Call Us: 905 268 0150 - Mail: amadan@madanca.com


Taxation of Stock Options for Employees in Canada

Did you receive stock options from your Canadian employer? If yes, this article is for you. In this short write-up, I explain how the “Taxation of Stock Options for Employees in Canada” directly affects you.

Employee stock options and taxation of stock options for CanadiansWhat is a stock option?

Stock options or employee stock options is an option in which the employer gives an employee the right to buy shares in the company in which they work usually at a discounted price specified by the employer.  There are different types of stock options that can be issued to employees, more information can be found at the Canada Revenue Agency website.

If you’re working here in Canada, and received stock options from your employer, it’s really important that you go through this write-up.  For employers who are looking to sell their company through their shares, please have a look at one of our articles regarding asset sale and stock sale.

Here, you will find out just about all you need to know in regards to taxation of stock options for Canadian employees. To make for easy understanding, I’ll break this article into two parts.

First, we’ll cover CCPCs (Canadian Controlled Private Corporations), and then public companies. This is because the tax rules are different. For those of you who don’t know, a CCPC, or Canadian Controlled Private Corporation, is a company that’s incorporated in Canada, whose shares are owned by Canadian residents, and it’s not listed on a stock exchange like the New York Stock Exchange or the Toronto Stock Exchange.

Taxation of Stock Options for Employees in Canada in CCPCs:

Let’s start off assuming that you work for a CCPC. The most common question that I get asked is, “Do I have to include anything in my income when I receive the stock options?” The answer is, no. You don’t have to include anything in your income when you:

• Enter into the stock option plan
• When the options are granted to you, or
• When you exercise the options

The next question that I often get asked by my clients is, “Do I have to pay tax at the time of exercise, or at the time of the sale of the shares?” The answer to this one is, at the time of the sale of the shares. Let’s take a numerical example to simplify things.

Let’s assume that the exercise price is $3 a share, and the market value of the share is $10. The benefit of when you exercise and immediately sell is, therefore, $7 ($10 minus $3). This is known as the employment benefit which would be included in your income at the time of the sale of the shares.

The third question that I often get asked is, “What is this 50% deduction about?” Well, you are entitled to a deduction equal to 50% of the employment benefit (that we calculated as being $7 in the previous example)if you meet one of two conditions:

  • You have held the shares for at least two years after you have exercised them
  • The exercise price is at least equal to the fair market value of the shares when they were granted to you

Taxation of Stock Options for Canadian Employees in Public Companies:

Now, we move to public companies. Let’s assume you work for a public company like Coca Cola and you are granted stock options. The most common question I get asked, is “Do I have to pay tax at the time of exercise, or at the time of the final sale of the shares?”

The answer is, at the time of exercise, which is different than the rules for CCPCs. Let’s take a numerical example.

Let’s assume you work for Coca Cola Canada and the fair market value of the shares today is at $30. According to the option agreement, you can exercise or buy the shares for $10. Therefore, the employment benefit that will be included in your income at the time of exercise is $20. Here’s a quick piece of advice – please don’t hold on to the shares for too long because if the price of the stock drops, let’s say, in a worst case scenario to $0, you’re still on the hook for the tax on the employment benefit.

So if you have a low risk tolerance, it makes sense to sell the shares immediately after you exercise, so you have enough cash available to pay for the tax.

50% Deduction – Stock Options in Public Companies

Are you entitled to the 50% deduction if you work for a public company and receive stock options? The answer is yes, if you meet three conditions. Unlike CCPCs, you have to meet all these three conditions in order to be entitled to the 50% deduction.

1. You receive normal common shares upon exercise
2. The exercise price is at least equal to the fair market value of the shares at the time the options were granted
3. You deal at arm’s length or on a third party basis with your employer (an example of when you would not deal on a third party basis with your employer would be, let’s say, if you were the spouse of the president of Coca Cola).

The Cash Out Option (for Public Companies):

The final point we look at here is the Cash Out option for public companies. Assume you’re working for Coke and under the option agreement you have the ability to cash out. So instead of having to buy the shares for $10, and then sell them for $30, your employer offers you ability under the option agreement to simply receive a cheque directly from your employer for $20. This is known as cashing out your stock options.

When you cash out, the amount of money you receive will be included in your income as an employment benefit. Once again, you may be entitled to a 50% deduction equaling to half of the employment benefit reported on your tax return. The rules for the 50% deduction for the cash out are fairly complex so I’m going to them out of this article.

I hope you found this article about taxation of stock options for employees in Canada useful and if you wish to know more, you now know where to turn to.

About the Author – Allan Madan

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation . Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

If you find this article useful, kindly +1 and follow Allan Madan on by clicking on these
two buttons.





Taxation of Stock Options for Employees in Canada was last modified: November 18th, 2014 by superAmin
This entry was posted in Personal tax and tagged , , . Bookmark the permalink.

About the author

is a Chartered Accountant, CPA and Tax Expert and enjoys working with business owners, individuals and entrepreneurs.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

71 Responses to Taxation of Stock Options for Employees in Canada

  1. William Zhang says:

    Thank you for the very detailed explanation.

    Another question is will [50% of] the gain from public traded company stock option be able to offset the previous year’s capital loss?

  2. Michelle.Wang says:

    Very insightful article,

    I was wondering if there is any capital gains tax on appreciated stocks when giving it to someone else as a gift?

    • superAmin says:

      Hi Michelle,

      Stocks when given as a gift are not subjected to any capital gains tax even if they have appreciated in value.

      Best Regards,

      Allan Madan and Team

  3. Milos says:

    Hi Allan,

    Do I have to pay taxes on capital losses when I exercise my shares?

    • superAmin says:

      Hi Milos,

      No you don’t have to pay any taxes because there is no capital gains, but rather you get tax benefits for selling it at a loss.

      Best Regards,

      Allan Madan and Team

  4. monkeyballzjr says:

    Hi Allan, just to clarify, if I have capital losses on my stocks, I can deduct that from my capital gains to minimize my taxes on the capital gains even if they were separate stocks?

    • superAmin says:

      Hi Huy,

      Yes the source of either the capital gain or loss is irrelevant, since you are expected to report your total capital gains and capital loss on your income tax return. It is important to note that for tax purposes, capital losses are only reported on items that are intended to increase in value. They do not apply to items used for personal use such as automobiles (although the sale of a car at a profit is still considered taxable income).

      Best Regards,

      Allan Madan and Team

  5. Charles says:

    Hi Allan,

    How would the CRA calculate the appreciated price of stocks to coincide with inflation?

    • superAmin says:

      Hi Charles,

      The CRA has there own calculation methods especially for stocks that individuals may have held for long periods of time. It is best to directly contact the CRA for more specific information.

      Best Regards,

      Allan Madan and Team

  6. Thompson says:

    Hi Allan, are there any taxes on stocks received from a deceased individual through their will in cases where the stocks have dramatically increased in value?

    • superAmin says:

      Hi Thompson,

      The stocks will only be subjected to capital gains tax when and if you decide to exercise/sell the stocks. There are no taxes on the transfer of assets through wills.

  7. Chrissy says:

    Hi Allan, as part of my employment contract, I have an option to receive shares or $10000. If I chose to receive the shares but later changed my mind since the values of the stocks are projected to be decrease in value, would I be taxed on the $10,000?

    • superAmin says:

      Hi Chrissy,

      If you choose to re-take the $10,000 then it would be included as part of your total taxable income as long as you received it within the taxation year. If it is a possible option, you can choose to defer the received income for next year as to avoid paying less taxes on it this year if you project your income to be lower.

      Best Regards,

      Allan Madan and Team

  8. Cruz says:

    Hi Allan,

    Are there capital gains loss for issued stocks in cases where the company has filed for bankruptcy?

    • superAmin says:

      Hi Cruz,

      Capital loss is only applied to cases where you have actually sold the stock. Luckily, for you there is a provision under section 50(1) of the income tax act that does allow for some tax relief. When this is applied, the shares will be deemed to have been disposed of for proceeds of nil at the end of the year, and to have been recacquired for adjusted cost base (ACB) of nil immediately after the end of the year. As a result, you will be able to realize the capital loss on the stock. The superficial loss rule does not apply in situation.

      Best Regards,

      Allan Madan and Team

  9. J.J. says:

    What if my company is being taken over by several investors and is going from a public to a private company, when they own 90% of the shares, I am force to sell mine at below market value, do I get any tax relief in terms of capital losses?

    • superAmin says:

      Hi J.J.,

      IF you are force to sell your shares then it is illegal for them to pay at below market value for the remaining shares, you should be able to get at least market value you for them. IF not, you can deduct your capital loss against your capital gains for tax relief.

      Best Regards,

      Allan Madan and Team

  10. Lyle says:

    Hi Allan,

    I did some contracting work for a small startup tech company. Since they had no money they paid me in shares, if and when they take the company public, would I have to pay taxes then?

    • superAmin says:

      Hi Lyle,

      You would only have to pay capital gains tax when and if you decide to exercise/sell your shares. If you continue to hold onto them, you will not be subjected to any taxes.

      Best Regards,

      Allan Madan and Team

  11. Arielle says:

    Hi Allan,

    Is it possible to hold my stocks within a TFSA account? how would the accrued interest on these stocks be taxed?

    • superAmin says:

      Hi Arielle,

      Yes common shares generally qualify for TFSA investments, however those shares must be listed on a designated stock exchange. If they are not listed, then they will be categorized as a non-qualified investment inside your TFSA and you will be hit with some severe penalties.

      The taxation of the accrued interest would be the same for any type of investment contributions made to your TFSA.

      Best Regards,

      Allan Madan and Team

      • Mahmoud says:

        What would be classified as a designated stock exchange? what about penny stocks?

        • superAmin says:

          Hi Mahmoud, the Canadian Department of Finance has a list of 41 designated stock exchange on it website here http://www.fin.gc.ca/act/fim-imf/dse-bvd-eng.asp.
          Penny stocks traded on pink sheets are not on a designated stock exchange but any penny stocks (people disagree on its definition) that are listed on any of the designated stock exchange are eligible for TFSA investments.

          Best Regards,

          Allan Madan and Team

          • Timothy says:

            What if a stock is listed on multiple exchanges some of which are not listed, how would the department of Finance categorize this?

          • superAmin says:

            Hi Timothy,

            As long as the stock is listed on at least one approved stock exchange that is recognized by the department of Finance, it will qualify for TFSA investment.

            Best Regards,

            Allan Madan and Team

  12. Jackie O. says:

    Hi Allan.
    I currently work for a CCPC, and they have offered me $5000 in stock as compensation. As I am new to world of stocks, I am wondering what to do with these. What happens when I exercise my stock options? Are there any tax implications?

    • amadan says:

      Hello, and thanks for your question.
      Stock options are one of the most popular form of non-monetary compensation that employers offer. They are a taxable benefit, and should be included on your total employment income on box 14 of your T4 slip. Here’s how they work. An employee is given the option to buy shares of a company at a future price. At this stage, there is nothing to report on income.

      When you buy the stocks at that agree-upon price (called exercising your option), the taxable benefit comes into play. This benefit is calculated as the difference between the fair market value of the shares on the date you purchased the shared and the price you paid for them. As your employer is a CCPC, you can defer all your taxable benefit until you sell your shares.

  13. Markus Greenbriar says:

    I worked for a company back in 2003 that had an IPO. Employees were awarded stock options, and I was given 2,000 shares. I still have the letter from the man who was then president and CEO. The length of the contract was 25 years. However, I ended up leaving the company a few months later, so it appears as if I am only 25% vested. The company has now been split into two separate companies.

    Do any of my stock options have value today? Can I cash out my vested portion?

    • amadan says:

      In your case, you would have 25% of the original contract for 2000 shares. The main question you need to answer here is which company took over the stock. If the company split into two, who took over the shares? Also, did the company that took over shares covert the option contracts? Sometimes the employee stock option plan (ESOP) will not have the options converted if the company is broken up.

      If the company did not give you options but just 2,000 shares, you would need to know what the shares converted into. Most companies only give option contracts to executives, because they are not actually holding onto the stock. Most option plans do not have a vesting, but the ESOP will.

      I would call the company that holds the stock, and find out what your options are. If the company split in 2003, it will probably take a long time to figure out the information. Companies are only required to keep records in the front office for 3 to 5 years, depending on the type of record. Therefore, the sooner you do this the better.

  14. Phillip says:

    Hi Allan. My company is offering me some stocks as compensation. What are some things I should know before I take them?

    • amadan says:

      Hello.

      A stock option plan allows your employer to sell you shares at a predetermined price (known as the exercise price). Normally, you’ll exercise your right to buy shares only when the fair market price is higher than your exercise price. After all, if your exercise is 15$ a share and the market value is only 12$, you are overpaying! When considering take an employee stock option, you want to be confident that the shares in the company are going to increase in value. Also, you want to be sure that you can sell the shares later. If your company is private, make sure you have someone to sell those shares to. It will do you no good to have a lot of shares worth millions if nobody is buying.

      Regards,
      Allan Madan and Team

  15. Whitney Sammie says:

    Hi Allan. I’ve signed up for an employee stock sharing plan on TFSA with my employer. As per the agreement, he matches 5% of my contributions. I have received a T4PS with an amount on box 35 that I need to include on my tax return. I thought the money you earn from a TFSA is tax free, was I wrong?

    • superAmin says:

      Hello,

      Only the interest, dividends, or capital gains within a TFSA are tax free. Amounts contributed to it are considered after tax, and thus are not deductible from income. On the other hand, withdrawals are not considered income.

      Your employer makes their matching contributions before tax, which is why these contributions are reported as additional income. This is why they are reported as additional income, and have to be reported on your tax return. Because of your employer’s contributions, it is quite easy to over contribute to your TFSA’s. Doing so may trigger penalty taxes, so do be careful. If you have any questions regarding this or any other tax-related question, please do not hesitate to ask me.

      Regards,
      Allan Madan and Team

  16. DonovanC says:

    I’m not very familiar with stocks or how they work but they seem intriguing to me. How would it work if I owned stock with the company I worked for, got it at a discounted price as per the stock options, but then was terminated. Would I still be in possession of those stocks and would I still have to pay taxes on them? Or would I lose the stocks since I was no longer employed with the company?

    • amadan says:

      Hi Donovan,

      Usually employees can and do keep the employers stock options even after termination.
      In the year you exercise your options you will have an income inclusion which will be the difference between the exercise price less the FMV of shares when the options were exercised.
      When you eventually sell the shares there will be a capital gain or loss.
      The adjusted cost base will be the FMV of the shares when you exercised the options.
      If the proceeds of disposition are more than the ACB you will have a capital gain.
      If the proceeds of disposition are less than the ACB you will have a capital loss.

      Best Regards,

  17. NExum says:

    So if I’m married or living with a common-law partner, and she is making considerably less than I am. Would I be able to share some of my dividends with her so that she can benefit from the tax savings that come along with the stock options or would that only be applied to my own person return?

    • amadan says:

      Hi Nexum,

      Under the Canadian tax system, there is a provision that allows you to transfer all of your dividend income to your spouse so that your spouse can recognize 100% of your dividend income if certain conditions are met. This may or may not be advantageous depending on you and your spouse’s tax situation and we’ll need more information.

      Best Regards,

  18. tompleet says:

    Hi, I was wondering if it would be worthwhile to invest some of my employee shares into my RRSP rather than sell them. I ask this because a colleague of mine buys his employee shares at a reduced price and then sells them at around the beginning of the year. From there he sells the shares, puts the money in his RRSP and then buys the shares again within the RRSP. He says this doesn’t save him much on taxes but it does help the return as he’s able to store money in his RRSP and watch it go untaxed. Is this something that is plausible?

    • amadan says:

      Hi Tom,

      One thing to remember when dealing with RRSPs is that they are tax deferrals, not tax free. This means that you can save taxes on them in the meantime by keeping the money in the RRSP, but once you make a withdrawal you will have to pay taxes on those withdrawals.

      There really isn’t any way to avoid paying taxes on public corporation employee shares, but there is a way to avoid taxes in the future on those amounts. If you contribute the shares directly to a Tax Free Savings Account, you can save on paying additional taxes in the long run. You would still have to pay taxes on the capital gains you incurred, and there would be no refund, but whenever you withdraw the money from the TFSA it would be free of tax. Hope this Helps.

      Allan

  19. Vitner Cacelmo says:

    Hello,

    My wife is currently on maternity leave until March. Therefore, she is on EI. The management of her company decided to allow her to cash in her stock options by December. We are not sure what the tax implications of this will be. The finance department of the company said that the income would be reported in the T4 as employee benefit. Will she have to report this income to the CRA, and will it reduce her EI benefit? She is in the top income bracket.

    • superAmin says:

      Hello,

      Options are not treated as capital gains, as you cannot deduct losses against them. They are, however, taxed as ordinary income. Also, they are subject to a “security option deduction” (line 249 on your tax return) if certain conditions are met. Half of your wife’s benefit she receives from cashing the option is included in her taxable income for the year. If she is in the top bracket, one-half of her option benefit could be taxed at 46%.

      Regards,
      Allan Madan and Team

  20. Becca Winfield says:

    Hello,

    Last year, I have exercised some deferred stock options. How do I report these?

    • superAmin says:

      Hello,

      If you received a T4 from the employer who also issued the stock options in your name, then the respective gain or loss would be reported as part of your T4 slip (as well as the stock option deduction in box 39 and 41). In addition, you will be able to claim 50% of the amount from line 4 of Form T1212, Statement of Deferred Security Options Benefits.

      Regards,
      Allan Madan and Team

  21. kunal says:

    Hi Allan,

    I received employee stock option when my company was private and now it went IPO. So its publicly traded, I still haven’t “exercised” my stock options and it is set to expire soon. I am thinking of doing “Exercise and hold”, when I do that I will have to pay the company the excessive price but will I also have to pay tax right away (even if I am not selling, just holding?). Also how can I deffer the taxes so I can split the taxable profit to multiple years so I pay less taxes?

    Any info of the “Exercise” and hold” option would be good.

    thanks,

    • amadan says:

      Hi Kunal,

      I received employee stock option when my company was private and now it went IPO. So its publicly traded, I still haven’t “exercised” my stock options and it is set to expire soon. I am thinking of doing “Exercise and hold”, when I do that I will have to pay the company the excessive price but will I also have to pay tax right away (even if I am not selling, just holding?). Also how can I differ the taxes so I can split the taxable profit to multiple years so I pay less taxes?

      Any info of the “Exercise” and hold” option would be good.

      thanks,

  22. Terrence Salts says:

    What are the tax implications of trading stocks in a non-TFSA account with a brokerage, when it comes to end of year taxes on profits? Is there a particular rate for capital gains? Also, do I keep track of my gains and losses myself?

    • superAmin says:

      Hello,

      50% of your gains are counted as taxable income. You can deduct past capital losses from current capital gains. After factoring in capital gains, if your personal income is below the exemption level you won’t pay any taxes on it. You also don’t have to pay taxes if you haven’t sold the stock this year. Earnings from dividends are taxed differently, and have different rates depending on whether they are considered eligible or inedible.
      Finally, keep track of all your gains and losses. Your institution may provide you with a summary, but will not give you a formal t-slip.

      Regards,
      Allan Madan and Team

  23. Jeremiah Rakham says:

    Hello.

    I received a company stock option some time ago. It has a strike price of $3.10, and a vest of $30,000 after each of three years. The most recent yearly dividend was $0.69, and six months ago the company offered to buy it back. Though they offered $2.80, nobody sold their shares. What, if anything should I do with these? What are the tax rules surrounding my situation?

    • superAmin says:

      Hello.

      Tax rules for stock options in Canada differ, depending on whether the company is a CCPC. If it is, there is no immediate taxable gain. The gain is taxed when shares are sold, not exercised. This significantly reduces the up-front difficulty of purchasing stock options. Also, if shares are held for at least two years after the exercise, half of the initial gains are tax-free.

      If it is not a CCPC, the taxable gain may be due in the year of exercise. Many companies in this situation offer near-immediate partial buyback to help offset these costs. The difference between the market value at the time of exercise and the value at the time of sale is taxed as income for non CCPC’s.

      My advice is to exercise and sell if the stock price is higher, and take your cash profit. Then, use that profit to buy shares and collect dividends. You will get taxed on the profit from selling your options, and later on the dividends.

      Regards,
      Allan Madan and Team

  24. Govind Swarna says:

    Hello,

    I work in Canada for a company that trades in the US. One of the benefits I get from my job is that I get restricted stock units (RSUs) once a year. These are connected to an ETrade account that the company arranged for me. I have filled out the W-8BEN tax form. I believe this is the correct form.

    I just found out that there was an automatic ‘sell to cover’ action that sold enough stock to account for 40% of the value that had vested. Does this amount satisfy Revenue Canada when it comes to tax time? Or do I need to put some of the remainder aside as well? I asked an accountant, and he said that since it is a capital gain that the CRA would tax me on 50% of the value…is this correct?

    Also, the stock vested at 25.61 (which is the value at which the sell-to-cover happened), but by the time I could sell, the stock was at 25.44. Does that have any bearing on my situation?

    • superAmin says:

      Hello,

      The fair market value of the RSU at vest time is treated as regular income paid to you by your employer and will be taxed at your marginal rate. 40% should be enough withholding to satisfy your personal income tax, depending on what your total income for the year is. Since it vested at $25.61 but you sold it at $25.44, you’ll be able to claim a capital loss (or carry it forward to a year where you have gains you can offset with it).

      Regards,
      Allan Madan and Team

  25. Yano says:

    Hello,

    I work for a start-up company, and part of my compensation is stock options. Assuming that we get a chance to exit (big assumption, of course), I stand to make a large sum of money when I exercise them. What happens at this point with regards to tax? As I understand it, all growth from the exercise price will be taxed as capital gains. Is this correct? If so, I would end up losing a large percentage in taxes.

    Is it possible to exercise the options sheltered inside a TFSA or RRSP to avoid capital gains? Is there anything I’d need to do beforehand (e.g. “transfer” the options un-exercised into a TFSA) to prepare for that?

    • superAmin says:

      Hello,

      Your options are taxed at capital gains rates (i.e. 50%) since you get a 50% deduction on the income inclusion assuming you meet certain conditions. Regarding holding them in a TFSA or RRSP, make sure that you ensure they will not be considered a non-qualified and/or prohibited investment. In general, you need to ensure that you and non-arm’s length parties (such as relatives) will not own more than 10% of the company.

      However, you may not be able to get them into a TFSA without paying some tax on them. This is the point of a TFSA; the contributions are after-tax. You could possibly exercise the option, pay the (income) tax, then transfer the shares to a TFSA. However, this is assuming the stock price goes up after you exercise.

      Regards,
      Allan Madan and Team

  26. Aaron Samuel says:

    Hello, in 2012, I bought 1,000 shares at my company at $10 each. In 2013, the stocks shot up to $40 a share. Some of my co-workers and I decided to sell the shares, but then the stocks declined back down to $10 a share. How should we handle this situation?

    • superAmin says:

      Hi, In this case you should report a taxable employment benefit of $30,000 on your T1 return. This represents the profit earned on the shares up to the date of exercise. In addition, you should report a capital loss of $30,000 because the shares dropped in value when you sold them. The bad news is, the capital loss of $30,000 cannot be offset with the taxable employment benefit of $30,000.

      If you want, you can contact your local CRA Tax Services office, explain the situation, and they will determine whether special payment arrangements can be made.

      Regards,

      Allan Madan and Team

  27. JCP says:

    Hi,
    My wife will need to exercise some options from her former employer this week. It’s a publicly traded company. I understand she will have pay taxes on the difference of price between the exercise price and the current value. My question is who is required to send the tax amount to the CRA: The employer or her.
    If it’s the employer, does that mean they can withhold some of the shares as payment to the CRA?
    Thanks

    • amadan says:

      Hi JCP,

      Generally, the difference between the fair market value of the shares at the time the option is exercised and the option price will give rise to a taxable benefit. This taxable benefit is included in the employment income when the stock option is exercised (i.e. it is added onto the T4 just like a salary or a bonus).
      Since this amount is like a salary, the employer has to make payroll remittances on it (CPP, EI and income tax).

      Best Regards,

  28. Carla Harmon says:

    Hi, I was just wondering if there are any benefits of transferring the stocks from my employee stock savings account to a TFSA.

    • superAmin says:

      Hi Carla, if you have room to contribute to your TFSA and you decide to transfer your stock over to the TFSA, it will be deemed that the stocks have sold for a capital gain (or capital loss). This means there may be taxes you will need to pay on the transfer in the tax year. If you are able to pay a small amount of capital gain now, your future returns (ex. Capital gain, dividends) will be tax free.

      Contact me or your bank directly before deciding to make the transfer. It’s always beneficial to get professional help so that you don’t run into any problems

      Allan Madan and his team

  29. Veronica says:

    Hello Allan, I own a start-up company and will be hiring employees soon. I just want to plan ahead so I don’t run into problems down the road. What options should I have for employee stock?

    • superAmin says:

      Hi Veronica, there are three main plans that you can deploy for your employee stock options. They are as follows:

      1) Employee stock purchase plan (ESPP): This plan will allow your employees buy shares at a discounted price. Many ESPPs provide a buffer in the purchase of the shares: an employee will pay a certain amount over a period of time and at pre-specified periods, the employees can purchase shares at a discount using the accumulated payments. The benefit is equal to the value of the shares, minus the amount paid.
      2) Stock bonus plan: under this plan, you will have to agree to give the shares to your employee(s) free of charge. In turn, you agree to sell or issue shares to the employee for no cost.
      3) Stock option plan: This plan allows your employee(s) to purchase shares of your company or of a non-arm’s length company at a predetermined price.

  30. Craig says:

    Hi, I am moving to the States soon, but I still have stock through my current employer. Do I need to sell my stocks now? Or can I keep the stocks and deal with them when I get to the States?

    • superAmin says:

      Hello Craig, if you hold stock options at the time you become a non-resident, there should be no tax consequences at the time you move, but you will be liable for an employment benefit on exercise of the option.

      On the other hand, if you have previously applied to acquire CCPC shares to defer employment income again before you become a non-resident, you will face departure tax on the shares that you hold. The gain or loss on disposition of the shares will be reduced by the inherent adjustment for employment income.

  31. Jaime says:

    Hi Allan, is there a tax advantage to selling shares of my corporation?

    • superAmin says:

      Hello Jaimer, yes, in some cases there would be a big tax advantage for selling the shares of your corporation. If you have a qualified small Canadian-owned business or qualified farm property, you will be able to claim the capital gains exemption that will come from the sale of your shares. The capital gains exemption is $800,000 in vale for dispositions occurring on or after January 1st, 2014. This one idea could save you around $200,000 in income taxes.

      You should note that selling shares is a lot harder than selling assets for your company. You may have to lower the price of your shares, and in turn, depending on your personal tax situation, you may not be able to make use of the capital gains exemption. The government restricts the use of the exemption in some cases where the taxpayer have claimed investment losses.

  32. Kasey says:

    Hi Allan, is there any way to defer the taxes I pay on my stock options until I sell them?

    • superAmin says:

      Hi Kasey, if you work for a Canadian-controlled private corporation, you will be able to defer the tax on the employment benefit until the shares are sold. The CRA realizes that most people cannot find a way to pay tax on $50,000 of noncash compensation, which is why they allow you to defer the tax. However, if you do not work for a Canadian-controlled private corporation or a publicly traded company, no deferral will be available.

  33. Sarah says:

    Hello Allan, I made the election to defer income taxes on my shares in a public company. The stock value has since declined and I don’t have enough money to pay the income taxes that I have deferred. Is there any way to postpone the payments until I get enough money to pay them off?

    • superAmin says:

      Hi Sarah, yes there is temporary relief that the CRA provides for employees who have made an election to defer income tax on declining stock options. The relief is intended to ensure the income taxes payable on the benefit arising on the exercise of the stock option does not exceed the proceeds of disposition received when the optioned securities are sold while taking account of the tax benefit resulting from the deductible capital loss on those securities.

      To take advantage of this relief, the election must be filed no later than your filing deadline for the taxation year during which the shares are sold, which is almost always April 30th.

  34. Dan says:

    Hello Allan, I was thinking of giving shares to my employees instead of stock options. I know some of the advantages to this method, but not a lot about the disadvantages. Can you tell me a few disadvantages of giving shares to employees?

    • superAmin says:

      Hi Dan, here is a list of potential disadvantages for issuing shares to your employees.

      • Deferred tax liability if shares are bought below fair market value.
      • May need to defend the fair market value. You may also need an independent valuation, although that is very rare.
      • You need to make sure that shareholder agreement provisions are in place.
      • Issuing shares at very low prices on a cap table may look bad to new investors.
      • More Shareholders to manage.

      Here are some advantages of giving out shares.

      • You can get up to $800,000 in life-time tax-free capital gains.
      • 50% deduction on gains if shares held for more than two years or if shares were issued at FMV.
      • Losses in a CCPC can be used as allowable business losses if the business fails.
      • Can participate in Ownership of company.
      • Less dilution than if stock options are issued.

Leave a Reply

Your name and email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>