Family law faces double-dipping dilemma when it comes to stock options, other deferred compensation

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The Little one Help Pointers and the Spousal Help Advisory Pointers have helped harmonize the awards of kid help and spousal help throughout Canada. Nevertheless, as help orders are based mostly on the revenue of the payor, there stay quite a few vexing points when figuring out what that revenue is in any given yr.

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One space of debate includes the earnings of executives who obtain employment compensation within the type of restricted share models, efficiency shares or inventory choices. In Ontario, unvested RSUs, efficiency shares and choices which had been granted previous to separation, are valued and are equalized within the property division, identical to pensions earned earlier than separation. This dedication is evident as a result of the Household Regulation Act’s definition of property consists of property that’s “vested or contingent.”

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Efficiency awards typically kind half or extra of an govt’s annual revenue. When the award recipient can also be a help payor, within the yr that the unvested, already equalized awards vest, the query turns into: are they nonetheless a part of the payor’s revenue for help, even when they’ve already been shared as property?

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As Llana Nakonechny of the Superior Court docket of Ontario noticed in Brennan vs. Lander, “The case legislation concerning whether or not to categorize RSUs and different comparable revenue producing belongings comparable to Restricted Share Awards and inventory choices as property or revenue for calculating youngster and spousal help is just not settled.”

Referring to the Supreme Court docket of Canada’s resolution in Boston vs., Boston, which handled the same concern concerning a help payor’s pension, Justice Nakonechny acknowledged that the Supreme Court docket had determined it’s typically unfair to allow a help recipient to learn from their former partner’s pension each as an asset and as a supply of revenue.

In household legislation phrases, equalizing a future curiosity in efficiency awards or a pension, after which utilizing the identical asset when it vests and falls onto the payor’s revenue tax return, is known as “double-dipping.”

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In quite a few circumstances, the courts have drawn a distinction between whether or not the “double dip” is for the needs of paying youngster help or spousal help. In Brennan, Nakonechy did simply that, deciding that “RSUs, which generated a part of (the payor’s) revenue have been equalized. That revenue ought to be deducted from the Respondent’s revenue for calculating spousal help and retroactive spousal help. Nevertheless, I don’t agree with the Respondent’s place because it pertains to youngster help.” She then calculated the kid help payable, together with the “double dip.”

Most lately, in Doyle vs. Canning, Justice Anna Loparco of the Alberta Court docket of Queen’s Bench handled the spouse’s request to put aside the prior consent order on the premise of the husband’s failure to correctly disclose. Whereas not a “double dipping” case, Loparco reviewed the husband’s compensation construction, which included exercised worker inventory choices, company-matched share financial savings and dividends from unvested company-matched share financial savings. Participation within the share-savings plan was voluntary; the husband may contribute as much as 10 per cent of his revenue to the plan which might be matched 150 per cent by his employer.

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The husband mentioned his skill to money in or in any other case get rid of the share financial savings plan shares was restricted, and that all the monies fashioned a part of a retirement plan. He additionally claimed that together with the worth of the exercised choices and the share financial savings plan could be a wealth switch.

Loparco gave quick shrift to the husband’s place, saying that together with the worth of the exercised choices and share financial savings plan revenue “is just not a wealth switch; it’s the recognition that what he has accrued as revenue ought to profit his youngsters. To conclude in any other case could be wholly unfair.”

Loparco in the end determined that whereas the worth of vested, unexercised inventory choices was not revenue, the worth of the exercised choices on his T4 was revenue. Equally, she discovered that the taxable profit on his T4 associated to the share financial savings plan which had vested in that yr and the dividends from the unvested share financial savings plan had been additionally revenue.

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As youngster help is the precise of the kid, evidently it’s extra seemingly that equalized, unvested choices and RSUs might be “double dipped” for youngster help. The courts seem to battle extra with double dipping for spousal help, because the property equalization cost is the precise of the partner.

Most lately, in an effort to keep away from double-dipping, many household attorneys will ask enterprise valuators to calculate the distinction between the worth of the inventory possibility or RSU that was equalized and the quantity that fashioned a part of the payor’s revenue after separation. The rationale is, after all, that in any appreciation in worth of choices and RSUs when realized, which kinds a part of the payor’s revenue was not equalized.

To the extent that there was a rise in worth, some separating {couples} have agreed that the distinction might be added to the payor’s revenue for the needs of paying spousal help.

Solely time will inform whether or not this compromise place might be authorised by the courts sooner or later when deciding the payor’s revenue for spousal help.

Laurie Pawlitza is a senior accomplice within the household legislation group at Torkin Manes LLP in Toronto. [email protected]