The favourable treatment entitles an arm's length employee to deduct one-half of the taxable benefit that is realized at the time of exercise, effectively taxing the benefit similar to a capital gain.
Determining the Taxable Portion of Security Option Benefits
The NWMM invited stakeholders to provide input through a public consultation period that was conducted from June to September The FES reflects stakeholder input from the public consultation and revises the NWMM proposals to provide certainty on several aspects of the original proposals that impact both employees and employers affected by the proposed legislation. The annual limit applies to all stock option agreements that an employee has with an employer or any corporation that does not deal at arm's length with the employer.
The FES adopts these measures while clarifying how the vesting year of options is to be determined. The FES specifies the manner in which such revenue threshold is computed. For members of a corporate group that prepare consolidated financial statements, gross revenue should be reported as it appears in the most recent consolidated annual financial statements presented to shareholders before the stock option is granted. For employers that are not members of corporate groups, gross revenue should be reported as found in the most recent annual financial statements prepared in accordance with the generally accepted accounting principles and presented to shareholders before the stock option is granted.
Notwithstanding the clarity provided by the revenue thresholds, they are not without some deficiencies. However, the use of revenues as the distinguishing criteria may have a disproportionate effect on large employers if they operate in an industry that demands a high degree of research and development and consequently, have lower profits and cash available to use for employee compensation.
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- Employee Stock Options: Tax Implications for Canadian Employees – A Canadian Tax Lawyer’s Analysis.
- Paying Tax on Stock Options (a Guide for Canadians by Stern Cohen).
Furthermore, the revenue threshold does not address situations where a corporation or mutual fund's revenue is close to, but does not meet the revenue threshold. Although such a corporation may have greater profits and cash flow to compensate employees in comparison to another corporation that is at or above the revenue threshold, the corporation below the revenue threshold will receive the advantage of qualifying for the proposed deductions.
It remains to be seen whether administrative policy will emerge to address certain anomalous situations on a case-by-case basis, to ensure that the proposed measures achieve their intended result.
- Backgrounder: Proposed Changes to the Tax Treatment of Employee Stock Options.
- Backgrounder: Proposed Changes to the Tax Treatment of Employee Stock Options - .
- 1. Employer's Tax Liability on Stock Options!
The proposals will provide an employer with a deduction in respect of the stock option benefit associated with non-qualified securities. At best, these proposals are tax revenue neutral from the federal government's perspective. For an employer or non-arm's length person to the employer to whom the proposals apply to claim a deduction in respect of the stock option benefit associated with non-qualified securities, certain conditions must be met. These conditions include that:. From an employer's perspective, the ability to treat all issued options as non-qualifying securities eases the administrative burden otherwise associated with tracking and complying with the annual limit.
Consequently, under the existing rules, an employee may acquire a share on the exercise of the stock option and donate it to a charity without any corresponding income inclusion. However, the capital gains exemption that is currently available to taxpayers in respect of the donation of publicly traded securities to a qualified donee is not impacted by the FES proposals. The new legislative proposals will apply to employee stock options granted on or after July 1, , in most cases. The proposals will not apply where options have been issued after June in exchange for options issued before July under subsection 7 1.
In these situations, the options will not be subject to the new rules and thus will not be considered to have been issued after June As stakeholder input has been received and revisions have been made, the proposed legislation is expected to be enacted into law. Employers and employees should consider the proposed changes in current discussions or planning for new employee stock options and are encouraged to reach out to a Miller Thomson tax advisor to better understand how the proposed changes may apply to their particular circumstances.
Upcoming changes to the taxation of certain employee stock options
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. All Rights Reserved. Password Passwords are Case Sensitive. Forgot your password? Free, unlimited access to more than half a million articles one-article limit removed from the diverse perspectives of 5, leading law, accountancy and advisory firms.
Employee security options -
We need this to enable us to match you with other users from the same organisation, it is also part of the information that we share to our content providers "Contributors" who contribute Content for free for your use. Learn More Accept. Your LinkedIn Connections with the authors. To print this article, all you need is to be registered or login on Mondaq. Introduction The long-standing tradition of using employee stock options to reward and retain employees in Canada is expected to change for some employees due to limits proposed by the federal government to the current advantageous tax treatment available to employees in certain circumstances.
The FES proposes that the vesting year of the option will either be the calendar year in which the right to acquire first becomes exercisable or, if unclear from the option grant, the option will be considered to vest on a pro-rata basis over the term of the agreement up to the earlier of a month period or the last day the option could be exercised. The proposals will apply to options granted on or after July 1, ; however, in certain circumstances, options issued after June in exchange for options issued before July will not be subject to the proposed changes.
Existing options are not affected. This change provides clarity that was lacking in the initial proposals. Employer Tax Deduction The proposals will provide an employer with a deduction in respect of the stock option benefit associated with non-qualified securities.
These conditions include that: the employer is a corporation or a mutual fund trust ; the employer was the employer of the individual at the time the stock option was granted; the amount being claimed as a deduction is not claimed as a deduction by another corporation or mutual fund trust ; the stock option deduction would have been available to the employee if the underlying securities were not non-qualified securities; in the case of an employee not resident in Canada throughout the year, the stock option benefit was included in the employee's taxable income earned in Canada for the year; and the employer provided: notice in writing to the employee within 30 days after the option agreement was entered into that the securities is a non-qualified security; and notice to the Canada Revenue Agency of any non-qualified securities by filing a prescribed form with its income tax return for the year in which the stock options were granted.
Looking Forward The new legislative proposals will apply to employee stock options granted on or after July 1, , in most cases.
In either case, affected employers should consider: the timing of granting stock options and other stock-based awards prior to these new rules coming into effect; and the notice requirements, including an appropriate method to notify employees of non-eligible securities. Manjit Singh. Anish Kamboj Articling Student. For employees receiving CCPC shares, paragraph 1 d. If, under the employee stock option, the employee receives shares in a CCPC, the employee receives the one-half deduction as long as the employee held the shares for at least 2 years.
The acquired shares, however, are a capital property that may give rise to a capital gain when the employee sells them. The employee would suffer double taxation if the tax cost of the acquired shares were not adjusted to account for the already taxed employee benefit. This result comes from paragraph 53 1 j of the Income Tax Act. In other words, although the subsection 1 may allow the employee to deduct half the ESO benefit from taxable income, the tax cost of the ESO shares includes the full amount of the ESO benefit.
The employee includes the benefit either in the year she exercised the employee stock option or, if she acquired CCPC shares, in the year that she sells the shares. The benefit from exercising an employee stock option is employment income; the profit from selling the acquired shares is a capital gain. And you cannot deduct capital losses against other sources of income.
As a result, if the shares that you acquired under an employee stock option later drop in value and you thereby sell them at a capital loss , you cannot offset your ESO benefit using that loss. If you plan on selling the shares you acquire from exercising your employee stock option, you can defer the resulting capital gain by selling these shares the following year. For instance, if you acquired your shares in , you can defer the need to report and thus pay tax on any capital gain by selling the shares at the beginning of If you sold the shares in , your tax liability for any capital gain would arise on April 30, But by selling the shares on, say, January 1st , you delay that tax liability until April 30, Of course, by delaying the sale, you risk the possibility that the shares will lose value.
So, you generally want to sell the shares soon after exercising your employee stock option and acquiring them.
Executive summary
Moreover, the expiry date for some ESOs aligns with the end of the calendar year. One alternative is to exercise your employee stock option as late in the year as possible, which ideally allows you to sell the acquired shares shortly thereafter yet in the following year. You thereby defer the tax liability on the resulting capital gain while both exercising the option before it expires and reducing your exposure to the risk that the shares may lose value.
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.