Jeremy Scott Tax Law

Canadian employee reviewing stock market performance on a laptop computer, while drinking coffee; employee stock options.

Many employers utilize stock options as a method of rewarding or attracting employees. Because they enable staff members to benefit from an organization’s future growth, they can be a useful incentive that helps to align an employee’s goals with those of a business, as both parties profit when the price of the stock increases. Moreover, stock options tend not to impact a company’s cash flow, which makes them a popular means of compensation. On the other hand, taxation rules linked to stock options are highly complex due to the multiple factors that can influence when and how stock options incur tax. Read on to learn more about employee stock options, alongside the Canadian tax implications associated with them. To find out how a Nova Scotia tax lawyer from Jeremy Scott Law can help clients with their tax concerns, call our office at(902) 403-7201 today and schedule a confidential consultation to discuss your Canadian business tax needs.

What Are Employee Stock Options?

Per the Canada Revenue Agency (CRA), stock options for employees refer to a staff member’s right to purchase company stocks at a price set by the firm, known as the exercise or grant price, within a specific period. Also according to the CRA, firms generally set this price lower than the current trading price, such that employees can purchase the shares for less than their fair market value (FMV); the difference is part of the total employee compensation package. Businesses occasionally review the price where employees may exercise their share options, which they typically do when the business’s stock price falls below the initial grant price to encourage employees to stay at the organization.

What Are the Different Employee Stock Options in Canada?

In Canada, employers typically provide employees with one of three stock option plans:

  • Employee stock purchase: Also known as an ESPP, this type of plan involves a staff member contributing a specific portion of their salary throughout a certain period. Usually twice per year of their employment, employees can choose whether to buy stock options at a reduced rate.
  • Stock bonus: For this plan, the employer provides the employee with free stocks that make up a proportion of that individual’s compensation package.
  • Stock option: Here, the employee gains the option to buy company shares at a predetermined price.

How Are Employee Stock Options Taxed in Canada?

Employees who buy shares of the company where they work at the discounted price incur tax on the benefit, which amounts to the number of purchased shares, multiplied by the variance between the fair market value of the shares on the date of exercising the share options, minus the grant price. If an employee keeps holding on to their shares after exercising their share options, they may experience a capital loss or gain; worth noting is that tax is due on 50% of a capital gain unless placed in a registered savings account, like a tax-free savings account (TFSA) or a registered retirement savings plan (RRSP).

The rules for when taxes on employee stock options are assessed differ slightly depending on the classification of the company:

  • CCPC: Employees working for Canadian-controlled private corporations, also referred to as CCPCs, do not owe tax until they decide to sell their shares; CCPCS are privately owned firms, meaning their shares are not publicly traded. The Canada Revenue Agency (CRA) states additional stipulations for CCPC classification; for instance, a company run by publicly owned firms or non-residents cannot be a CCPC.
  • Non-CCPC: For other firms, such as public corporations, employees incur tax on the bought shares during the year of purchase.

To develop a more robust understanding of the Canadian tax ramifications of using employee stock options to compensate staff members, consider arranging a consultation with a Nova Scotia tax lawyer from Jeremy Scott Law.

How Do I Report Employee Stock Options on My Tax Return in Canada?

Canadian employers who offer employee stock options will need to maintain accurate records regarding each employee’s exercise of these options throughout the year in order to report the activity accurately on annual tax forms. Below is a summary of the Canadian tax implications associated with stock options from public companies and non-Canadian private firms, international company shares, and selling shares.

Public Company and Non-Canadian Private Company Stock Options

Employees obtain a taxable benefit when they exercise their stock options obtained from either a public company or a non-Canadian private firm, which their employers should record on the person’s issued T4 form. This benefit refers to the contrast between the strike price, which is the price paid by the employee for the shares, and how much they are worth on the exercise date.

Upon the issue of an employee’s options, and provided the individual meets other conditions, they could gain a 50% deduction of the taxable benefit. The hiring organization should calculate this deduction on behalf of the staff member and report on their T4 slip.

International Company Shares

Canadian employees who receive company shares as part of their compensation while working for international employers may have to submit a T1135 form. Individuals who submit this form late could receive a $2,500 penalty.

Share Selling

The price paid by the employee, combined with the benefit received, makes up the shares’ adjusted cost base (ACB). The ACB, in turn, helps calculate the capital loss or gain made when selling the shares. 

Is an ESPP a Taxable Benefit in Canada?

Public companies frequently offer ESPPs to their employees as part of their compensation. In Canada, the employee taxable benefit here refers to the difference between how much the employee paid and the share’s trading price, which the employer should report on the staff member’s T4; moreover, the hiring organization should retain this tax.

Are RSUs Taxable in Canada?

A restricted stock (or share) unit (RSU) plan provides employees with units that have a value determined from the company share value. Staff members cannot sell these units until they fulfill specific conditions over a certain period. They operate similarly to prolonged employee bonuses. When employees can sell their RSUs, the taxable benefit received equates to the cash or share value obtained, which employers should report on the individual’s T4.

Contact a Nova Scotia Tax Lawyer Today

Stock options can provide employees with potential tax advantages, such as more favorable tax compared to a bonus or salary, but the taxation rules applicable to these employee benefits can be very complex. In light of this complexity, consider reaching out to a seasoned lawyer for assistance with understanding the various stock option tax implications. Learn more about the Canadian tax effects linked to employee stock options and discover how a Nova Scotia tax lawyer can aid businesses with their tax issues by calling(902) 403-7201 to schedule a consultation with Jeremy Scott Law