Family law faces a dilemma of double dipping when it comes to stock options and other deferred compensation

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Laurie H. Pawlitza: The courts have drawn a distinction between whether the “double dip” is intended to pay child support or spousal support

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The Child Support Guidelines and the Spousal Support Advisory Guidelines have helped harmonize child support and spousal support awards across Canada. However, because support orders are based on the payor’s income, there remain a number of thorny issues when it comes to determining what that income is in any given year.

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A topic of debate concerns the earnings of executives who receive compensation in the form of restricted stock units, performance shares or stock options. In Ontario, unvested RSUs, performance shares and options granted before separation are valued and equalized in the property division, as are vested annuities before separation. This determination is clear because the definition of property in the Family Law Act includes property “devolved or quota.”

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Performance bonuses often represent half or more of an executive’s annual income. Where the scholarship recipient is also a support payor, in the year that the unearned and already equalized scholarships vest, the question becomes: do they still form part of the support payor’s income, even if they have already been shared as property?

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As Llana Nakonechny of the Ontario Superior Court observed in Brennan v. Lander, “The case law regarding the categorization of RSUs and other similar income-producing assets such as restricted stock awards and stock options as property or income for the calculation of child support and spouse is not settled.”

Referring to the Supreme Court of Canada decision in Boston v. Boston, which dealt with a similar issue regarding the support of a support payor, Judge Nakonechny acknowledged that the Supreme Court had decided that it is generally unfair to allow a support recipient to benefit from his former spousal pension both as an asset and as a source of income.

In family law terms, the equalization of a future interest in performance bonuses or a pension, and then the use of the same asset when it is acquired and falls on the payer’s tax return, is called ” double deduction”.

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In a number of cases, the courts have made a distinction between whether the “double dip” is intended to pay child support or spousal support. In Brennan, Nakonechy did just that, deciding that “the RSUs, which generated part of the (payer’s) income, were equalized. This income must be deducted from the respondent’s income for the calculation of alimony and retroactive alimony. However, I disagree with the respondent’s position with respect to child support. She then calculated the alimony to be paid, including the “double dip”.

More recently, in Doyle v. Canning, Alberta Court of Queen’s Bench Judge Anna Loparco dealt with the wife’s request to have the prior consent order set aside due to the husband’s failure to properly disclose. While not a case of “double dipping,” Loparco reviewed the husband’s compensation structure, which included employee exercised stock options, assorted stock savings to the company and dividends from stock savings associated with the company that have not been acquired. Participation in the stock savings plan was voluntary; the husband could contribute up to 10% of his income to the scheme, which would be matched 150% by his employer.

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The husband said his ability to cash in or otherwise dispose of the stock savings plan shares was limited and that all funds were part of a retirement plan. He also claimed that the inclusion of the value of exercised options and the stock savings plan would constitute a transfer of wealth.

Loparco ignored the husband’s position, saying the inclusion of the value of options exercised and income from the stock savings plan “is not a transfer of wealth; it is the recognition that what he has accumulated as income should benefit his children. To conclude otherwise would be totally unfair.

Loparco ultimately decided that while the value of vested and unexercised stock options was not income, the value of options exercised on its T4 slip was income. Similarly, she concluded that the taxable benefit on her T4 slip related to the stock savings plan that had vested that year and the unvested stock savings plan dividends were also income.

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Since child support is the right of the child, it seems like it is more likely that equalized and unearned options and RSUs will be “doubled” for child support. The courts seem to have a harder time with double-dipping for spousal support because the property equalization payment is the right of the spouse.

More recently, in an effort to avoid double dipping, many family law attorneys ask business valuators to calculate the difference between the value of the stock option or RSUs that has been equalized and the amount that formed part of the payor’s income after the separation. The reasoning is, of course, that in any appreciation in the value of options and RSUs when realized, what is part of the payor’s income has not been equalized.

To the extent that there has been an increase in value, some separating couples have agreed that the difference can be added to the payor’s income for the purpose of paying child support.

Only time will tell if this middle ground will be approved by the courts in the future when deciding the income of the support payor.

Laurie Pawlitza is a Senior Partner in the Family Law Group at Torkin Manes LLP in Toronto. [email protected]

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