The Bennett Jones Tax and Employment Services groups have a wealth of experience in implementing equity-incentive plans and would be pleased to collaborate with employers in understanding the implications of the proposed new rules for and designing any amendments to equity-based incentive programs which may be desirable in the circumstances.
Written by Anu Nijhawan, Blake Haarstad and Hennadiy Kutsenko For many public corporations, employee stock options have historically represented the "holy grail" of equity-based employee compensation. The New Regime The new regime stems from the Liberal Party's platform during the federal election, and is premised on the notion that the current stock option rules are not sufficiently well-targeted and the preferential tax treatment provided to optionholders accrue disproportionately to a small number of high-income individuals employed by large established corporations.
Employers The proposals do, however, provide a benefit for employers.
Change in the tax treatment of employee stock options
Designating Non-Qualified Securities Under the proposals, large public corporations will also have the ability to "opt-in" to the Non-Qualified Securities regime. Compliance The entity that is the employer of an option holder who is granted an option for Non-Qualified Securities is, under the proposals, responsible for notifying employees in writing, no later than 30 days after the day an option is granted, if any underlying shares or a proportion thereof are a Non-Qualified Security and also to notify the Minister in a form to be prescribed but not yet available , if any underlying shares or a proportion thereof are a Non-Qualified Security.
Conclusion The proposed new rules provide a dramatic shift in the tax treatment of stock options. The following key take-aways emerge: As the new regime applies only to stock options granted after June 30, , public corporations may wish to consider granting stock options prior to that date so as to benefit from the grandfathering. Disclosure and related issues will need to be considered. As a practical point, given the coming into force of these proposals, it is expected that most annual grants are excluded from the new regime. For options granted after June 30, , a public corporation granting options will need to decide whether, and what portion, of shares underlying options will be designated as Non-Qualified Securities.
Such a designation will be adverse to employees since the option benefit will no longer qualify for capital gains-like treatment , but beneficial to the corporation which will be entitled to claim a tax deduction. Corporations may wish to consider whether, and to what extent, the benefit of any corporate-level tax deduction should be shared with employees—whether by way of increased stock option grants or otherwise.
Thought Capital
Stock option plans and grant agreements may need to be amended to accommodate the designation of Non-Qualified Securities and the notice requirements under the proposed rules. There are a number of nuances to these legislative changes to the taxation of stock options that are beyond the scope of this article, such as the ordering of stock options qualifying for preferential treatment, options and requirements for employers including administrative and tax compliance matters, etc. The effect of changes to the taxation of stock options in this example is significant in that only a small portion of the benefit is eligible for half taxation, leaving most of it to be fully taxable.
As the taxation of stock options is payable at the time of exercise, stock option holders who are affected would be wise to hold off exercising their options until the time of sale of the underlying shares, to defer the tax payable until funds are realized on the sale. This content is believed to be accurate as of the date of posting. Tax laws are complex and are subject to frequent change.
- credit card forex rates;
- Related articles;
- Current rules.
- etrade optionshouse merger platforms.
- Revenues from tax changes on stock options to slowly ramp up over a decade, PBO says | CTV News.
- Tax alert: Fiscal update includes tax changes for Netflix, stock options and working from home!
- Tell Finance Canada the stock option deduction loophole must go;
Stock option plans and employee stock purchase plans provide additional flexibility to attract employees and to encourage loyalty to the company. The tax treatment of equity based compensation can vary widely depending on the treatment in Canada, the U. First of all, the options must be granted only to employees of the company. Further, the employee must be granted the option at fair market value FMV as of the date of the grant. After exercise, the employee must wait at least a year before selling the acquired stock which is two years from the date the option was granted.
Proposed Amendments
If any of the above conditions are not met, the option becomes a non qualified stock option, which brings with it different tax consequences. There is no income tax effect when an employee is granted a QSO and when the option is exercised after one year. Certain other strategies to avoid AMT involve exercising early in the year and monitoring the stock price.
If the stock price declines the shares may be sold, and although that may be a disqualifying disposition AMT on phantom income would be eliminated. If the stock price increases then the employee may not be concerned about AMT since it would be recovered eventually when the shares are sold.
A non qualified stock option NQSO may be issued to anyone, including employees, suppliers, directors and contractors, and in any amount. Although there is no tax consequence at the grant date of a NQSO, exercising the option gives rise to ordinary income equal to the difference between the fair market value FMV at grant date and the FMV at exercise date. One clear advantage to an issuing company is that the company receives a tax deduction as compensation expense equal to the amount reported by the recipient at exercise. Normal withholding taxes apply when a NQSO is exercised.
When a disqualifying disposition occurs, the employee is subject to tax at regular rates based on the difference between the selling price of the shares and the grant price. This is known as a cashless exercise, because the net result is that shares are exercised without the employee having to pay cash for the grant price or the income tax withholding resultant from the exercise.
If these shares are then held for over a year, the net gain over this basis is treated as a long term capital gain, taxable at the reduced rates referred to above. If the shares are sold before being held for a year, any further gain would be treated as a short term capital gain, which is treated as ordinary income. As an alternative, sometimes the company will lend money to the employee to fund the purchase of stock. Often a company will issue shares to an employee to hold pending some event, such as the completion of a number of years of employment, etc.
- etoro forex trading lessons;
- qm forex indicator!
- Industries.
- Timeline of proposed changes;
- qm forex indicator.
- different types of incentive stock options;
- exercised stock options included in w2.
The shares are actually issued to the employee but must be returned unless they subsequently vest when the underlying conditions are met. The basis of the shares equals the amount paid for them plus any amount included in income on vesting.