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The Child Support Guidelines and the Spousal Support Advisory Guidelines have helped harmonize the awards of child support and spousal support across Canada. However, as support orders are based on the income of the payor, there remain a number of vexing issues when determining what that income is in any given year.
One area of debate involves the earnings of executives who receive employment compensation in the form of restricted share units, performance shares or stock options. In Ontario, unvested RSUs, performance shares and options which were granted prior to separation, are valued and are equalized in the property division, just like pensions earned before separation. This determination is clear because the Family Law Act’s definition of property includes property that is “vested or contingent.”
Performance awards often form half or more of an executive’s annual income. When the award recipient is also a support payor, in the year that the unvested, already equalized awards vest, the question becomes: are they still part of the payor’s income for support, even if they have already been shared as property?
As Llana Nakonechny of the Superior Court of Ontario observed in Brennan vs. Lander, “The case law regarding whether to categorize RSUs and other similar income producing 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’s decision in Boston vs., Boston, which dealt with a similar issue regarding a support payor’s pension, Justice Nakonechny recognized that the Supreme Court had decided it is generally unfair to permit a support recipient to benefit from their former spouse’s pension both as an asset and as a source of income.
In family law terms, equalizing a future interest in performance awards or a pension, and then using the same asset when it vests and falls onto the payor’s income tax return, is referred to as “double-dipping.”
In a number of cases, the courts have drawn a distinction between whether the “double dip” is for the purposes of paying child support or spousal support. In Brennan, Nakonechy did just that, deciding that “RSUs, which generated part of (the payor’s) income have been equalized. That income should be deducted from the Respondent’s income for calculating spousal support and retroactive spousal support. However, I do not agree with the Respondent’s position as it relates to child support.” She then calculated the child support payable, including the “double dip.”
Most recently, in Doyle vs. Canning, Justice Anna Loparco of the Alberta Court of Queen’s Bench dealt with the wife’s request to set aside the prior consent order on the basis of the husband’s failure to properly disclose. While not a “double dipping” case, Loparco reviewed the husband’s compensation structure, which included exercised employee stock options, company-matched share savings and dividends from unvested company-matched share savings. Participation in the share-savings plan was voluntary; the husband could contribute up to 10 per cent of his income to the plan which would be matched 150 per cent by his employer.
The husband said his ability to cash in or otherwise dispose of the share savings plan shares was restricted, and that all of the monies formed part of a retirement plan. He also claimed that including the value of the exercised options and the share savings plan would be a wealth transfer.
Loparco gave short shrift to the husband’s position, saying that including the value of the exercised options and share savings plan income “is not a wealth transfer; it is the recognition that what he has accrued as income should benefit his children. To conclude otherwise would be wholly unfair.”
Loparco ultimately decided that while the value of vested, unexercised stock options was not income, the value of the exercised options on his T4 was income. Similarly, she found that the taxable benefit on his T4 related to the share savings plan which had vested in that year and the dividends from the unvested share savings plan were also income.
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As child support is the right of the child, it seems that it is more likely that equalized, unvested options and RSUs will be “double dipped” for child support. The courts appear to struggle more with double dipping for spousal support, as the property equalization payment is the right of the spouse.
Most recently, in an effort to avoid double-dipping, many family lawyers will ask business valuators to calculate the difference between the value of the stock option or RSU that was equalized and the amount that formed part of the payor’s income after separation. The rationale is, of course, that in any appreciation in value of options and RSUs when realized, which forms part of the payor’s income was not 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 purposes of paying spousal support.
Only time will tell whether this compromise position will be approved by the courts in the future when deciding the payor’s income for spousal support.
Laurie Pawlitza is a senior partner in the family law group at Torkin Manes LLP in Toronto. email@example.com