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.
Stock Options
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.