Stock options can leave you with a nasty tax bill

Contact me or your bank directly before deciding to make the transfer. Also what department of the company would I phone to find out. I have unexercised employee options granted to me before the company I work for went public IPO. Would there be any tax implications? CSI and in September, , exercised his options and acquired 53, shares in his employer. 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.

Taxation of Employee Stock Options. Many businesses use stock options to attract and reward good employees. Stock options give employees the opportunity to share in the future growth of a company without reducing the company’s cash flow. If the stock options are structured properly, the employee can enjoy the benefit on a tax-effective basis.

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The dilutive effect of options, even when granted to most employees, is typically very small and can be offset by their potential productivity and employee retention benefits. Options are not, however, a mechanism for existing owners to sell shares and are usually inappropriate for companies whose future growth is uncertain. They can also be less appealing in small, closely held companies that do not want to go public or be sold because they may find it difficult to create a market for the shares.

Stock Options and Employee Ownership Are options ownership? The answer depends on whom you ask. Proponents feel that options are true ownership because employees do not receive them for free, but must put up their own money to purchase shares.

Others, however, believe that because option plans allow employees to sell their shares a short period after granting, that options do not create long-term ownership vision and attitudes. The ultimate impact of any employee ownership plan, including a stock option plan, depends a great deal on the company and its goals for the plan, its commitment to creating an ownership culture, the amount of training and education it puts into explaining the plan, and the goals of individual employees whether they want cash sooner rather than later.

In companies that demonstrate a true commitment to creating an ownership culture, stock options can be a significant motivator. Companies like Starbucks, Cisco, and many others are paving the way, showing how effective a stock option plan can be when combined with a true commitment to treating employees like owners. Practical Considerations Generally, in designing an option program, companies need to consider carefully how much stock they are willing to make available, who will receive options, and how much employment will grow so that the right number of shares is granted each year.

A common error is to grant too many options too soon, leaving no room for additional options to future employees. One of the most important considerations for the plan design is its purpose: Does the company wish to promote long-term ownership or is it a one-time benefit? Is the plan intended as a way to create employee ownership or simply a way to create an additional employee benefit?

The answers to these questions will be crucial in defining specific plan characteristics such as eligibility, allocation, vesting, valuation, holding periods, and stock price. We publish The Stock Options Book, a highly detailed guide to stock options and stock purchase plans. Email this page Printer-friendly version. You might be interested in our publications on this topic area; see, for example: Stock Options A guide to administrative and compliance issues for stock option plans in US public companies.

Performance-Based Equity Compensation Provides the insight needed to create and manage a successful performance equity program. Liquidity Options for Entrepreneurial Companies Describes how entrepreneurial company owners can achieve liquidity without going public or selling the company. Advanced Topics in Equity Compensation Accounting A selective and detailed examination of crucial issues in equity compensation accounting.

Participant Education and Communication: 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.

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? 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. 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.

I worked for a company back in that had an IPO. Employees were awarded stock options, and I was given 2, shares.

I still have the letter from the man who was then president and CEO. The length of the contract was 25 years. The company has now been split into two separate companies. 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, 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 , 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. My company is offering me some stocks as compensation.

What are some things I should know before I take them? A stock option plan allows your employer to sell you shares at a predetermined price known as the exercise price. 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.

I have received a T4PS with an amount on box 35 that I need to include on my tax return. 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. 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.

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? 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. 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?

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.

Is this something that is plausible? 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.

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.

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. She is in the top income bracket. Options are not treated as capital gains, as you cannot deduct losses against them.

They are, however, taxed as ordinary income. 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 I received employee stock option when my company was private and now it went IPO. Also how can I deffer the taxes so I can split the taxable profit to multiple years so I pay less taxes?

Also how can I differ the taxes so I can split the taxable profit to multiple years so I pay less taxes? 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? You can deduct past capital losses from current capital gains. 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. I received a company stock option some time ago. What, if anything should I do with these? What are the tax rules surrounding my situation? 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. 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. I work in Canada for a company that trades in the US. 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. 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? Also, the stock vested at Does that have any bearing on my situation? 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.

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. If so, I would end up losing a large percentage in taxes.

Your options are taxed at capital gains rates i. 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. How should we handle this situation?

This represents the profit earned on the shares up to the date of exercise. 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.

Hi, My wife will need to exercise some options from her former employer this week. 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. 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. Since this amount is like a salary, the employer has to make payroll remittances on it CPP, EI and income tax. Hi, I was just wondering if there are any benefits of transferring the stocks from my employee stock savings account to a TFSA.

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. In your public company example the Coca cola shares are on a US exchange, so presumably the transactions will occur in the USA through some sort of US trustee or brokerage. You will simply report the capital gain on your Canadian tax return and pay tax to Canada.

Hi, Could you please tell me what are the cost implications to both an employer and employee in a stock options plan. If the employee exercises the option below the fair market value of the stock, the employee will receive a taxable benefit.

This would be an employment benefit equal to the amount by which the value of the shares at the exercise date exceeds the total amount paid. Hello Allan, I own a start-up company and will be hiring employees soon. What options should I have for employee stock? Hi Veronica, there are three main plans that you can deploy for your employee stock options. They are as follows:. This plan will allow your employees buy shares at a discounted price.

Many ESPPs provide a buffer in the purchase of the shares: The benefit is equal to the value of the shares, minus the amount paid.

In turn, you agree to sell or issue shares to the employee for no cost. 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? 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. 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. 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. 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. However, if you do not work for a Canadian-controlled private corporation or a publicly traded company, no deferral will be available. Hello Allan, I made the election to defer income taxes on my shares in a public company.

Is there any way to postpone the payments until I get enough money to pay them off? 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. 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?

You may also need an independent valuation, although that is very rare. I work for a public company and received shares of stock options. I paid necessary tax at the time of exercise, but I did not immediately sell my shares.

I paid the necessary taxes at the time of exercise and the employment benefit was included in my income on my T4 slip. Hello I find your blog informative and valuable. I have a question regarding TFSA and employee stock option. The contribution I make towards the stock option is on a monthly basis for 3 years and of course the contributions are after tax. Would there be any tax implications? Also, after I exercise can I keep these shares in TFSA and later on sell the shares if the price go up without any tax implications?

You can transfer stock options given to you to your corporation. However, there will be a capital gain realized upon the transfer. The amount of the gain will be equal to the market value of the options less the amount you paid for them.

Dear Allan, Quick question about employee stock options. I was wondering what the requirements are to deduct the stock option employment benefit? Dear Sumeer, As an employee who exercises options and acquires shares, you are entitled to an offsetting deduction that equates to one half of the employment benefit amount.

This is given to you as long as these conditions are met:. Hello Allan, I am ready to declare my security option benefit and I work for a private Canadian corporation — how do I go about this?

Hello Ranjeet, Declaring your security options benefits depends on the type of company issuing the benefits. If the company is a Canadian controlled private corporation, you have to report the benefits the year you plan on selling your securities. I exercised options using a net exercise they used part of my available options to purchase shares and provided me with a certificate for those shares last year but on review the company did not report the taxable benefit on my T4.

The stock is for a publicly listed company on the TSX. How should this be cleared up with CRA? You should speak with your employer and ask them if they will be issuing amended T4 slips to their employees.

Hi Allan, I was just wondering what kind of stock options can people generally choose from? Hi Laurentine, Employees are generally issued a variety of different options under one of three types of plan.

For further details about each of these options, please visit the Canada Revenue Agency website. Dear Allan, I have read a lot about stock options for workers in Canada.

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Public company stock options. The rules are different where the company granting the option is a public company. The general rule is that the employee has to report a taxable employment benefit in the year the option is exercised. Picture this. You're employed by a company that offers a stock option plan. Under the plan, you're able to buy shares in your employer at $10 per share. Over the course of time, the value of the shares on the open market rises to be worth $ per share. So, you exercise your options and buy 1, shares for $10 each. Your cost, then, is $10, Feb 27,  · The primary disadvantage of Stock Option Plans for the company is the possible dilution of other shareholders’ equity when the employees exercise the stock options. For employees, the main disadvantage of stock options in a private company—compared to cash bonuses or greater compensation—is the lack of liquidity.