Do Not Forget About Your Future Taxes When Dividing Matrimonial Property
Author: Calgary Family Lawyer Mat Wirove
The division of matrimonial assets upon divorce and separation is a very complex matter. While the law stipulates that matrimonial property is generally split 50/50, that may not make sense practically. For example, one party may want to keep the house, classic car, hobby plane and the travel trailer, while the other wants more in liquid assets. Typically, after deciding who keeps what, one party will pay out an equalization payment to the other to ensure fairness in the distribution of martial assets and debt. The question is, how does the property get valued when looking at a list of different types of assets?
A common issue is pre-tax assets such as RRSP’s, LIRA’s and RRIF’s. It is important to remember that an RRSP is a tax-deferred savings vehicle which is taxed on the withdrawal of funds. A dollar in a bank account is not the same as a dollar in an RRSP because to remove that dollar the holder of the RRSP has to pay taxes on the RRSP when it is cashed in. Tax rates, as we all know are progressive. The more income you make, the higher the tax rate. Therefore, your income and when you cash in the RRSP is going to affect its value. You will have to “net down” any RRSP’s based on your income to ensure the proper value is being used in any equalization calculation. For example, if Mr. and Ms. Smith are going through a divorce. Mr. Smith wants to keep his classic car worth approximately $40,000 and offers to roll over $40,000 from an RRSP to balance it out. If Ms. Smith’s tax rate is 25%, that $40,000 would only be worth $30,000 after Ms. Smith withdraws it. Therefore, a notional tax of 25% may be applied to the RRSP in calculating the division of assets.
Due to these tax implications, when dividing matrimonial property, it is generally best to treat all pre-tax assets separately from post-tax assets such as the home, car, and bank accounts. Compare apples to apples and oranges to oranges, as the old adage goes. If the parties want to keep the funds in an RRSP or other deferred tax savings vehicle, these pre-tax assets can be rolled over to a spouse on marriage breakdown to equalize pre-tax assets without incurring any income tax under the provisions of the Income Tax Act. However, if you intend to set off pre-tax assets against other assets in property equalization, a valuation by an expert is helpful to ensure the correct amount of notional tax is used.
There are many intricacies to consider when dealing with property division during divorce or separation. The lawyers at Crossroads Law are well versed in dividing matrimonial property and are available for consultations on these issues. Please contact our office today to learn more.