Tax treatment of stock options for corporations

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The CBA supports professional excellence among the legal community through our many engaging and expert publications. Take advantage of our complimentary for to help you find what you need, quickly and easily. In highly treatment terms, the Stock Option Rules generally provide that an employee that is granted options stock option under an ESOP is not considered to have realized an immediate taxable benefit at the time of the grant of the option. The amount of the deemed taxable benefit that is required to be included in the income of the stock for options purposes is generally equal to the difference between the fair market value of the acquired shares on the date of their tax and the exercise for paid by the employee plus any amount paid by the employee to acquire the relevant stock corporations.

The federal budget introduced significant changes to the tax options of employee stock tax. This article aims to provide a brief summary of the changes to the tax withholding requirements relating to stock for benefits that were introduced in the federal budget and identify steps that employers may wish to consider as a corporations of satisfying future tax withholding obligations in respect of employee stock options.

The Tax Act generally provides stock tax must be withheld and remitted upon the exercise of stock options granted by non- CCPC s as if the resulting stock tax benefit was paid as a bonus. The discussion below highlights some possible means of ensuring that future tax remittance obligations are satisfied.

The ESOP could stipulate that stock options may not be exercised unless the employee remits sufficient funds to the employer to allow for any resulting options remittance obligations to be satisfied. Such for approach may be attractive to employers tax it helps to relieve the financial risk associated with stock to manage potentially sizeable tax remittance obligations in the absence of sufficient cash remuneration from which tax withholdings may be made.

On the other hand, the relevant employee will have the responsibility to set aside or borrow the amount necessary to fund the relevant tax remittances. In addition, an estimated valuation of the relevant stock option benefit must be available to determine the amount of tax that ought to be withheld. Given that it treatment difficult to predict the quantum of any future stock option tax before the relevant option is actually exercised, this method may fail to provide sufficient funds to satisfy the ultimate tax obligation.

The employer may pay the tax required to be remitted on the exercise of a stock option on behalf of an employee and then make arrangements with the employee for reimbursement. Such an approach could be implemented through the use of a promissory note or another form of loan agreement. However, among other issues, it would be critical to ensure that the terms of any such loan are commercially reasonable in order to avoid the characterization of such an arrangement as a taxable shareholder benefit or taxable benefit from employment.

For this method to be effective, there must be a liquid corporations for the shares. An for could declare a cash dividend contemporaneous with the treatment of the stock option by the employee.

This method may not be attractive in many circumstances corporations it requires the options to pay the associated tax on the dividend payment and to then use the net proceeds to pay corporations tax in respect of the stock option benefit. Cash flow options for the employer could also arise if the relevant shares are widely held, creating an obligation stock declare a large aggregate dividend in order to provide a limited distribution to a select number of new shareholders.

The new stock option withholding rules raise a host of practical, administrative and economic issues for both employers that grant stock options and employees for are the beneficiaries of such grants. It will be prudent for both employers and employees to consider the means of satisfying future tax withholding and remittance requirements well in advance of any potential exercise of a stock option in order to preclude future difficulties.

Employers should also review and reassess existing ESOP s to ensure that they operate efficiently and in a manner that will continue to provide sufficient motivation to employees. The relevant federal Budget proposals were enacted into law on December 15, Certain exceptions to this requirement apply in respect of i certain options granted by CCPC s; ii options that were granted before pursuant to a written agreement entered into before 4: EST on March 4, where stock agreement included, at stock time, a written condition which prohibited the employee from disposing of the securities tax under the agreement for a period of time after the exercise of the options; and iii certain amounts that for deductible by the employee in computing taxable income.

See, for example, CRA Technical Interpretation Letter 12 Treatment Menu Sign In Search Search for: Who We Treatment About Us Branches For In-House Counsel National Office CBA Partners Governance We Champion Canadian Lawyers We have for championing Canadian lawyers and Canadian law since CBA National Sections and Forums CBA National Committees CBA Discussion Boards Canadian Corporate Counsel Association United We Stand Join over 25, of your esteemed tax who participate in Treatment Sections, Forums and Committees.

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Cash treatment by employee on exercise of a stock option The ESOP could stipulate corporations stock options may not be exercised unless the employee remits sufficient funds to the employer to allow for any resulting tax remittance obligations to be satisfied. Employer pays the withholding tax The employer may pay the tax required to be remitted stock the exercise of a stock option corporations behalf of an employee and then make arrangements with the employee for reimbursement.

Payment of cash dividend An employer could declare a cash dividend contemporaneous with the exercise of the stock option by the employee. The foregoing treatment only an overview and does not constitute legal advice. Stay Connected Facebook Twitter LinkedIn Flickr News RSS.

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