“As a general rule, a court will only permit a deduction for notional tax and disposition costs if it is more likely than not, on the evidence, that such costs will be incurred: See Long v. Long (1994), 1994 CanLII 18215 (ON SC), 8 R.F.L. (4th) 269 (Ont. Gen. Div.); Gomez-Morales v. Gomez-Morales (1990), 1990 CanLII 12307 (NS CA), 30 R.F.L. (3d) 426 (N.S. C.A.); Starkman v. Starkman (1990), 1990 CanLII 6793 (ON CA), 28 R.F.L. (3d) 208 (Ont. C.A.); and Leeson v. Leeson (1990), 1990 CanLII 12281 (ON SC), 26 R.F.L. (3d) 52 (Ont. Dist. Ct.).
The issue of notional costs of disposition was reviewed in the Ontario Court of Appeal’s decision in Sengmueller v. Sengmueller. 1994 CanLII 8711 (ON CA), 17 O.R. (3d) 208 (Ont. C.A.). According to Justice McKinlay at p. 215:
In my view, it is equally appropriate to take such costs [i.e. tax consequences] into account in determining net family property under the Family Law Act 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. In my view, for the purposes of determining net family property, any asset is worth (in money terms) only the amount which can be obtained on its realization, regardless of whether the accounting is done as a reduction in the value of the asset, or as a deduction of a liability: the result is the same. While these costs are not liabilities in the balance-sheet sense of the word, they are amounts which the owner will be obliged to satisfy at the time of disposition, and hence, are ultimate liabilities inextricably attached to the assets themselves.
Justice McKinlay went on to explain at p. 216:
If assets are transferred in specie or are realized upon to satisfy the equalization payment, the amount of tax and other disposition costs is easily proven, assuming the availability of a preliminary calculation of the equalization payment. The real problem arises when the equalization payment is satisfied with liquid assets not subject to disposition costs, and there are other assets to be valued for the purposes of s. 4(1) which will inevitably be subject to disposition costs at some time in the future. Two questions then arise: First, in what circumstances should disposition costs be deducted, and second, how should the amount of the deduction be calculated?
According to Justice Czutrin in the case Hawkins v. Huige, 2007 CarswellOnt 6762 (Ont. S.C.), the Court of Appeal’s decision in Sengmueller, has come to stand for the following propositions (paras. 101-102):
1) notional costs of disposition are to be deducted as long as it is clear that these costs will be incurred;
2) if the costs of disposition are so speculative that they can safely be ignored based on the evidence presented, they should not be considered; and
3) the circumstances of each case should determine how notional income tax and disposition costs should be calculated.
The Court of Appeal in Sengmueller, noted 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” (at p. 218). It is now generally accepted that RRSP funds, like pensions, will be reduced by a reasonable amount to account for the income tax ultimately payable when brought into income: Lackie v. Lackie, 1998 CarswellOnt 2200 (Ont. Gen. Div.); Appleyard v. Appleyard (1998), 1998 CanLII 4974 (ON CA), 41 R.F.L. (4th) 199 (Ont. C.A.); and Hawkins, at para. 101.
In the current case, the Respondent’s RRSPs are taxable, and they have been collapsed. For these reasons, they satisfy the threshold for a deduction based on notional disposition costs.
The court in Virc v. Blair 2016 ONSC 49, at para. 198 stated:
Courts have adopted various approaches to deal with the lack of evidence in these cases. In some cases, the Court will allow a deduction in the absence of any evidence and will simply insert a percentage without further discussion. In other cases, a deduction may be allowed but at a reduced rate. However, in some cases the Court disallows the deduction altogether due to lack of evidence. Courts have considered hindsight evidence of post-separation tax rates and actual costs of disposition incurred when RRSPs were sold after separation but before trial: Ibid, citing Stacie R. Glazman & Susan Blackwell, “New Developments in Disposition Costs and Why They Matter” (2014), 33 C.F.L.Q. 49 (WL).
In Hawkins v. Huige, the wife proposed the tax rate of 30% be used for both parties’ RRSPs. Justice Czutrin concluded that while 30% “may appear reasonable, it does not take into account future contingencies and the present values given the age of the parties.” Disappointed that neither party had provided reliable evidence as to likely disposition dates and the present value of any possible future disposition, Justice Czutrin decided to allow a 23% notional tax reduction on all potentially taxable assets, being half the current top marginal rate of 46%. Justice Czutrin expressed: “Absent reliable evidence and following case law, I find this is the fairest way to deal with this issue for both parties” (para. 112).
In Ali v. Williams, 2008 CarswellOnt 1757 (Ont. S.C.), Justice van Rensburg allowed disposition costs on both parties’ RRSPs, as a result of the Court of Appeal’s decision in Sengmueller v. Sengmueller, noting: “Costs of disposition should be calculated in particular with respect to RRSPs which will be subject to tax whether they are cashed in or received subsequently as an annuity” (at para. 102). Justice van Rensburg used the tax rate of 25% for both parties.
I have applied a notional disposition cost of 25% for the Respondent’s RRSPs which is fair and proportionate.”