Stock Options and Restricted Share Units
Equity compensation is frequently the second largest asset in an executive separation, and the one most often overlooked or mishandled in the arithmetic.
Start My Enquiry →Equity compensation is frequently the second largest asset in an executive separation, and the one most often overlooked or mishandled in the arithmetic.
Start My Enquiry →Option Plans | Vesting Schedules | Deferred Units | Tax on Exercise | Support Income
Yes. Stock options, restricted share units and similar awards held at the date of separation form part of net family property and must be disclosed and valued, whether or not they have vested. Unvested awards are not worthless, because they carry a contingent value that can be assessed. Awards granted after separation are generally not property to be equalised, but they can be relevant to income for support. The most common error is leaving them off the financial statement altogether.
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Equity compensation is disclosed incorrectly more often than any other executive asset, and usually without any intention to mislead. People report what appears on a brokerage statement and omit awards that have been granted but not vested, because those do not feel like something they own yet. In law they are property with a value, and omitting them is a disclosure failure with consequences.
What is needed is the plan documentation and the grant history, not a summary. Each award has a grant date, a vesting schedule, an exercise price where applicable, and conditions that may include continued employment or performance targets. Two awards of the same nominal size can be worth very different amounts depending on those terms.
Where a spouse suspects awards have not been disclosed, the route is a disclosure request and, if necessary, a motion. Employers will produce plan records on request in the right circumstances, and the paper trail in this area is unusually complete because it has to be for tax reasons.
An unvested award is a contingent right, and contingent rights are valued rather than ignored. For options, valuation models are available that account for the exercise price, the time remaining, and volatility. For restricted share units, the starting point is the share price with discounts for the vesting risk and the time to receipt.
A separate question is how much of an award relates to the period of the marriage. An award granted during the marriage but vesting over four years may be partly compensation for work performed before separation and partly an incentive for work performed after it. Apportionment approaches exist, and the fairest allocation depends on why the award was granted, which the plan documents usually reveal.
Instead of valuing and equalising, the parties can sometimes agree to share the award in kind when it vests, with the employee spouse holding it in trust. This avoids paying today for something that may never materialise, and it carries its own difficulties around tax, timing and continued employment. Which structure is preferable depends on the plan and on the relationship between the parties.
The same award cannot fairly be equalised as property and then counted again as income for support in the same period. That is double recovery, and Ontario courts guard against it. The practical rule of thumb is that awards held at separation are property, and awards granted after separation are income when they are realised.
The line is not always clean. An award granted before separation but vesting long after it may be equalised in part and treated as income in part. Getting this articulated in the agreement matters, because a settlement that is silent leaves the argument to be had later, at which point positions have hardened and the money has usually been spent.
For support purposes, timing produces distortion. Income that is lumpy, arriving in a large amount every few years when awards vest, does not sit comfortably with support calculated annually. Averaging, or a formula that shares realised awards as they arrive, generally produces a fairer result than treating an exceptional year as the new normal.
Equity compensation is taxed when it is exercised or when it vests, depending on the instrument, and the tax is significant. Dividing awards on a gross basis hands one spouse a pre tax figure and leaves the other with the liability. Any competent division accounts for the tax that will actually be paid.
There are further practical constraints that a valuation does not capture. Blackout periods restrict when an employee may transact. Insider trading rules apply to senior people. Some plans prohibit transfer or assignment outright, which means an in kind division has to be structured as a trust arrangement rather than a transfer.
None of this is a reason to avoid dealing with equity compensation. It is a reason to deal with it precisely, in language that says what happens on vesting, who bears the tax, what occurs if employment ends, and how the award is dealt with if the company is acquired.
Use our Child Support Calculator for an instant estimate based on Ontario law. Takes under a minute, and you can have a detailed breakdown emailed to you.
Our lawyers deal with equity and deferred compensation in separations. Call, email, or arrange a consultation. Bring your plan documents and grant history if you have them.
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