What Are Notional Taxes?

Article by Ken Fraser

When spouses separate in Ontario, it is often necessary to address issues that relate to the assets and liabilities owned by each spouse. To properly address these issues, the spouses must know the accurate value for each asset and liability. For many assets and liabilities, this process is simple. However, for some, there are unique considerations that influence their value. One such consideration is that some assets have inherent tax consequences that affect their value. An example of this is notional taxes.

Notional taxes are taxes that are not payable now, but will likely be payable with respect to the asset in the future. In the family law context, notional taxes often arise in connection with investments and retirement savings, such as RRSPs or pensions. While an RRSP or pension statement may show the current balance of those assets, that does not necessarily reflect the true value of the asset or the value to be used for family law purposes.

When the owner of the RRSP or the pension withdraws the money held within those accounts, they will have to pay taxes. Therefore, the true value of those assets cannot be determined until there is a consideration of the future taxes to be paid. An experienced family law lawyer can assist in reviewing these assets and making sure that the owner does not attribute an inappropriate value to those assets. This may include retaining the assistance of an accountant or an actuary.

Failing to consider notional taxes can result in unintended negative financial consequences. Therefore, it is imperative to seek appropriate legal assistance when addressing issues that relate to the assts and liabilities owned by each spouse. The family law team at Cohen Highly is well versed in these issues and prepared to assist you.