When a party has stock options or Restricted Stock Units (“RSUs”), additional considerations can arise following separation when settling issues of property division, spousal support and child support. These types of assets can be considered either property or income. Although stock sales will appear on the recipient party’s tax return, this does not mean that their value is unavailable for purposes of a support calculation until the sale has closed. In various recent cases, courts have distinguished when a party’s stock options may be considered income and how these types of assets can affect support payments.
Before the parties can divide assets, they must be valued and included in the parties’ net family property calculations. The differences between these calculations are used to determine the amount of equalization payment owing from one party to the other. In order to complete the net family property calculations, this process requires determining whether an item is considered to be “property” under the Family Law Act.
In Buttrum v. Buttrum, the husband held stock options, and a question arose as to what the value of these stock options was as of the valuation date. The parties retained business valuators, however, the husband claimed that the stock options had no value because they had not yet vested as of the valuation date. Justice Aitken explained that under the Family Law Act, “property” included “any interest, present or future, vested or contingent, in real or personal property.” Consequently, even though the husband’s stock options were unvested, they were considered property as of the valuation date because he had “a present right to acquire something in the future, provided certain conditions were met.”
As the Court noted, this situation is similar to a spouse who holds rights to a pension that has not yet been vested, as these rights are considered property and are included in that party’s net family property calculation. The fact that stock options cannot be exercised on the valuation date may impact their value, however, it does not mean that they have no value at all.
If unvested stock options are viewed as property, how do courts approach stock options that have vested but are unexercised? This was at issue in Patterson v. Patterson in relation to spousal support payments. The husband received annual stock options as a portion of his employment compensation. One option for the Court’s consideration was that the stock options should be included as income when they are exercised. The Court looked to the earlier case of Marinangeli v. Marinangeli for guidance, as this case held that gains from the options would be included as income for child support purposes.
Based on Marinangeli v. Marinangeli, the husband claimed that his stock options would be included as income in the year that they were exercised. Justice McLaren disagreed with this argument and did not believe that the decision in Marinangeli v. Marinangeli concerned the timing of exercising the options. Justice McLaren relied on section 19 of the Federal Child Support Guidelines, which enables courts to impute income in a range of circumstances, including where:
(d) it appears that income has been diverted, which would affect the level of child support to be determined under these Guidelines;
(e) the spouse’s property is not reasonably utilized to generate income.
The husband had received options annually for ten years prior to the hearing, and if they were only counted as income when they were exercised, there could be over one million dollars in income that would not be available for child support considerations. If this occurred, the husband’s property would not be reasonably utilized to generate income according to section 19. Therefore, options that have vested will be included in the recipient’s income in the year that they vest.
In A.E. v. A.E, Justice Chappel noted that prior cases dealing with income-producing assets, such as Restricted Stock Units and stock options, within the context of support and property claims, had established that such assets can be treated as either property or income depending on the circumstances. Justice Chappel also confirmed that once the asset vests, it should be included in the party’s income in the year of vesting to determine child and spousal support awards. This approach can be used irrespective of whether the party chooses to redeem the awards in that year or whether they appear on that party’s income tax return for the year.
When the value of an asset has been equalized as part of a property settlement, there may be concerns about “double dipping” when the asset is also counted as income. This can occur when there are claims relating to property division and support awards at issue. The Supreme Court of Canada addressed the concern in Boston v. Boston in the context of pensions. In that case, the Supreme Court acknowledged the potential for a double recovery where part of a support payor’s pension has been equalized as property, with the full amount of the pension counted as income for support payments when the party begins to draw upon the pension. If the recipient were to share in the pension income through an award of spousal support when the payor spouse retires, the recipient would recover from the pension twice.
Accordingly, in Boston v. Boston, the Supreme Court indicated that the focus should be on “that portion of the payor’s income and assets that has not been part of the equalization or division of matrimonial assets” when dealing with spousal support payments. However, the Supreme Court warned that in some cases, double recovery cannot be avoided and stated that when:
“an economic hardship from the marriage or its breakdown persists. Double recovery may also be permitted in spousal support orders/agreements based mainly on need as opposed to compensation.”
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