Not All Assets Are Equal

When going through a divorce, you will be required to list all your personal assets, including what you came into the marriage with, acquired during the marriage, and a net present value of what those items are worth. You will be required to list the value before marriage if you owned the assets beforehand, and what the actual value of those assets are upon your separation date. But, not all assets are not considered equal.

Some assets depreciate in value while others will appreciate in value. Real estate is usually an item that will appreciate over time however, if you used marital assets to pay for a renovation or upgrade, this needs to be captured as a marital asset.

Investments are another asset that can be volatile in value. If you have an RRSP before entering into a relationship, you need to capture the value at the date of marriage, and the existing value upon separation. Depending upon the type of investments, you could have a balance that looks very different from what the investments were worth when you entered into the relationship, either positively or negatively, depending upon the risk tolerance that you selected.

Items like cars, furniture and personal effects tend to be assets that depreciate in value. The value of these assets are determined by what someone would be willing to purchase these items for on the open market. If you can agree to split these items in a fair and reasonable way, this makes the most amount of sense. Remember that what you would receive for items like furniture would generally not be enough to replace those items. Also, remember that sentimental value doesn’t get factored into an item’s true worth.

Some assets have greater liquidity than other assets. Liquidity represents the ease in which an asset can be converted to cash. Bank accounts have the greatest liquidity whereas items like recreational real estate, or business assets, are more difficult to convert to cash. A remote cottage property in northern Ontario may be worth $250,000, but it may take a year before the seller gets the proceeds because these assets are not in as high of demand, thus not as easily convertible to cash.

A business asset is complex and generally requires a couple of valuations from professional business valuators. These are not precise in their assessment, and are subject to opinion. It is not uncommon to have a couple of companies doing valuations. One valuator may value a business at 2 times earnings, whereas another company may value a business’ worth at 4 times earnings. The difference in these valuations can represent millions of dollars and a huge discrepancy in value. The other thing to factor into the equation is these valuations are very expensive to undertake.

Some assets are tax exempt, whereas some are subject to capital gains tax. The principle resident is tax exempt whereas assets like a pension, registered investments, or recreational and investment properties are subject to capital gains or income tax. If you must liquidate registered investments, these assets become part of your income in that taxation year, and are taxed at your marginal tax rate. Capital gains tax is the net difference between what you purchased the property for and what you sell it for, less any expenses incurred to increase the value of a property. Assets that are subjected to potential taxation are best not to be liquidated, and thus not subject to taxation, at least not immediately.

Not all assets are created equally, nor should they be. Assets that can be split between couples equally should be divided in an amicable fashion if possible. When it comes to assets that have tax consequences, parties should figure out if these can be split without liquidating so as not to face any tax obligation. If assets like a family cottage can be bought out, then it’s advisable to take this measure. Taxes will not be avoided – but instead deferred to when the property is sold at a later date or with registered investments, until you access them for your retirement at a lower marginal tax rate.