Ottawa Citizen
Monday 2 October 2000

Stock millions exempt from child support

Huge profits not really 'income,' judge rules

Cristin Schmitz
The Ottawa Citizen

An Ontario Superior Court judge has ruled that millions of dollars in employee stock option profits made by a senior executive of Nortel Networks must be ignored when deciding how much support he should pay for his three children.

Justice Douglas Rutherford's mid-September decision is one of the first cases to address an issue affecting the children of many Canadian executives and high-tech workers, who often receive a large chunk of their compensation in stock options.

The decision, reported this week in The Lawyers Weekly, involves R. Peter Washburn of Ottawa. The $3.2 million in employee stock option profits he made in 1999 were more than 10 times the value of his salary and bonus. A valuation filed in court by his ex-wife, Wendi Arnold, projects Mr. Washburn's total profit will be almost $7.6 million, or an average of $583,084 per year, on his stock options between 1988 and 2001.

Mr. Washburn's lawyer, Robert Montague, said the decision is of note to employees of any company where stock options are part of the remuneration package.

"It would be important for them to know how these may impact on their family situation where there is a separation, or where they are going into a new relationship and they are considering a prenuptial agreement and how to protect themselves from having stock options brought into their income," Mr. Montague said.

Judge Rutherford held that it would not be "fair" or appropriate, under the new federal child support guidelines, to take into account more than $3.5 million in taxable income from the exercise and sale in 1993 and 1999 of Mr. Washburn's stock options in the Ottawa-based telecommunications giant. He reasoned that the profits were "non-recurring" amounts that did not form part of Mr. Washburn's usual salary, bonus and investment income, which otherwise totals $377,000.

The stock option profits "are large amounts which do not form a pattern of 'income' and otherwise skew in a major way what pattern does emerge," Judge Rutherford wrote in a decision that Ms. Arnold's lawyer, Hector Emond, says will be appealed to the Ontario Court of Appeal.

Judge Rutherford also refused to attribute as "income" to Mr. Washburn a future, projected profit of nearly $2.9 million if he were to sell this year, at last June's market price of $78.75 share, the vested Nortel stock options he now owns, and an additional $1.2 million if he were to exercise vested stock options he holds which are exercisable in 2001. (Nortel actually closed last Friday at $90.35 per share.)

Because Mr. Washburn's stock option profits were excluded from his income, he was ordered to pay $5,324 per month to support his three children, aged 22, 19 and 17.

The award is more than the $3,000-per-month child support Mr. Washburn was required to pay under a 1991 divorce settlement. But it is significantly less than the $9,720 per month sought by Ms. Arnold. It is also a far cry from the $46,000 per month that Mr. Washburn's lawyer calculates would have been yielded if the court had opted to strictly apply the child support guideline formula to Mr. Washburn's $3.5-million total income in 1999.

Under the federal guidelines, which came into force May 1, 1997, a court normally sets child support based on a mathematical formula that takes into account the number of children and the paying parent's income.

One of the key issues under the child support guidelines is what qualifies as "income."

Ms. Arnold's lawyer, Mr. Emond, argued that the $3.5 million Mr. Washburn netted from the sale of his employee stock options in 1993 and 1999 should be averaged over the past 11 years.

The average $324,215 stock option profit should be added to Mr. Washburn's salary of $187,000, bonus of $70,000 and investment income of $123,837 to produce a current annual income of $705,052 -- which yields a monthly support award of $9,720, Mr. Emond argued.

"I am not persuaded that the approach advocated by Mr. Emond is correct, let alone that the application of the Support Guidelines to the resulting income would produce an amount of child support that is needed, to say nothing of being in the best interests of the children," Judge Rutherford wrote in rejecting the argument.

The judge said Mr. Washburn has supported his children above and beyond the requirements of his 1991 divorce settlement.

He noted that Mr. Washburn has paid $25,000 this year for his daughter's graduate studies in England, in addition to $3,000-per-month child support he pays his ex-wife.

Mr. Emond argues that the judge's $5,324 support order is too low. "The husband really, he is paying less than 10 per cent of his income toward the children, which is not fair," Mr. Emond said.

"Basically when you calculate the husband's income, they have got to bring in the average value of the stock options exercised, and to be exercised, because it's a most important component of any high-tech employee's" compensation.

Mr. Montague responds that "the guidelines do give judges discretion not to award these huge sums of support if they don't feel it's 'fair' -- however you may wish to define 'fair.' I'd say it's not fair to include all that (stock option) income because he is not drawing it out each and every year in fact. He doesn't have it. It's sitting in an investment portfolio. It's capital to him."

Copyright 2000 Ottawa Citizen