Employee Stock Options Calgary Tax Lawyer Introduction
Employee stock options ("ESO") are a form of compensation that corporations often grant to certain employees in addition to a regular salary. An ESO grants the holder of the option a right, but not an obligation, to purchase shares of the corporation at a certain predetermined price. The idea behind an incentive stock option is to help align the employee’s interests with those of the corporation. Our top Calgary tax lawyers can provide tax help to design and implement an employee stock option plan that suits the needs of your business.
Canadian Controlled Private Corporations & Employee stock options
Canadian Controlled Private Corporations ("CCPC") enjoy a number of special benefits over other corporations, and employee stock options are another area in which CCPC status is beneficial with regards to tax treatment. Essentially, a Canadian Controlled Private Corporation is a corporation that is resident in Canada, which is not controlled by non-residents or public corporations. Whether a corporation qualifies as a CCPC can sometimes get complicated because of the various definitions of control, and falls outside the scope of this article.
Canadian Tax Treatment of Employee Stock Options
In general, when an employee stock option is issued, there are no related tax implications for either the employee or the employer. A tax benefit has not arisen, and therefore the employee is not subject to an income inclusion and the employer does not claim a related deduction. However, when an employee stock option is exercised – that is, when the employee wishes to use the employee stock optionto purchase company shares – a divergence arises between the tax treatment of a Canadian Controlled Private Corporation’s stock options and other corporate stock options.
Upon exercising the stock option, non-CCPC employees have incurred a taxable benefit and it must be included in their income. The amount of the benefit to be included is equal to the fair market value of the shares purchased minus the amount paid by the employee to the corporation for the shares, and minus the amount (if any) paid by the employee to acquire the stock options. So for example, an option is issued at no cost to the employee with an exercise price of $10 per share when the corporation’s shares were worth $10. The value of the corporation’s shares then rises to $15 per share. If the employee exercised the option, then the taxable benefit would be $5 per share (= $15 – $10). This amount is includable under section 7 Income Tax Act employment income. If the employee had to pay $1 to acquire the option, the taxable benefit would be $4 (= $15 – $10 – $1).
Conversely, a Canadian Controlled Private Corporation employee does not have to include any benefit amount in their income when exercising an employee stock option; the inclusion is deferred until the employee disposes of the shares. At that time, the Canadian Controlled Private Corporationemployee must include the taxable benefit amount in their income, and must calculate any taxable capital gains, just as a non-Canadian Controlled Private Corporation employee would. The ability to defer is beneficial since no tax has to be paid at the time of exercise. Furthermore, the shares might then be sold at a time when there are capital losses to offset the capital gain.
Additionally, if certain criteria are met an employee can deduct 50% of the taxable benefit they would have had to include in their employment income arising from exercising their employee stock option.
This preferable tax treatment arises pursuant to the deduction under sub-paragraph 110(1)(d) of the Income Tax Act. This deduction applies if an employee meets four criteria:
- The employer or a corporation not dealing at arm’s length with the employer is offering employee stock options
- The shares are "prescribed" shares (equivalent to common shares)
- The employee isn’t paying more for the employee stock option than the benefit gained
- The corporation is dealing with the employee at arm’s length.
Employee Stock Options Calgary Tax Lawyer Help
Canadian Controlled Private Corporation status comes with various tax minimizing opportunities, including the preferential treatment of employee stock options. If you require assistance with setting up a Canadian Controlled Private Corporation, drafting or implementing an employee stock option plan, or you would like advice on the current structure of your employee stock option plan, please contact one of our experienced Calgary tax lawyers for tax planning tax help.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."