Free and Clear? Understanding Contingent Disposition Costs

(Originally Posted January 15, 2019)

It is often said, ‘slow and steady wins the race’. After years of saving, it isn’t unusual for one to have acquired a family cottage, retirement savings in your RRSP, investments accumulating in your business, or a rental property on the side.

But if you withdraw the $1,000,000 from your RRSP, will you be left with the whole $1,000,000? Or if your real estate agent recommends a selling price of $400,000 for your rental property, are you free and clear to expect the whole $400,000 upon closing? Between real estate commissions, investment commissions, legal fees, income taxes, and disposition costs there are many ways in which you might reduce your proceeds more than you’d expect.

Although planning for taxes, commissions, and other disposition costs is important when planning your future cash flow, it’s equally important when equalizing property in a matrimonial dispute. If the goal is an equitable splitting of assets between spouses, then it’s important to understand and account for which assets may lead to future disposition costs.

Common Contingent Disposition Costs

Just as there are seemingly endless types of assets, there are a wide variety of disposition costs associated with those assets. From the common income tax to the less common land remediation fees, it’s important to consider what future costs are likely to be incurred upon selling your assets. We discuss two common disposition costs below:

1. Income Taxes

As one of Benjamin Franklin’s certainties in life, income taxes seem almost inevitable. A few common sources of disposition-related taxes are:

• Capital gains – from selling an asset for more than the original cost (a few common exceptions are principal residences, TFSA investments, and certain small businesses, farms and fisheries)
• Dividends – from paying cash out of a corporation
• RRSP or pension income – from withdrawing funds from a RRSP or RRIF
• Recaptured capital cost allowance – from some circumstances where an annual capital cost allowance has been claimed

For example – because of the tax differences – a $500,000 principal residence (which could be sold tax-free) is not the equivalent to a $500,000 cottage (which may have taxes upon disposition) for matrimonial equalization purposes.

2. Commissions

Typically paid to the individual that sells your assets on your behalf, commissions can be substantial and are often based on a percentage of the selling price. A few common commissions are:

• Real estate commissions – paid upon the sale of land and buildings
• Deferred sales charges – paid to investment advisors on the sale of some investments
• Broker fees – paid to the advisor that sells your business

Regardless of the type of disposition costs, it’s important to factor the expected costs into the matrimonial equalization.

Disposition costs can result in a substantial reduction of proceeds resulting from a sale of assets. Whether currently engaged in a sale, planning for the future, or determining a fair and equitable matrimonial settlement, it is important to have an informed understanding of the potential disposition costs.

If you would like to discuss the potential costs in your situation, please contact the experts at Davis Martindale.

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