British Columbia Law

Divorce and Executive Compensation in BC: Stock Options, RSUs, and Deferred Bonuses

By Andrew Liggett, Sea to Sky Law, New Westminster, BC

As executive and professional compensation packages increasingly rely on equity — stock options, restricted share units (RSUs), long-term incentive plans (LTIPs), and deferred bonuses — the question of how to treat these assets in a BC divorce has become one of the most technically demanding areas of family law.

The core challenge is timing: these forms of compensation are earned over time, vest on a schedule, and may not be received until years after they were granted. Working out which portion is family property, and how to divide it fairly, requires both legal expertise and careful financial analysis.

Why Executive Compensation Is Different

Cash income earned during a relationship is straightforwardly family property. Executive compensation is more complex because:

• It is typically granted at one point in time but vests (becomes receivable) over months or years
• Unvested equity may or may not have been earned during the relationship
• The value fluctuates with the company's share price
• Tax treatment varies by type and timing
• Some compensation is forward-looking (incentive for future performance) and some is backward-looking (recognition of past service)

BC courts must determine what portion of each grant was earned during the relationship and therefore constitutes family property.

Stock Options

A stock option gives the holder the right to buy shares at a fixed price (the "strike" or "exercise" price) regardless of the current market price. If the shares are worth more than the strike price, the option has intrinsic value; if less, it is "underwater."

Vesting: Options typically vest over a multi-year schedule (e.g., 25% per year over four years). Unvested options cannot be exercised until they vest.

Family property analysis: BC courts apply a time-based proration approach. If an option was granted during the relationship and vests partially before and partially after separation, the family property portion is typically calculated as: (months from grant to separation ÷ total vesting period) × total option value.

For options granted before the relationship began: only the portion attributable to the relationship period is family property, which generally requires the same proration calculation.

For options granted after separation: generally excluded — they represent future compensation for future services and are not family property.

Valuation: Exercisable options in a public company can be valued using market price minus strike price. Unvested options and options in private companies are more complex — financial experts (often using Black-Scholes or similar models) provide valuations.

Restricted Share Units (RSUs)

An RSU is a promise to deliver shares (or their cash equivalent) when the unit vests. Unlike options, RSUs have value even if the share price stays flat or drops — each RSU represents one share.

Vesting: RSUs typically vest over two to four years, often with performance conditions attached (performance share units, or PSUs).

Family property analysis: The same time-based proration applies. The family property portion of an RSU grant is determined by the proportion of the vesting period that fell within the relationship.

Key issue — performance conditions: PSUs vest only if the company meets certain performance targets. Courts must grapple with whether unvested, performance-conditioned units should be treated as having contingent value or no value until they vest. There is no settled BC rule; the approach depends on the specific facts and the judge's assessment.

Long-Term Incentive Plans (LTIPs) and Deferred Bonuses

LTIPs typically combine cash and equity components paid out over multi-year periods. Deferred bonuses are earned in one year but paid out over subsequent years (often with vesting or forfeiture conditions).

Family property analysis: The general approach is to ask: was the underlying work that earned this compensation performed during the relationship? If yes, the payment is family property even if it arrives after separation. Courts look at the nature of the award — whether it was primarily a reward for past performance or primarily an incentive for future performance — to prorate the family property portion.

Practical Issues in Division

Liquidity: Unlike cash, you cannot simply write a cheque for half of unvested options. Common approaches include:

• One spouse retains the equity compensation; the other receives an equalizing payment from other liquid assets
• A deferred payment structure: the holder agrees to pay the other spouse their share as the equity vests and is received
• A "if and when" order: the other spouse receives their share if and when the equity actually vests and is received, removing the risk that unvested equity is never received

Tax: Exercising stock options and receiving RSUs triggers income tax. A fair division must account for the after-tax value, not the gross value. This often requires a tax specialist's input alongside legal advice.

Private company equity: Options or shares in a private company are harder to value (no public market price) and harder to liquidate. The same issues that arise in business valuation generally apply — a Chartered Business Valuator may be needed to assess value.

Disclosure: Full and timely disclosure of all equity grants — including grant dates, vesting schedules, exercise prices, and current values — is mandatory in BC family law proceedings. Failure to disclose can lead to adverse inferences and cost consequences.

What to Do

If you or your spouse receive significant equity compensation:

1. Gather complete documentation on every grant: grant agreements, vesting schedules, company plan documents, current values.
2. Get legal advice before separation is finalized — the structure of a settlement dealing with unvested equity is complex and the wrong approach can cost significantly.
3. Consider a financial specialist to model after-tax values and present-value comparisons between different settlement structures.
4. Negotiate a deferred payment or if-and-when structure where immediate payment of unvested equity's value isn't possible.
5. Document everything in a comprehensive separation agreement — vague language about "dividing the stock options" without specifying vesting, tax treatment, and mechanics creates disputes later.

This article is general information, not legal or tax advice. Meetings are by appointment only, by phone or secure video.