• by Amruta Ponkshe
Originally published in the OFLM 2023-9 edition
There is little doubt that family lawyers in Ontario require a comprehensive understanding of financial disclosure and equalization of net family property. And counsel who routinely prepare financial statements (myself included) will appreciate that notional disposition costs can significantly affect a net family property calculation.
So, what are these costs exactly? How does recent case law guide us in applying them and at what percentage should they be applied?
The aim of this article is to answer these questions.
What are Notional Disposition Costs?
There are several disposition costs associated with the sale of assets. These costs include taxes, legal fees and commission, and other similar types of costs that are triggered by a sale.
Selling a plot of land or a house triggers real estate commission and legal fees. Selling a rental property triggers capital gains tax. Cashing in a Registered Retirement Savings Plan (RRSP) triggers payment of income tax on the proceeds. The list goes on. And such costs reduce the balance of proceeds that a client receives from the sale of an asset which ultimately affects the client’s Net Family Property (NFP).
Legislation and Jurisprudence
Before we get down to the nitty-gritty of disposition costs, it may be worthwhile to discuss their legislative and common-law basis.
In the context of discussing notional disposition costs, the Ontario Court of Appeal in Berta v. Berta (2015 ONCA 918) reiterated that section 4(1.1) of the Family Law Act stipulates that specified liabilities to be deducted from a spouse’s NFP include “any applicable contingent tax liabilities in respect of the property”.
In Sengmueller v. Sengmueller (1994 CanLII 8711 (ON CA)), the Ontario Court of Appeal established that “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 ultimately liabilities inextricably attached to the assets themselves”.
In Sengmueller, the Court, based on an analysis of McPherson v. McPherson (1988 CanLII 4732 (ON CA)) “gleaned” three rules that apply in all cases where notional disposition costs may be associated:
- apply the overriding principle of fairness, i.e., that costs of disposition as well as benefits should be shared equally;
- deal with each case on its own facts, considering the nature of the assets involved, evidence as to the probable timing of their disposition, and the probable tax and other costs of disposition at that time, discounted as of valuation day; and
- deduct disposition costs before arriving at the equalization payment, except in the situation where “it is not clear, if ever” there will be a realization of the property.
Criteria for Deduction
In Bortnikov v. Rakitova (2016 ONCA 427), the Ontario Court of Appeal provided a guide to applying notional disposition costs:
As a general rule, in determining whether disposition costs should be deducted from an asset’s value, the analysis should take into account evidence of the probable timing of the asset’s disposition. It is appropriate to deduct disposition costs from net family property “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”: Sengmueller v. Sengmueller (1994), 1994 CanLII 8711 (ON CA), 17 O.R. (3d) 208 (C.A.), at pp. 216-17. An allowance for disposition costs from net family property should not be made in the case “where it is not clear when, if ever, a sale or transfer of property will be made”: McPherson v. McPherson (1988), 1988 CanLII 4732 (ON CA), 63 O.R. (2d) 641 (C.A.), at p. 647. However, it is not necessary for the court to determine whether the disposition of the assets is inevitable; rather, the court should determine on the basis of the evidence whether it is more likely than not that the assets would be sold, at which point disposition costs would inevitably be incurred: Buttar v. Buttar, 2013 ONCA 517, at para. 20. (emphasis added)
Further, as pointed out by Justice Kimmel in Oudeh v. Prior-Oudeh (2021 ONSC 3718), where there is only speculative evidence of a sale, it may be appropriate to discount the notional costs of a sale of property. For example, in Baiu v. Baiu (2014 ONSC 216), Justice Gilmore did not find that the sale of the former matrimonial home was speculative to the point where disposition costs could be ignored. Although the sale was some years away, the intention of the respondent was to sell it when the children had completed their high school education. The court accepted this evidence and found that it was “reasonable to apply a reduced disposition cost to the matrimonial home at the rate of 2.5%”.
We can thus deduce three general principles to follow in determining whether disposition costs should be deducted from an asset’s value, based on the above case law:
- When a sale is inevitable – deduct the full cost
- If it is not clear when, if ever, a sale will be made – do not deduct the cost
- When a sale will occur at some point between the immediate present and the distant future – deduct a discounted cost
Below is a further discussion of how judges in Ontario have applied these rules to cases involving notional disposition costs.
No deduction applicable
A prominent case where notional disposition costs were not deducted is Berta v. Berta (discussed above). In this case, one of the issues before the Ontario Court of Appeal was whether the trial judge had erred in assigning a nil value to the notional disposition costs of each of the wife’s and the husband’s corporate shares. In support of the wife’s argument that the trial judge erred by failing to value her share disposition costs at $384,884, she submitted that the sale of her shares was imminent as of the 2010 valuation date and she relied on undisputed evidence of the husband’s 2012 purchase of the wife’s shares for $2.2 million.
The Court of Appeal stated that the relevant inquiry was not what reasonable share disposition costs should have been assigned to the wife’s shares at the time of the 2012 share transaction but, rather, whether there was a reasonable likelihood at the valuation date that the wife would sell her shares and, if so, at what reasonable estimated value.
The trial judge found that, as of the valuation date, the wife’s sale of her shares was contemplated only as part of the parties’ proposed joint sale of the business to a third party. This sale had ultimately collapsed. Consequently, the Court of Appeal saw no basis to interfere with this aspect of the trial judge’s NFP calculation.
In Oudeh v. Prior-Oudeh (discussed above), it was entirely speculative as to whether the applicant would have to sell the matrimonial home or find some other means of financing the equalization payment he owed. Justice Kimmel found that, in such circumstances, it was fair and equitable to allow some deduction of notional disposition or financial costs and that the precise cost need not be determined. In exercise of her discretion, Justice Kimmel set the notional cost at 2.5% of the separation date value of the matrimonial home, as opposed to the 5% that was sought.
In Fielding v. Fielding (2014 ONSC 2272), notional disposition costs were allowed even though no evidence was led about an intention to sell. The court was not presented with any evidence by the wife of a present intention to sell the cottage; however, the court also accepted the reality that it would be sold at some point — whether it was actually disposed of, or whether there was a deemed disposition of it on the wife’s death. The court noted that the wife was in late middle age and recognized that her eventual death was “hardly remote”. Notional disposition costs of 5% were not permitted, since disposition was likely not for some time, but the court found that a deduction of notional disposition costs at 2% would be a “reasonable figure to represent a deferral of those costs to a future date”.
Recent case law discussing notional disposition costs
Daciuk v. Daciuk
In Daciuk v. Daciuk (2023 ONSC 70), Justice Kurz was presented with an NFP statement that excluded the notional disposition costs for the parties’ matrimonial home. After analysing the parties’ finances and reviewing the evidence before him, Kurz J. concluded that it was most likely that the matrimonial home would have to be sold to pay the equalization payment and support awards that he granted to the applicant. In those circumstances, the court reasoned that it was open for them to include notional costs of disposition.
Accordingly, Justice Kurz deducted 5% notional disposition costs from the value attributed to the matrimonial home and $1,000 as notional costs of legal fees for the sale.
Alexander v. Gensberger
In Alexander v. Gensberger (2023 ONSC 904), the applicant wife applied notional disposition costs to her RRSPs and investment accounts at the rate of 21% for the valuation date and the date of marriage. The respondent husband did not apply any notional disposition costs to his RRSPs and investment accounts.
Justice Kraft discussed the three rules laid down in Sengmueller (discussed above) and reiterated Justice Jarvis’ approach in Virc v. Blair (2016 ONSC 49) that in order to determine the appropriate notional RRSP tax rates – where the parties disagree – the court’s analysis must rely on evidence supporting the expected time of disposition. And, if the evidence is lacking, “the court may consider both agreed upon rates for other assets as well as hindsight evidence of post-separation [tax] rates and actual disposition costs incurred upon sale of RRSPs”.
Since neither party adduced any evidence as to the correct tax rate, Justice Kraft accepted the applicant wife’s 21% tax rate and applied the same rate to the respondent husband’s investment accounts.
Common Disposition Costs
Costs associated with sale of land or real estate property
The common costs associated with the sale of land and real estate properties are real estate commission and legal fees. In Oudeh v. Prior-Oudeh (discussed above), the court stated that it can take judicial notice that “a typical real estate commission for a vendor to pay in Toronto is 5% and presumably (t)he (husband) would like the court to infer that there will be some modest real estate transactional legal fees”.
In Sengmueller, the Court of Appeal established that RRSPs, in particular, are taxable in full, regardless of the time of realization, whether they are cashed in total, or taken by way of annuity.
However, there is no consistency in how courts have approached determining notional costs for RRSPs. As pointed out in Virc v. Blair (discussed above), one authority’s review of the case law observed that “in cases where deduction is allowed, the rate of deduction varies anywhere from 15 per cent to 30 per cent. No one percentage appears to be more common than another in the case law…”.
In Taylor v. Marshall (2016 ONSC 4547), the wife sought to have a notional disposition rate of 30% for her RRSPs. The husband took the position that the notional disposition rate should be 18%, as her income was low. As there was no expert evidence on this point, Justice Miller found that a reasonable notional disposition rate for the RRSPs was 20%, taking into account the wife’s income level. However, in Taylor, the court did not explain on what basis 20% was chosen and thus the determination appeared to be arbitrary.
In Townshend v. Townshend (2010 ONSC 6405), Justice Kruzick found that notional disposition costs take into account a number of factors, most importantly the age of the parties. His Honour stated that courts routinely discount RRSPs at 25%.
In C.Z. v. J.Y. (2021 ONSC 256), the husband requested that the notional disposition costs in respect of his RRSPs be at a rate of 35%. The wife took the position that the applicable tax rate for each of them was 25%. The husband relied on a decision that used 33.7% as the tax rate. However, Justice Himel noted that the evidence in the relied upon decision to support 33.7% came in the form of an expert's report. The husband in C.Z. v. J.Y. did not produce any expert evidence.
Justice Himel further reasoned as follows:
While the husband identifies that he plans to withdraw his RRSPs within 10 years after his retirement he provides no retirement date, nor any evidence of any retirement plans as of the date of separation. I am unprepared to make any finding about his retirement or his intentions respecting his RRSPs.
The husband testified that he focuses on growing his investments and avoids dissipating same. He states that if he disposes of the assets at one time the disposition rate would be as high as 50%.
I accept the wife's argument that there is no evidence to suggest that the husband will have to collapse his RRSPs "all at once", and no evidence that he contemplated same on the date of separation. At that time the husband was 45 years of age. Given the significant savings he has amassed in other vehicles (TFSAs, investment accounts, etc.), as well as the efforts he has undertaken to ensure tax efficiency (i.e., by maintaining investment loans to allow the ongoing deduction of carrying costs), the evidence suggests he will likely withdraw funds from his RRSPs gradually and in a manner that limits his tax burden as much as possible.
In Townshend v. Townshend , Kruzick J. found that notional disposition costs take into account a number of factors, most importantly the age of the parties. Courts routinely discount RRSPs by 25%.
I accept that 25% is an appropriate rate for each of the parties in the absence of expert evidence on the notional disposition costs.
Sometimes courts do not provide an explanation as to why a certain notional disposition cost was used over another. For example, in S. v. S. (2023 ONSC 882), Justice Pinto accepted 30% as the disposition cost for joint investments of the parties. The court did not offer any reasoning for the figure. However, it may have been because the investments were joint and thus any change in the percentage would have affected the parties equally.
On the other hand, courts can be quite specific in requiring proof before accepting certain disposition cost estimates. This occurred in Noble v. Curveira (2023 ONSC 1211) where the husband proposed 20% as a notional disposition cost to his RBC shares. The court did not allow any deduction reasoning as follows:
The respondent claims 20% for notional costs of disposition for his RBC shares.
I know that realizing on registered accounts runs into withholding taxes and can incur significant costs depending on the terms of the accounts. So, with the parties pennies apart on the notional costs of the registered accounts, I accepted the respondent's estimate as reasonable.
But I do not understand why the same 20% estimate would apply to notional disposition costs of the respondent's RBC shares. They are just shares in his name. There may be broker commission I suppose. But I have no idea of what, if any, tax consequence there may be on the disposition. With the respondent's line 150 income for the past two years being very modest indeed, the likely outcome of the taxation of any capital gains on the shares (if any) needs proof by evidence. I cannot just accept an arbitrary number that is not agreed by the applicant without any evidence or justification.
Accordingly, I find that the notional costs of disposition of the LIRA and RRSP are properly claimed at $21,024.74. I find that the respondent did not prove any notional disposition costs for his RBC shares.
Courts have noted that while determining disposition costs for pensions, a reliance on evidence is preferable. In Lambert v. Peachman (2017 ONSC 7450), Justice Woodley stated that pensions are contingent interests, and consequently the court examines what was “reasonably foreseeable on the valuation date”.
In Kruschenske v. Kruschenske (2018 ONSC 4342), Justice Cane assessed the wife’s retirement age and the factors that contributed towards an early retirement versus a later retirement. The court also had the benefit of an expert report from Guy Martel. Justice Cane concluded that the appropriate tax liability rate to be applied for the parties’ pensions was 19%.
In Meffe v. Meffe (2023 ONSC 3195), the wife hired an expert to determine the notional disposition costs with respect to her Ontario Teacher’s Pension Plan. In his report, the expert took into consideration the following assumptions:
- retirement age of 65,
- life expectancy of 80,
- wife would withdraw from her pension in equal amounts each year, and
- the withdrawals would be subject to an effective tax rate of 25% to 30%.
The expert proposed a mid-point between the two percentages which the court accepted.
The lesson in Meffe appears to be that for any report that is used, counsel should review the assumptions that are being relied on and ensure that they are consistent with the facts.
Other types of disposition costs
Other disposition costs include (a) capital gains tax, (b) taxes associated with a capital gain in the cash surrender value of a life insurance policy, and (c) costs for transfer of interest in a business/corporation, among others.
Notional costs of disposition are generally listed under Part 5: Debts and Other Liabilities of the Form 13.1 Financial Statement. However, we find it more convenient to list them immediately below the asset to which they relate. If you prefer this approach, don’t forget to list the value in brackets so that it will be deducted from the total value of assets. Disposition costs should generally be included for all relevant dates: the date of marriage, the date of separation, as well as the “today’s date” column in the Financial Statement. Creating an Excel spreadsheet to calculate dispositions costs is an effective way to ensure accuracy of the calculations as well as to provide a reference if the calculations need to be explained, verified or adjusted.
Hiring an expert is a relatively inexpensive process and can cost as little as $500 for a notational disposition cost report. We have used Guy Martel and his prices are reasonable and his turnaround time continues to be impeccable.