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Family law faces a double dilemma when it comes to stock options, other deferred benefits

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Personal Finance Family Finance

Laurie H. Pawlitza: Courts have distinguished whether the ‘double dip’ is for paying child support or spousal support

In family law terms, equating a future interest in performance awards or a pension, and then using the same asset when it vests and lands on the payer's income tax return, is called In family law terms, equating a future interest in performance awards or a pension, and then using the same asset when it vests and lands on the payer’s income tax return, is called “double-dipping.” Photo by Brent Lewin/Bloomberg

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The Child Support and Spouse Guidance Guidelines have helped to harmonize child support and spousal support payments across Canada. However, because support orders are based on the payer’s income, some annoying problems remain in determining what that income is in any given year.

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A topic of discussion concerns the earnings of executives who receive labor compensation in the form of restricted shares, performance shares or stock options. In Ontario, unvested RSUs, performance shares and options granted before the demerger are valued and settled in the ownership division, as are pensions earned before the demerger. This finding is clear because the definition of property in the Family Law Act also includes property that is “residential or contingent.”

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Performance incentives often make up half or more of an executive’s annual income. When the recipient of the award is also a support payer, in the year the unallocated rewards already paid become unconditional, the question becomes: are they still part of the support payer’s income, even if they are already property are shared?

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As Llana Nakonechny of the Superior Court of Ontario noted in Brennan vs. Lander: “The case law regarding categorizing RSUs and other similar income-generating assets such as Restricted Share Awards and stock options as property or income for calculating child and spousal support is not settled.”

Referring to the Supreme Court of Canada decision in Boston vs. Boston, dealing with a similar issue regarding a support payer’s pension, Judge Nakonechny acknowledged that the Supreme Court had ruled that it is generally unfair to allow a support recipient to take advantage of their former partner’s pension as an asset. and as a source of income.

In family law terms, equating a future interest in performance awards or a pension, and then using the same asset when it vests and lands on the payer’s income tax return, is called “double-dipping.”

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In a number of cases, the courts have distinguished between whether the “double dip” is intended for the payment of child support or spousal support. In Brennan, Nakonechy did just that, concluding that “RSUs, which generated a portion of (payer’s) income, have been settled. That income must be deducted from Defendant’s income for the purposes of calculating spousal support and retroactive spousal support.” However, I do not agree with Defendant’s position regarding child support.” She then calculated the child support to be paid, including the ‘double dip’.

Most recently, in Doyle vs. Canning, Judge Anna Loparco of the Alberta Court of Queen’s Bench heard the wife’s request to withdraw the prior consent warrant based on the husband’s failure to properly disclose. While not a “double dipping” case, Loparco revised the spouse’s compensation structure, including exercised employee stock options, company-related stock savings and dividends from unvested company-related stock savings. Participation in the stock savings plan was voluntary; the man could contribute up to 10 percent of his income to the plan, which would be matched 150 percent by his employer.

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The husband said his ability to redeem or otherwise dispose of the stock savings plan shares was limited and all the money was part of a retirement plan. He also claimed that including the value of the options exercised and the stock savings plan would be a capital transfer.

Loparco made short work of the spouse’s position, saying that including the value of the options exercised and the income from the savings plan “is not a transfer of wealth; it is the recognition that whatever he has built up as income should benefit his children. To conclude otherwise would be completely unfair.”

Loparco eventually concluded that while the value of vested unexercised stock options was not income, the value of exercised options on his T4 was income. Likewise, she found that the taxable benefit on his T4 was related to the stock savings plan that vested that year and the dividends from the unvested stock savings plan were also income.

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Since child support is the child’s right, it seems more likely that assimilated, non-vested options and RSUs will be “double-dipped” for child support. The courts seem to struggle more with double immersion for spousal maintenance, as the payment of property equalization is the right of the spouse.

Most recently, in an effort to avoid double-dipping, many family lawyers will ask business appraisers to calculate the difference between the value of the stock option or RSU that was liquidated and the amount that was part of the payer’s income after divorce. The rationale, of course, is that any appreciation in value of options and RSUs when realized, which are part of the payer’s income, was not equalized.

To the extent that there is an increase in value, some divorcing couples have agreed that the difference can be added to the payer’s income for paying spousal maintenance.

Only time will tell whether this compromise position will be approved by the courts in the future when determining the payer’s income for spousal support.

Laurie Pawlitza is a senior partner in the family law group at Torkin Manes LLP in Toronto. lpawlitza@torkinmanes.com

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