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Paying Tax on Stock Options (a Guide for Canadians)

Do you need to pay tax on stock options?

Are you an employee or former employee of a company that offers stock-based incentives? (like Tesla, Uber, and Lyft)

If so, 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).
ESO's RSU's & Canadian Taxes

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 Unit plans generally offer shares to an employee 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. 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.

Independent Contractors

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

The cost to provide these services starts at $1,000 CAD and increases based on the complexity and time required. Contact us for a more accurate fee estimate based on your situation. Please note that a retainer and a signed engagement letter are required before we can provide any advice.

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