Stock Options: Income or Property?
When it comes to divorce between affluent couples, the legal and financial untangling of Bill and Melinda Gates’ 27-year marriage might top them all. Bill has a current 2022 estimated net worth of about US$134 billion, so the fair division of the couple’s various assets and investments will likely take considerable time and expertise.
Apparently the process of dividing up their vast portfolio of shareholdings has already begun: As was last year, immediately after their formal separation Bill transferred to Melinda more than 14 million shares of Canadian National Railway Company, and over 2.9 million shares of the company AutoNation. At the time Melinda received them, these shares were collectively worth more than US$1.8 billion.
Although Bill transferred shares he already owned, there can be significant potential future value in stock options and Restricted Stock Units (known as RSUs). Conceptually, these can have the characteristics of either a fixed asset, and an income-producing one – or both, depending on the context. This begs the question:
How are stock options treated under Canadian divorce law?
A very recent Ontario case called A.E v. A.E. sums up the principle this way: For the purposes of support and property claims these types of assets may be treated as either property or income, depending on the context in which they are being evaluated, and depending on the circumstances of the case.
Stock Options as Income
In general, any stock options or RSUs that have already vested are considered to be a benefit that accrues to the spouse who receives them, and are included in his or her income in the year that they vest. (This rule applies even if that spouse does not redeem the awards in that year, and regardless of whether they appear on that year’s Income Tax Return. In such cases, the income can be imputed by a court, either as regular income or as a one-time windfall, as the case may be).
The most straightforward scenario for using an “income” characterization, pertains to child support. The Child Support Guidelines clearly state that when calculating a paying spouse’s income for child support purposes, any stock options and RSUs that are vested or paid out to that spouse are considered “income” for child support purposes.
With that said – and while a regular exercise of stock options may be treated differently – a one-time redemption of stock options might not always be included as income even for these purposes. This will be left up to the court’s discretion. However, any such exclusion may evaporate if the spouse is deliberately choosing to defer the exercise of options, rather than take regular compensation, as a means of trying to realize a great amount.
Note that a support-paying spouse may have one income figure for child support, and a different one for spousal support/property division. Again, this will depend heavily on the facts.
Stock Options as Property
In contrast to vested stock options, if at the date of separation any options to purchase shares still remain unvested in a spouse, then they constitute a present right to acquire something in the future (usually with certain conditions attached). This puts them within the broad definition of “property” in section 4(1) of the Family Law Act, and their value, with a deduction for tax liability, is subject to the equalization scheme set out in that legislation. They are treated similarly to a pension that has not yet vested at the separation/valuation date.
Valuation Problems
Putting a true value on a large portfolio of stock options can be challenging when they are worth a certain amount at separation, but a much lower one by the time of trial. This is especially pertinent these days, when the ongoing economic fallout of the COVID-19 pandemic may have forced the stock-owning spouse’s shares to plummet post-separation. When these diminished options are in the hands of a support-paying spouse, the argument can be made that – to avoid an unconscionable situation – they should be subject to an unequal division under s. 5(6) of the Ontario Family Law Act.
This will be determined according to the facts, but the approach is illustrated in Sfeir v. Sfeir, where a support-paying husband’s stock options, originally worth about USD$90,000, depreciated drastically after the valuation date. After cashing in nearly US$30,000 to pay support, the husband saw his remaining unexercised stock options drop in value to about US$7,600 by the time of trial. He had refrained from making major trades or selling the options up to that point, following the advice of his own lawyers who were still negotiating with the wife. In rejecting the husband’s request for an unequal division, the court found the situation was not unconscionable to the point where the wife should be forced to share in the post-separation decline in the value of the husband’s stock options. Instead, he was required to include the entire US$90,000 in his Net Family Property Statement.
As these cases show, the treatment and valuation of stock options and RSUs on divorce is tricky – and no doubt Bill and Melinda Gates each have a fleet of lawyers helping them through it. If you have questions about your own unique situation, give our offices a call.
For the full text of the decision, see:
A.E v. A.E., 2021 ONSC 8189, 2021 CarswellOnt 18880 [The case is not yet on CanLII]
Sfeir v. Sfeir, 2010 ONSC 1163 (CanLII)
Marinangeli v. Marinangeli, 2003 CanLII 27673 (ON CA)
Serra v. Serra, 2009 ONCA 105 (CanLII)
