Stock options can leave you with a nasty tax bill

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Stock options can be accounting for employee stock options canada lucrative bonus for high-achieving employees or a remuneration mainstay for senior executives. The reward depends not just on rising share prices, but also on timing and taxes. Options can accounting for employee stock options canada an attractive perk particularly for employees of a successful, growing company.

However unlike a cash bonus, a tax deduction is available. Because of the preferential tax treatment, Stock Options attracted a lot of attention last year when the Liberal government considered placing a restriction on how they were taxed.

Ultimately no change was made, to the relief of new businesses and other small companies, as well as senior executives who count on options as an integral accounting for employee stock options canada of their compensation package.

This is known as exercising the option, and can be done after the option has vested typically several years after the option is awarded and prior to its expiry date. Of course, you have to share a piece of that profit with the tax man — not as a capital gain, but as a taxable employment benefit. However, a tax deduction is available on the exercised options, so that only one-half of the benefit is taxable.

If the options are for shares of a Canadian-controlled private corporation CCPCthe taxable benefit is calculated only when the shares are sold, not when the options are exercised.

And, for publicly traded shares, assuming they are increasing in value, the longer you wait to exercise, the longer the tax deferral Of course, you can exercise earlier and hold the shares longer to maximize your gain — but in the case of publicly traded shares, you would have to pay the taxes when the shares are exercised.

And while stock options provide significant upside if the company is growing, there is downside risk in holding shares after you have exercised your options. This is because the profit was taxed as employment income, not a capital gain. This would not be an issue when exercising options on CCPC shares, since the taxable benefit is only calculated when the shares are sold.

What Planning is available for stock options? Stock options continue to be a popular form accounting for employee stock options canada remuneration and to continue to make the most of them, here are some additional tax planning points to consider:.

Check with your employer on how your options are tax withheld and ensure you pay installments on time to avoid interest charges. If you exercise an employee stock option and donate the shares to charity you do not need to accounting for employee stock options canada the resulting employee benefit in your income.

To be eligible they must qualify for the stock option deduction and be donated in the year and within 30 days of being exercised. By seeking the advice of a financial professional who is familiar with employee options, including the tax element, you can make the most of this potentially lucrative employment perk. Kerr Financial Group was formed in for the purpose accounting for employee stock options canada assisting individuals to maximize their personal financial resources, alleviate their financial and retirement concerns and simplify the administration of their affairs.

What are stock options? If you are a human and are seeing this field, please leave it blank. See how smart stress-free taxes can be with Kerr. Request your free consultation. About Kerr Kerr Financial Group was formed in for the purpose of assisting individuals to maximize their personal financial resources, alleviate their financial and retirement concerns and simplify the administration of their affairs. Accounting and Tax Advisory. Krista Kerr - Advice on avoiding tax chaos Worried about your taxes?

Worried about your taxes? Krista Kerr shares three to Since the Great Recession, investors have been on the lookout for indicators tha A bi-weekly publication summarizing the latest financial market activity from a Canadian investors perspective.

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The Canada Revenue Agency CRA has updated its position on employer deductions for share plans that settle in newly issued stock. The CRA now accepts that an employer should be entitled to a deduction if it: The Queen , TCC 86, in which Transalta had a performance share unit plan that was entirely discretionary, in terms of both settlement and whether any amount would be ultimately payable.

A CRA technical interpretation released on April 12, , signals that when an employer has the right to choose between settling an award in cash or shares, no agreement to issue shares exists and, therefore, paragraph 7 3 b should not apply to deny a corporate deduction. It further states that a discretionary arrangement is not an agreement for the purposes of section 7. Except for the SAR grants, the CRA found that section 7 applied to all of the awards because they created legally-binding obligations to issue shares by USCo assuming that the conditions for vesting were met.

The CRA states that the SAR awards provided a right to receive a payment in cash or shares or a combination thereof at the discretion of the plan sponsor. If the amounts are otherwise deductible under normal corporate tax principles and no legally enforceable rights to shares are created, Canadian employers should be able to claim a deduction going forward. As well, they should consider amending previously filed tax returns.

It is important to ensure that an employer or payor of share-based compensation does not create a unilateral contract by committing to issuing shares after an award has been granted but before settlement. Employers should ensure that the share plan is not an SDA, which can trigger an immediate employee income inclusion if deferrals of compensation do not meet specific exemptions.

It is uncertain whether the CRA will accept that there is no section 7 agreement when an employer has the discretion to issue previously unissued shares or shares purchased on the market. The CRA has permitted market-purchased share plans to be deductible and found them to fall outside section 7, so it would be consistent for the CRA to permit a deduction when there is a choice between previously unissued shares and market-purchased shares, i.

An arrangement that always results in shares being issued would typically preserve certain desirable accounting outcomes, but it remains to be seen whether this type of arrangement would be acceptable to the CRA. If a corporate parent charges a Canadian subsidiary the fair value amortized over the vesting period and accounts for the compensation cost on an equity i.

When shares are issued, there would be no change to the expense at settlement. It is possible that the chargeback to Canada, based on the accounting expense, could exceed the fair market value of the shares eventually settled. Perhaps they should be considered contributions to an employee benefit plan, in which case they would not be deductible until the awards are settled. Employee benefit plan treatment may also provide a statutory basis for a deduction of the full amount of the charge in a previous year, even if the share value has declined by the time the shares are released to employees.

Deductibility of employee share plan costs: Jerry Alberton Partner Tel: Issue In brief The Canada Revenue Agency CRA has updated its position on employer deductions for share plans that settle in newly issued stock. The CRA responded by confining Transalta to its facts. Canco claimed deductions for reimbursements to USco in respect of these awards. A discussion of related issues follows.

Salary deferral arrangements SDAs Employers should ensure that the share plan is not an SDA, which can trigger an immediate employee income inclusion if deferrals of compensation do not meet specific exemptions. Market-purchased shares It is uncertain whether the CRA will accept that there is no section 7 agreement when an employer has the discretion to issue previously unissued shares or shares purchased on the market.

Timing of a chargeback If a corporate parent charges a Canadian subsidiary the fair value amortized over the vesting period and accounts for the compensation cost on an equity i. Subscribe to tax publications. Related services Global Mobility Services. Contact us Jerry Alberton Partner Tel: