is stronger depends on the asset, whether a sale is likely and what evidence is available.

Whether and how a court allows any reduction depends on the facts and the expert evidence presented, and is worth confirming with a lawyer and accountant.

Points that can affect the answer

• Whether the asset is likely to be sold or cashed out soon, or kept for the long term.
• Whether the asset is the matrimonial home, which has its own rules in the formula.
• Whether the property is excluded property, such as an inheritance after the date of marriage, which is left out of net family property unless it is a matrimonial home.
• Whether a domestic contract says how the property is to be treated.
• Whether the same cost is counted twice, for example once as a lower asset value and again as a separate debt.

On that last point, the law takes double-counting seriously in the marriage-date setting, where the same property cannot be both an excluded amount and a marriage-date deduction. Apply the same care to any adjustment you propose.

Fairness arguments have a high bar

Some people feel it is unfair to share the full value of an asset that will be taxed later. A court can vary the equal share only if equalizing net family properties would be unconscionable. The threshold is high, and mere unfairness is not enough.

How best to raise a concern about future tax or selling costs depends on your situation, so it is worth confirming with a lawyer and an accountant.

What to do next

Raise the issue early, because valuation evidence takes time to obtain. How to present a figure for any asset depends on your situation, so it is worth confirming with a lawyer.

• List each asset and the valuation date balance or market value.
• Note which assets you intend to keep and which are likely to be sold.
• Gather account statements and any recent appraisals.
• Ask an accountant how tax might apply to each asset.
• Ask a family lawyer how deferred tax and selling costs are generally treated and whether evidence is needed.
• Keep proposed deductions consistent so nothing is counted twice.

Frequently asked questions