Do you need to pax tax on stock options?
Make sure you consult a tax specialist to ensure you can take full advantage of this significant cash windfall.
If you are an employee or former employee of a company that offers stock-based incentives (like Tesla, Uber, and Lyft), this guide is for you.
Read on to learn about the Canadian tax treatment of these incentive plans and how to report the ultimate sale of your shares.
This article provides a high-level overview of the different types of stock-based incentive plans and how they are taxed in Canada. This article assumes that all services were performed in Canada as an employee of a company (as opposed to an independent contractor).
Receiving Stock-based Incentives
Employee Stock Options (ESO) from Public Companies and Non-Canadian Controlled Private Companies
When you exercise your employee stock options, a taxable benefit will be calculated. This benefit should be reported on the T4 slip issued by your employer. The taxable benefit is the difference between the price you paid for the shares (the “strike price”) and their value on the date of exercise.
If your options were issued (and certain other conditions are met) you may be eligible for a deduction equal to 50% of the taxable benefit. Your employer should calculate this for you and report it on your T4.
However, if you are no longer an employee of the company, a T4 may not be issued or may not be issued correctly. This is a common occurrence for former employees of foreign employers. If this applies to you, a Stern Cohen tax specialist can help you calculate the appropriate amount to report.
Restricted Stock Units (RSUs)
Restricted Stock Units (also called restricted share units) plans generally offer units to an employee (whose value is derived from the shares of the company) that can’t be sold until certain conditions are met over a period of time. RSU’s are effectively deferred employee bonuses. When the RSU’s vest (when you’re able to sell them), you’ll receive a taxable benefit equal to the value of the shares received or cash received. This amount should be reported on your T4 from your employer.
Employee Share Purchase (ESP) Plan
An Employee Share Purchase Plan (or ESPP) is a benefit frequently offered to employees of public companies. In this case, an employee is allowed to purchase a certain amount of shares at a discounted price. The difference between the price paid by the employee and the trading price is a taxable benefit to the employee. The taxable benefit should be reported on the employee’s T4 and the employer should withhold tax on it.
Other Plans – Phantom Shares, Deferred Stock Units (DSU), and Other Variations
If you’ve been issued shares or units through another equity-based plan than those discussed above, it’s important to have it reviewed by a tax specialist. The drafting and structure of these plans can vary greatly from employer to employer.
If you’re an independent contractor (instead of an employee), the taxation of stock-based incentives can vary greatly. Frequently, the tax treatment is less beneficial than if you were an employee. Contractors can also be faced with a tax bill before they are able to sell their shares.
Selling the Shares
In general terms, the price you paid plus the taxable benefit you received will be the adjusted cost base (ACB) of your shares. Calculating the ACB can be difficult when you’ve received the shares through multiple plans, over multiple dates, and frequently the shares are quoted in a foreign currency. The ACB is important as it is used to determine the capital gain or loss on the sale of your shares.
Please note the ACB must be tracked in Canadian dollars based on Canadian tax principles. The reports provided by most US based brokerages (such as Charles Schwab) are typically not prepared in a manner suitable for Canadian tax reporting.
Reporting Shares in Non-Canadian Companies – Avoid Penalties
If you work for a foreign employer (e.g. Tesla, Uber, Lyft) and have received shares in the company, you may need to file a T1135 foreign reporting form. Why is this important? Well, if you forget to file your T1135 there’s a late filing penalty of up to $2,500 CAD per year! If you have been delinquent in your reporting, you may qualify to make a voluntary disclosure to waive the penalties.
How Stern Cohen Can Help
You’re not alone! If you need assistance with your stock-based incentive plan, Stern Cohen can help. Our tax specialists provide the following services:
- We can advise on how your phantom shares, deferred stock units, or other stock-based plans will be taxed in Canada.
- We can calculate the ACB of your shares prior to sale to assist in reporting a capital gain or loss.
- No T4 issued? Don’t sweat it. We can calculate the taxable benefit and assess whether a deduction equal to 50% of the benefit is available.
- Foreign reporting: We can assess whether it is required and help you become compliant.
- Employers: We can advise on how to structure a stock-based incentive plan for employees.
Our Fees and Retainer
Please note that a paid consultation with a Tax Partner and a signed engagement letter are required before we can provide any advice.
Advice and tax planning options can vary greatly depending on the contents of the plan and your situation.
Contact us for more information and to ensure your tax planning is optimal.
Disclaimer: While the information in this article is meant to be helpful, it is not meant to be advice for your unique situation. If you would like assistance with your tax needs, please contact us.