Need to Know for High Net-Worth Earners
As a high net worth individual, you may have specific concerns about the consequences of divorce, including division of property and support. Here are the highlights of some of the specific issues that may affect you as a high income earner.
Under the Family Law Act, there is equal division of financial gains of the marriage.
The net family property (NFP) of each spouse is calculated by finding his or her net worth on the date of separation (the valuation date) and subtracting his or her net worth on the date of marriage, and excluding all forms of excludable income or property gained over the course of the marriage. The spouse with the lesser NFP is entitled to one-half the difference between the spouses’ NFPs (equalization of NFP).
Stock options are typically valued for equalization purposes using the Black Scholes Method. This method is complicated and generally completed by a chartered business valuator (CBV). Determining whether it is appropriate to hire a valuator will depend on the estimated value of the stock option (for example, if hiring a valuator is as expensive as the value of the stock, then it is not worth it to hire a valuator).
The objective of the Black Scholes option pricing formula is to calculate the value of an option. The calculated price does not favour either the buyer or seller. Because employee stock options cannot typically be traded or sold, it is common practice for valuators to use a value to owner definition as there is no willing buyer.
Stock options are valued on the valuation date and form part of a spouse’s NFP. Accordingly, the value of stock options may form part of an equalization payment. Spouses who hold stock options may be concerned that they will be “hit twice”: first, when the value of the stock option is equalized, and second, if the value of the stock option forms part of their income for the purpose of calculating support.
Although the courts generally do not allow “double dipping” when calculating spousal support, they will allow it for child support.
Under the Federal Child Support Guidelines, the “double dipping” argument (that the court should essentially order an amount for support that varies from the Guidelines amount due to the matrimonial property agreement between the parties) is limited by s.17(6) of the Divorce Act. That section states that a court may award an amount different from the guideline amount only if it is satisfied that: 1) special provisions in an order, judgment or written agreement respecting the financial obligations of the spouses, or the division or transfer of their property, directly or indirectly benefit a child, or that special provisions have otherwise been made for the benefit of a child; and 2) the application of the applicable guidelines would result in an amount of child support that is inequitable given those special provisions.
Where there is no indication in the parties’ agreement that the matrimonial property division was intended to or did benefit the parties’ children, the courts have deemed it appropriate to include a non-recurring capital gain for the purposes of calculating the income of a support payor. In that instance, the payee is not considered to be “double dipping” because the matrimonial property division upon divorce was not for the children’s benefit.
On the other hand, a claim for spousal support based on the proceeds from the sale of the payor’s share of the matrimonial assets which have been equalized would raise concerns about double dipping. Where a payor’s income is higher as a result of, for example, the exercise and disposition of employee stock options upon termination of employment, a court will generally not include this amount in calculating spousal support (Shields v Shields, 2006).
Child and Spousal Support “Ceilings”
Support is calculated using prescribed formulas. Child support is determined using the Child Support Guidelines (CSG), and depends on the payor spouse’s income and the number of children for whom support is owed. Spousal support is determined using the Spousal Support Advisory Guidelines (SSAG). While the SSAG are merely recommendations (not legislated like the CSG), they are very influential and courts will usually need justification to vary them.
The SSAG formulas generate ranges for both amount and duration and consider the length of cohabitation, not simply the length of the marriage. The formula to be applied depends on whether the payor is also paying child support. Unlike child support, however, a spouse must establish entitlement to spousal support before amount and duration may be considered.
The calculation of child support for spousal incomes of more than $150,000 differs somewhat (s. 4 CSG). The CSG give specific values of child support up to a spousal income of $150,000, and a formula for calculating an additional amount where spousal income exceeds $150,000. Section 4 grants the court discretion to either use the Table formula for calculating the additional amount or, if the resulting level of support is deemed “inappropriate,” to award the additional amount having regard to the conditions, needs and financial ability of each spouse.
In reality, judges rarely use their discretion to lower the amount of support owed when the payor’s income is under several million dollars, opting rather to use the Table formula for calculating support.
Similarly, the SSAG has a “ceiling” for payor’s with a gross annual income of more than $350,000.
The ceiling is not an absolute or hard cap, and spousal support can and usually does increase for a payor income above $350,000 (Smith v Smith, 2008). Although the formulas may provide an appropriate method of determining spousal support in an individual case (depending on the facts), the formulas are not to be applied automatically above the ceiling.
The outcome in cases involving a payor spouse with an income above the spousal support ceiling generally depend on the specific facts of the case, and can go either way.