Restricted Share Units (RSU) in Ontario Family Law
By Mason Morningstar – 4 Minute Read
What Is a Restricted Share Unit (RSU)?
Restricted share units (RSUs) are a form of employee compensation, typically given to higher level executives at large companies. RSUs are essentially hypothetical (or “notional”) share units given to employees that track the value of the company’s underlying shares, but vest at some point in the future. Conceptually, RSUs are like a deferred bonus for employees. The employer promises to provide the employee with a benefit at some point in the future, after certain conditions are met. Those conditions may be based simply on the passage of time (i.e. the vesting period may start after 3 years), company performance, individual performance, or a combination of several factors.
When the RSUs vest, they become “settled”. RSUs may be settled by cash, where the employee receives a cash payout based on the value of the shares as of the date of vesting; alternatively, the employee may hold onto the shares they receive and sell them at a future date. These decisions could lead to different tax treatment that may benefit from accounting advice. In any event, settled RSUs trigger consequences in the family law world, some of which can be complex.
Considerations For Family Law Purposes
RSUs can be treated as assets for property division, income for support purposes, or both. RSUs that have not yet vested as of the date of separation provide the employee with a present right to acquire an asset in the future. This right to acquire a future asset is considered a “contingent” interest that falls under the broad definition of “property” in the Family Law Act, and is therefore subject to property division. The value of this asset, net of its tax liability and any other notional disposition costs it may attract, is then included in that person’s net family property.
RSUs are considered income for support purposes only in the year they vest, and not in the year they were received. For example, if Nancy enters into an RSU Agreement with her employer in 2015 which stipulates that her RSUs will begin vesting in the year 2018, the RSUs will only be included in her income for support purposes as of 2018. (However, they will still be considered assets for property division as of 2015.)
If Nancy elects to retain the shares in 2018 and sell them at a later date, the value of those shares may still be included in her income for support purposes, although she did not actually receive cash for them in that year. In this situation, her income may be “imputed” to include the full value of the shares (less their disposition costs) pursuant to section 19 of the Child Support Guidelines.
Additional considerations come into play when RSUs will be subject to property division and considered income for support purposes at the same time. If the value of Nancy’s RSUs are considered an asset for property division, and those same RSUs are included in Nancy’s income for support purposes, her partner may benefit twice (once when property is divided, and again when her income is calculated). This is called “double dipping”, which the courts treat with caution and generally try to avoid.
Accordingly, where RSUs have already been equalized under the property division scheme, they will generally be excluded from that spouse’s income for support purposes. However, a major exception to this is triggered when child support comes into play. Courts view property division as a right between the spouses, whereas child support is the right of the child. As such, courts have reasoned that children should be entitled to benefit from their parents’ income, even when the source of that income was previously subject to property division. Practically, this could result in one spouse having two different incomes in the family law world: one for child support (which will be higher), and one for spousal support (which will be lower).
Family law can become complex quickly, particularly when dealing with financial issues. Speak with a family lawyer with knowledge of this area if you need assistance.
As always, none of the above is legal advice; it is information only. If you have questions about your situation, speak to a knowledgeable family lawyer for assistance.
Written by Mason Morningstar, Toronto Family Lawyer