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Remember Income Tax Adjustments for Valuation of Net Family Assets


Determining values of assets to be divided as part of a marriage breakdown is complex. Of course, so is the whole process of separation and divorce.  There are more articles about these issues on my website (https://www.corkumfinancial.ca/financial-divorce-counselling/articles/). Clients and their lawyers often do not understand why income taxes must be considered as part of the valuation process.  Ignoring income taxes effects on certain assets can lead to costly errors and unfair settlements.  They also need to be considered in spousal support negotiations, but that is another topic.

I often tell my financial planning clients, “Do not think that the $100,000 showing on your RRSP account statement is actually worth $100,000.” Everyone knows (or should know) that an RRSP withdrawal will result in a tax bill unless they have more tax deductions than income.  For the same reasons, income tax costs will reduce the values of assets when equalizing them upon your separation.

“Value” is seldom specifically defined in legislation.  However, valuation experts, such as Chartered Business Valuators, will tell you that value is the price that an asset would sell for in an open and unrestricted market where both buyers and sellers have a reasonable knowledge of the asset and the marketplace, are not subject to any undue pressure to buy or sell, are acting in their own best interest, and have a reasonable time period to complete the transaction.

For example, assume a husband and a wife have only two assets. The first asset is a bank savings account of $100,000 belonging to the husband.  I will use the bank account as an example, but it could be the family’s principal residence or other tax-free assets.  Assume that the second asset is an RRSP of $100,000 belonging to the wife.  It could be a pension plan, real estate with large capital gains, or other taxable assets.  Next, let us consider income taxes.

Brief takeaway from this article

The present value of the  future tax costs of selling an asset should be deducted from in reaching today’s valuation if their is reasonable certainty that such costs will be incurred, and can be reasonably estimated.  Read the balance of this article for exceptions and a better understanding of this guidance.

The need for income tax adjustments

Is it fair to give the husband the bank account of $100,000 and give the wife the $100,000 RRSP? It certainly is not.  If the husband spends the money in the bank account tomorrow, he will have $100,000 to spend.  If the wife spends the money in the RRSP, she will first have income taxes to pay.  She will be left with much less money, typically only $60,000 to $70,000.  It will depend on her tax rate at the time of withdrawal.  Therefore, if you truly wish to equalize the assets, the husband must pay some money from the bank account to the wife to make up for this difference.  Once everyone realizes this problem, the question is, “How much must be paid to make up the difference?”  In a simple situation like this, it can be an easy calculation, as in the table below.  I am assuming the wife would pay 30% tax in this example.

Husband with Bank Balance

Wife with RRSP

Balance in account



Taxes on withdrawal at 30%



Balance remaining



Transfer of cash required to wife



Balances after transfers:
 Bank account



 RRSP (before tax balance)


$100,000 (worth $70,000)

 Total after taxes



What tax rate should be used?

Choosing the correct income tax rate is important. I will continue to use the RRSP as an example because it is the most common asset where this problem arises.  Certain professional advisors often use an arbitrary tax rate between 20% and 30%.  The correct rate would be the actual tax rate applicable at the time of withdrawal.  This should be the obvious choice.

However, there could be more than one alternative. If it were known that the RRSP (or other asset) would be sold immediately, then the person’s tax rate based on their current tax bracket should be used.  This would be the tax rate applicable on any increase in income, which is called the “marginal tax rate.”  Tax rates start out low, and gradually increase, such that the first amounts of income are always taxed lower than the later amounts.  Tax rates increase in steps (called tax brackets) as income rises, which you can see on my web site at https://www.corkumfinancial.ca/tax-financial-planning/articles/. See the article on Combined Marginal Tax Brackets and Rates for PEI for the current year.

For example, assume a person over the age of 65 has taxable income of $50,000. They would pay taxes of about $10,500 based on PEI 2014 tax rates.  At $50,000 of income, they would be in a 36% tax bracket.  This means that the next dollar they earn will be taxed at 36%.  However, if you do your math, you will note that $10,500 is only 21% of $50,000.  Their “average tax rate” is 21%, because they are still paying a lower tax rate on the first income earned.  Only the income within the higher tax bracket is taxed at the higher rate.

If the RRSP must be used immediately to pay for expenses, then a tax rate of 36% would be appropriate. In fact, the tax rate might be more if the extra income will push them into a higher tax bracket.  However, under normal circumstances, it would be expected that the RRSP would not be used until retirement age.  If that were the assumption, then I would use the average tax rate applicable to all income in retirement.  This would be 21% in my example.  The marginal rate would not be appropriate because the RRSP should be treated no differently than any other retirement income.  In addition, a person can usually plan on the timing of their withdrawals to minimize tax costs.  To determine the average rate requires a calculation of estimated retirement income.  This would include Old Age Security, Canada Pension Plan, pensions from employment, RRSP withdrawals and any other income.

Do you use the same or different rates for both spouses?

In many cases, I see the same tax rate being used for both spouses. This is certainly appropriate when both incomes are similar or taxable assets are small.  However, by way of another example, assume that both spouses have only two assets.  This time, each person has $100,000 in an RRSP.  Assume the wife has a retirement income, including RRSP withdrawals, of $50,000.  Her average income tax rate in PEI would be 21%.  In retirement, assume the husband will have a much higher taxable income.  If his expected income were $100,000, his average rate would be 31%, being higher than his wife’s tax rate.  For valuation purposes, her RRSP would be worth $79,000 ($100,000 less 21% tax).  His would be worth $69,000 (after deducting 31% tax).  Therefore, it would be unfair to say, “They both have equal RRSP’s, so we will let each keep their own RRSP and call it even.”

In many cases, all parties may agree that the difference is not material. Then, using the same rate will simplify the calculations and reduce professional fees.  However, such an agreement should not be made without due consideration of tax rate differences and the size of the assets.  This is especially true because some pension valuations for people nearing retirement may be near the million dollar mark.  In addition, differences in RRSP balances may be very high, which in themselves will trigger significant differences in retirement tax rates.

Note in the table below that the equalization transfer of $5,000 is an after-tax amount. The transfer is not $5,000, and it is not $5,000 increased by the husband’s tax rate of 31%.  If so, the transfer would be $5,000 divided by 0.69, which would be $7,246.  Using the wife’s tax rate of 21%, the transfer would be $6,329.  An equalization difference would remain.  The actual number as proven in the table below is a transfer of $6,757.  Hence, a complex calculation is required unless you are using computer software to assist you.



Before equalization:
RRSP balance



Retirement tax rate



Taxes paid



Value of RRSP – amounts differ due to taxes



“After-tax” adjustment required



After equalization (with an RRSP transfer of $6,757)
RRSP balances



Retirement tax rate



Taxes paid



Value of RRSP – now the same



The background for my tax adjustment opinions

My theory, I believe, is consistent with the way taxes are calculated for defined benefit pension plans. The Standards of Practice (March 2013) published by the Canadian Institute of Actuaries, Standard 4320.27 states,

“Income tax may be taken into account in the calculation. If it is taken into account, then the actuary would do so by calculating the average income tax rate based upon the member’s anticipated retirement income computed in “current” dollars, including accrued and projected future pension income, Canada Pension Plan, Old Age Security and other anticipated income, and continuance of the tax environment at the report date or the calculation date; i.e., assuming continuation of the existing tax rates, brackets, surtaxes and clawbacks, applied to the projected income on retirement expressed in “current” dollars.”

In addition, in the Saskatchewan legal case of Knippshild v. Knippshild, 1995 CanLII 5840 (SK QB), Justice Kelbuc refers to Long v. Long [1989] W.D.F.L. 671 (Ont. H.C.) regarding a deduction for income taxes related to a pension valuation:

“In my judgment, the principles of fairness and equity require that a deduction for tax obligations be made even though the Plan cannot be collapsed immediately. As to the discount rate, I am of the view the procedures as set out in Long v. Long [1989] W.D.F.L. 671 (Ont. H.C.) are applicable. They are:

  • when a court is satisfied as to when sheltered funds are to be collapsed, the tax deduction to be allowed should be the rate at which the owner would, in that year, be taxed, bearing in mind the sum total of all income including the face value of the R.R.S.P.’s for the given tax year.
  • when a court is not so satisfied, they should be discounted at the minimum income tax rate then applicable, UNLESS;
  • unusual and special circumstances warrant otherwise in which case a notional discount could be given depending on the unusual and special circumstances that might weigh in favour of this option.”


I hope this article, though complex, helps shed some light on the importance of considering income taxes in reaching asset valuations if a fair equalization of assets is intended. It also likely suggests the importance of using skilled financial advisors.

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum