Pagando impostos sobre opções de ações exercidas

Exercício de opções de ações não qualificadas.
O que você precisa saber ao exercer opções de ações não qualificadas.
Sua opção de ações não qualificadas lhe dá o direito de comprar ações a um preço especificado. Você exerce esse direito quando notifica seu empregador sobre sua compra, de acordo com os termos do contrato de opção. As consequências fiscais precisas do exercício de uma opção de ações não qualificadas dependem da maneira de exercer a opção. Mas, em geral, você relatará uma renda compensatória igual ao elemento de barganha no momento do exercício.
Nota: As regras descritas aqui se aplicam se o estoque for adquirido quando você o receber. Geralmente, o estoque é adquirido se você tiver um direito irrestrito de vendê-lo, ou você pode sair do seu trabalho sem abrir mão do valor do estoque. Veja quando o estoque é investido. Se a ação não for adquirida quando você exercer a opção, aplique as regras para ações restritas descritas em Compra de Ações do Empregador e na Seção 83b Eleição.
Elemento de barganha.
O elemento de barganha no exercício de uma opção é a diferença entre o valor do estoque na data de exercício e o valor pago pela ação.
Exemplo: você tem uma opção que lhe dá o direito de comprar 1.000 ações de ações por US $ 15 por ação. Se você exercer a opção inteira em um momento em que o valor do estoque é de US $ 40 por ação, o elemento de barganha é de US $ 25.000 (US $ 40.000 menos US $ 15.000).
O valor do estoque deve ser determinado a partir da data do exercício. Para ações negociadas publicamente, o valor é geralmente determinado como a média entre as vendas relatadas altas e baixas para aquela data. Para empresas de capital fechado, o valor deve ser determinado por outros meios, talvez por referência a transações privadas recentes nas ações da empresa ou a uma avaliação geral da empresa.
Elemento de barganha como receita.
O elemento de barganha no exercício de uma opção recebida pelos serviços é considerado como remuneração compensatória. No exemplo acima, você informaria $ 25.000 de receita, como se a empresa tivesse pago um bônus em dinheiro de $ 25.000. Você não tem permissão para tratar esse valor como ganho de capital.
O valor do imposto que você pagará depende da sua faixa de imposto. Se a quantia inteira cair na faixa de 30%, por exemplo, você pagará US $ 7.500 (mais qualquer imposto de renda estadual ou local). Se você exercer uma opção grande, é provável que parte da renda suba para uma faixa de imposto maior do que a usual.
O importante para se concentrar - antes do tempo, se possível - é que você tem que reportar essa receita, e pagar o imposto, mesmo se você não vender a ação. Você não recebeu nenhum dinheiro; Na verdade, você pagou em dinheiro para exercer a opção, mas ainda tem que arranjar dinheiro adicional para pagar o IRS. Essa é uma das razões pelas quais o planejamento antecipado é importante para lidar com as opções.
Retenção.
Se você é um empregado (ou era funcionário quando recebeu a opção), a empresa é obrigada a negar quando exercer sua opção. É claro que a obrigação de retenção deve ser satisfeita em dinheiro. O IRS não aceita ações de ações! Existem várias maneiras pelas quais a empresa pode lidar com o requisito de retenção. O mais comum é simplesmente exigir que você pague a quantia retida em dinheiro no momento em que exerce a opção.
Exemplo: Você tem a opção de comprar 1.000 ações por US $ 15 por ação, quando elas valem US $ 40 por ação. A empresa exige que você pague US $ 15.000 (o preço de exercício das ações) mais US $ 9.000 para cobrir os requisitos estaduais e federais de retenção.
O montante pago deve cobrir a retenção do imposto de renda federal e estadual e a participação do funcionário nos impostos sobre o emprego. O montante pago como retenção na fonte de imposto de renda será um crédito contra o imposto que você deve ao reportar a receita no final do ano. Esteja preparado: o montante de retenção exigido não será necessariamente grande o suficiente para cobrir o valor total do imposto. Você pode receber um imposto em 15 de abril, mesmo que tenha pago a retenção no momento em que exerceu a opção, porque o montante retido na fonte é apenas uma estimativa do imposto real.
Não empregados.
Se você não é funcionário da empresa que concedeu a opção (e não era funcionário quando recebeu a opção), a retenção não será aplicada quando você a exercitar. A receita deve ser informada a você no Formulário 1099-MISC, em vez do Formulário W-2. Lembre-se de que isso é uma compensação pelos serviços. Em geral, essa renda estará sujeita ao imposto por conta própria, bem como ao imposto de renda federal e estadual.
Base e período de detenção.
É importante acompanhar sua base em estoque porque isso determina quanto ganho ou perda você reporta ao vender a ação. Quando você exerce uma opção não qualificada, sua base é igual ao valor que você pagou pela ação, mais a quantia de receita que você reporta para exercer a opção. No exemplo que estamos usando, sua base seria de US $ 40 por ação. Se você vender as ações em uma data posterior por US $ 45 por ação, seu ganho será de apenas US $ 5 por ação, mesmo que você pague apenas US $ 15 por ação pela ação. O ganho será ganho de capital, não renda de compensação.
Para determinados fins limitados (particularmente sob as leis de valores mobiliários), você é tratado como se fosse o dono da ação durante o período em que manteve a opção. Mas essa regra não se aplica quando você está determinando qual categoria de ganho ou perda você tem quando vende a ação. Você tem que começar a partir da data que você comprou o estoque, exercendo a opção, e mantenha por mais de um ano para obter ganho de capital a longo prazo.
Outros métodos de exercício
A descrição acima supõe que você exerceu sua opção não qualificada pagando em dinheiro. Existem dois outros métodos de exercício de opções que às vezes são usados. Um é o chamado exercício "sem dinheiro" de uma opção. O outro envolve o uso de ações que você já possui para pagar o preço de exercício sob a opção. Esses métodos e suas conseqüências tributárias são descritos nas páginas a seguir.

Impostos e remuneração executiva.
Documento de resumo 344.
O tema da remuneração dos executivos tem sido de grande interesse para acadêmicos, imprensa popular e políticos. Com o aumento contínuo da remuneração dos executivos e o consequente aumento da disparidade salarial entre esses executivos e o trabalhador médio, essa questão está mais uma vez à frente do debate sobre políticas públicas. Ao longo dos anos, os legisladores ajustaram o código tributário para limitar as formas desfavorecidas de remuneração dos executivos, enquanto os reguladores aumentaram a quantidade de divulgação que as empresas precisam fazer. No atual Congresso, a deputada Barbara Lee (D-Calif.) Introduziu a Lei de Equidade de Renda de 2011 (H. R. 382), que alteraria o Internal Revenue Code para proibir deduções por compensação excessiva para qualquer funcionário em tempo integral; a compensação é definida como “excessiva” se exceder US $ 500.000 ou 25 vezes a remuneração do empregado mais mal pago, o que for maior.
O objetivo deste estudo é examinar o impacto de uma limitação prévia à dedutibilidade da remuneração, Seção 162 (m) do Código da Receita Federal. Em contraste com grande parte do debate atual sobre a necessidade do governo federal aumentar as receitas fiscais, o principal objetivo da Seção 162 (m), que limitava as deduções fiscais para a remuneração dos executivos, não era aumentar a receita, mas reduzir remuneração baseada no desempenho - em outras palavras, fazer algo sobre a compensação excessiva contra a qual o candidato presidencial de 1992, William Jefferson Clinton, fez campanha contra. Este documento analisará a eficácia dessa provisão no alcance de suas metas e fornecerá informações sobre quanto receita ela elevou ou perdeu devido a deduções para remuneração de executivos. Com relação à redução da compensação excessiva e não baseada em desempenho, muitos consideram a Seção 162 (m) como falha, incluindo Christopher Cox, o então presidente da Securities and Exchange Commission, que chegou a sugerir que ela pertencia “ao mercado”. O senador Charles Grassley (R-Iowa), então presidente da Comissão de Finanças do Senado, foi ainda mais direto, dizendo:
162 (m) está quebrado. … Foi bem intencionado. Mas realmente não funcionou de todo. As empresas acharam fácil contornar a lei. Tem mais buracos do que queijo suíço. E parece ter encorajado a indústria de opções. Essas pessoas sofisticadas estão trabalhando com dispositivos parecidos com relógios suíços para jogar com essa regra de queijo suíço.
Desde que a Seção 162 (m) passou quase 20 anos atrás, tanto a pesquisa acadêmica quanto a prática mostraram um aumento dramático na remuneração dos executivos, com poucas evidências de que ela esteja mais ligada ao desempenho do que antes. Neste artigo, estimamos que as deduções corporativas para remuneração de executivos foram limitadas por essa provisão, com as empresas públicas pagando, em média, um extra de US $ 2,5 bilhões por ano em impostos federais. Eles continuam, no entanto, a deduzir a maior parte de sua remuneração de executivos, e essas deduções custam ao Tesouro dos EUA cerca de US $ 7,5 bilhões por ano. Como os dados reais de retorno de imposto são, por estatuto, confidenciais, nossas estimativas são um pouco imprecisas, já que temos que deduzir tanto a dedutibilidade fiscal da remuneração de executivos quanto o status fiscal da corporação de registros públicos.
Nossas principais descobertas são:
As empresas podem deduzir integralmente os componentes da remuneração dos executivos que atendem aos requisitos do IRS para se qualificarem como “baseados no desempenho”. Um desses requisitos é a aprovação dos acionistas. No entanto, apenas informações muito gerais são fornecidas aos acionistas. Portanto, os acionistas são solicitados a, e normalmente o fazem, aprovar planos sem saber se as condições de desempenho são desafiadoras ou não, e os possíveis pagamentos do plano. Remuneração por desempenho, como opções de ações e planos de incentivo não patrimoniais, que atendam aos requisitos do IRS para o contrato baseado em desempenho & # 8220; & # 8221; exceção é totalmente dedutível. Salário, bônus e subvenções são dedutíveis, mas sujeitos a um limite de US $ 1 milhão. Em 2010, nossa estimativa era de que havia US $ 27,8 bilhões em remuneração de executivos que eram dedutíveis. Um total de US $ 121,5 bilhões em remuneração de executivos foi dedutível no período de 2007-2010. Aproximadamente 55 por cento desse total foi para compensação baseada em desempenho. As corporações aparentemente sofisticadas em impostos parecem não se importar com as restrições às deduções e continuam a pagar salários executivos indedutíveis. O número de executivos que recebem salário acima do limite máximo dedutível de US $ 1 milhão aumentou de 563 em 2007 para 594 em 2010. Para todos que a Seção 162 (m) pretende limitar a remuneração excessiva dos executivos, são os acionistas e o Tesouro dos EUA que sofreram perdas financeiras. O código não proíbe as empresas de pagar qualquer tipo de compensação; em vez disso, eles são proibidos de deduzir esse valor em sua declaração de imposto. O resultado é uma diminuição dos lucros da empresa e retornos reduzidos para os acionistas. Assumindo uma alíquota marginal de 25% sobre os lucros corporativos (estimativa conservadora), a receita perdida para o governo federal em 2010, de uma compensação executiva dedutível, foi de US $ 7 bilhões, e a receita federal perdida no período 2007-2010 foi de US $ 30,4 bilhões. Mais da metade da receita federal perdida deve-se aos subsídios do contribuinte para o pagamento do desempenho do executivo. A remuneração dos executivos deverá se recuperar no futuro próximo, excedendo os níveis observados em 2007.
1. Fundo.
A seção 162 do Internal Revenue Code cobre despesas de comércio e negócios. Conforme estabelecido na Seção 162 (a), as entidades podem deduzir todas as despesas ordinárias e necessárias pagas ou incorridas durante o exercício tributável para realizar qualquer negociação ou negócio, incluindo, conforme observado na Seção 162 (a) (1) , um subsídio razoável para salários ou outra compensação por serviços pessoais realmente prestados.
No entanto, várias seções do Internal Revenue Code - em particular, seções 162 (m), 162 (m) (5), 162 (m) (6) e 280 (g) - limitam a dedutibilidade da remuneração dos executivos. Adotada em 1993, a Seção 162 (m), que se aplica a empresas de capital aberto, limita a dedução da remuneração de executivos a US $ 1 milhão por indivíduo coberto, 1 com exceção da remuneração baseada em desempenho qualificada. Ou seja, uma empresa pode deduzir US $ 1 milhão de remuneração baseada em não desempenho por indivíduo coberto e uma quantia ilimitada de remuneração baseada em desempenho.
Em contraste com a Seção 162 (m), as seções 162 (m) (5) e 162 (m) (6) são mais recentes e estreitamente direcionadas; aplicam-se, respectivamente, aos participantes do Programa de Alívio de Ativos Problemáticos (TARP) e às seguradoras de saúde. Eles também estabeleceram um limite mais baixo para as deduções fiscais permitidas para compensação em US $ 500.000 por indivíduo, sem distinção ou exceção para compensação baseada em desempenho. A seção 162 (m) (5) foi adotada em 2008 e se aplica ao diretor executivo (CEO), diretor financeiro (CFO) e aos próximos três executivos mais bem pagos de entidades públicas e privadas que aceitaram dinheiro sob TARP. A seção 162 (m) (6) entra em vigor em 2013 e suas limitações se aplicam à maioria dos funcionários de prestadores de serviços de saúde. A seção 280 (g) não se aplica a pagamentos periódicos a empregados, mas a alterações nos pagamentos de controle.2 Se o valor for igual ou superior a três vezes a remuneração W-2 média do indivíduo coberto para os cinco anos anteriores Em alguns anos, a empresa perde a dedução fiscal para esse pagamento, e o indivíduo está sujeito a um imposto sobre o excesso de pagamento de 20%. Como nas seções 162 (m) (5) e 162 (m) (6), a seção 280 (g) não contém exceções baseadas em desempenho.
Para discutir a dedutibilidade fiscal da remuneração dos executivos, este artigo enfocará a Seção 162 (m) por causa de seu alcance mais amplo. Lembre-se, não se limita a um setor específico da economia; limita a dedução para remuneração de executivos em empresas públicas a US $ 1 milhão por indivíduo coberto, com exceção da remuneração baseada em desempenho qualificada. Para se qualificar como remuneração baseada em desempenho, os seguintes requisitos devem ser atendidos:
A compensação deve ser paga unicamente por conta do cumprimento pelo executivo de uma ou mais metas de desempenho determinadas por uma fórmula objetiva. Essas metas podem incluir preço de ações, participação de mercado, vendas, custos ou ganhos e podem ser aplicadas a pessoas físicas, unidades de negócios ou corporações como um todo; As metas de desempenho devem ser estabelecidas por um comitê de remuneração de dois ou mais conselheiros independentes; Os termos devem ser divulgados aos acionistas e aprovados por maioria de votos; e O comitê de remuneração deve certificar que as metas de desempenho foram cumpridas antes que o pagamento seja feito.
Embora a Seção 162 (m) tenha a intenção de limitar a remuneração excessiva dos executivos, esse autor vê vários pontos fracos ou brechas no código. Em relação à aprovação dos acionistas, as empresas só precisam dar aos acionistas os termos mais gerais quando colocam o plano de compensação em votação. Os acionistas são solicitados a, e geralmente o fazem, aprovar planos sem saber se as condições de desempenho são desafiadoras ou não, e os possíveis pagamentos do plano. Esses detalhes são deixados para o comitê de remuneração, que deve definir os termos até o primeiro trimestre do ano fiscal da empresa. Também é problemático que, se esses termos não forem cumpridos, a corporação não seja proibida de pagar a compensação. Em vez disso, é proibido deduzir esse valor em sua declaração de imposto. O resultado é um menor lucro da empresa. Os que sofrem são os acionistas - as mesmas pessoas que, mesmo neste dia de divulgações de compensação expandidas, não recebem detalhes sobre os planos de remuneração dos executivos antes de serem solicitados a votar nelas, nem recebem informações sobre as deduções fiscais ou perdida.
Na Seção 2, examinaremos os componentes do pacote de remuneração e discutiremos as conseqüências tributárias de cada um deles. A Seção 3 utilizará informações de remuneração de executivos divulgadas em declarações de procuração corporativa - as declarações exigidas, úteis para avaliar como a administração é paga e identificar possíveis conflitos de interesse, que devem ser arquivadas na Comissão de Valores Mobiliários dos Estados Unidos (Formulário DEF 14A) - para resumir e tabular a remuneração reportada para cada ano de 2007 a 2010 e contrastar os valores reportados com aqueles efetivamente dedutíveis por essas corporações. A Seção 4 estimará a perda de receita associada a essas deduções. O artigo concluirá com a Seção 5, que fará uma retrospectiva do impacto dessas disposições tributárias, especificamente das limitações às deduções e seu efeito sobre a remuneração dos executivos, e aguardará como certos eventos atuais, como a adoção de políticas de pagamento, afetará o futuro da remuneração dos executivos.
2. Componentes do pacote de remuneração dos executivos.
Antes de podermos explorar plenamente as consequências da Seção 162 (m), precisamos entender o pacote de remuneração dos executivos. Assim, esta seção apresentará os componentes do pacote de remuneração, que estão resumidos no quadro intitulado "Componentes do pacote de compensação", & # 8221; e discutir suas conseqüências tributárias para o executivo e para a empresa.
Componentes do pacote de compensação.
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Salário é o montante fixo, possivelmente contratado, de remuneração que não varia explicitamente com o desempenho. Por definição, o salário não é baseado no desempenho e, portanto, não se qualifica para a exceção baseada no desempenho sob a Seção 162 (m). Consequentemente, é tributável para o executivo e dedutível para a empresa (sujeito a limitações de dedução) no ano pago. Deve-se observar que o limite de dedução de US $ 1 milhão se aplica a todas as compensações de desempenho não agregadas, não a cada componente individual dessa remuneração. Se uma empresa paga um salário executivo de US $ 750.000, o valor total seria dedutível. No entanto, se pagar US $ 500.000 adicionais em outras formas de indenização por desempenho, sua dedução total por compensação baseada em não desempenho seria limitada a US $ 1 milhão; os US $ 250.000 adicionais não são dedutíveis.
A compensação de bônus pode estar condicionada ao desempenho de um indivíduo, grupo ou corporação. Por estar condicionada ao desempenho, muitas vezes é paga após o final do ano fiscal da empresa. Do ponto de vista do funcionário, é tributável não no ano ganho, mas no ano recebido. Para o empregador, o Regulamento do Tesouro 1.404 (b) -1T permite que uma empresa que use um método de contabilidade de exercício possa usar a dedução no ano ganho se um funcionário receber compensação dentro de 2,5 meses após o término do ano fiscal do empregador. . Em outras palavras, os bônus são tributáveis ​​para o executivo no ano recebido, embora dedutíveis (sujeito a limitações de dedução) no ano ganho (sob a suposição de que os bônus são pagos dentro de 2,5 meses do final do ano). Embora os bônus sejam, teoricamente, uma recompensa pelo desempenho, eles não são concedidos ou pagos de acordo com um plano por escrito aprovado pelos acionistas, 3 e, portanto, não se qualificam como baseados no desempenho sob a Seção 162 (m).
Compensação do plano de incentivo não patrimonial.
Da mesma forma que os bônus, a compensação do plano de incentivo não patrimonial pode estar condicionada ao desempenho individual, grupal ou corporativo. A diferença entre os dois é que a compensação do plano de incentivo não patrimonial é paga de acordo com um plano por escrito, que, para fins deste estudo, supomos que atenda aos requisitos da Seção 162 (m) .4 plano de incentivo são totalmente tributáveis ​​para o executivo no ano de recebimento e dedutíveis pela empresa no ano ganho.5.
Bolsas de estoque.
As concessões de ações ocorrem quando as corporações dão ações a seus empregados.6 Elas diferem das opções de ações por não terem preço de exercício. Enquanto uma opção de ações só tem valor se o preço da ação da empresa estiver acima do preço de exercício, uma concessão de ações terá valor desde que o preço da ação esteja acima de zero. Consequentemente, uma concessão de ações vale sempre mais do que uma concessão de opção de ações para o mesmo número de ações. As concessões de ações podem ser irrestritas ou restritas; no entanto, a grande maioria dos subsídios de funcionários é restrita. Por exemplo, uma restrição pode ser que o executivo não possa vender as ações até que ele ou ela tenha trabalhado para a corporação por um período de tempo (um período de aquisição típico seria de três ou quatro anos). Restrições também podem ser baseadas no desempenho. Por exemplo, o executivo perderá as ações se os lucros e / ou os retornos das ações não atingirem uma meta pré-estabelecida.7 Uma vez que essas restrições expirem, o executivo tem a propriedade total das ações e, na ausência da seção 83 (b), 8 irá reconhecer imediatamente o lucro tributável equivalente ao valor justo da ação naquele momento. Portanto, o ano de concessão e o ano de reconhecimento de imposto são geralmente diferentes. A dedutibilidade das concessões de ações como baseadas no desempenho depende dessas restrições. Isto é, se as restrições são baseadas no desempenho, então as concessões de ações podem se qualificar para a exceção baseada no desempenho sob a Seção 162 (m), 9 enquanto que se as restrições expirarem somente com a passagem do tempo, elas não. Nos últimos anos, tem havido uma tendência de maior uso do que hoje é chamado de “ações de desempenho”; no entanto, em anos anteriores, eles eram uma minoria distinta de concessões de ações. Consequentemente, a suposição feita neste artigo é que a maioria das concessões feitas em anos anteriores e adquiridas no período de observação não se qualificam para a exceção baseada no desempenho da Seção 162 (m). A possibilidade é que quanto mais concessões se tornarem baseadas no desempenho, o percentual e o valor em dólares da remuneração dos executivos que serão dedutíveis aumentarão. No entanto, mesmo as concessões de ações baseadas em desempenho não precisam atender aos requisitos de dedutibilidade. Considere a seguinte passagem da declaração de procuração da Intel Corporation de 2012:
A seção 162 (m) do código tributário estabelece um limite de US $ 1 milhão sobre o valor da compensação que a Intel pode deduzir em qualquer ano com relação ao seu CEO e cada um dos três executivos executivos mais bem remunerados (excluindo o CFO). Determinada remuneração baseada em desempenho aprovada pelos acionistas não está sujeita a esse limite de dedução. A Intel estruturou seu Plano de Incentivo a Ações de 2006 com a intenção de que as opções de ações concedidas sob o plano se qualificassem para a dedutibilidade fiscal. Além disso, para manter a flexibilidade e promover a simplicidade na administração desses acordos, outras compensações, como OSUs, RSUs e pagamentos de incentivos anuais e semestrais, não são projetados para se qualificar para dedutibilidade fiscal acima do código tributário Seção 162 ( m) limitação de US $ 1 milhão.
As OSUs mencionadas na passagem acima são unidades de estoque de desempenho superior, ou seja, baseadas em desempenho, e ainda não são projetadas para se qualificar sob a Seção 162 (m).
Opções de ações.
As opções de compra de ações permitem que o seu detentor compre uma ou mais ações a um preço de exercício fixo durante um período de tempo fixo. Eles têm valor se o preço da ação da empresa no momento do exercício ou da compra for maior que o preço de exercício. Como o preço de exercício é normalmente estabelecido pelo preço da ação na data da outorga, o valor final da opção depende do desempenho do preço da ação de uma corporação subseqüente à data da outorga. Isto é, eles podem ser extremamente valiosos quando o preço das ações sobe dramaticamente, mas também podem expirar sem valor se o preço da ação cair. Assim como as concessões de ações, as opções de ações normalmente são concedidas a executivos com restrições. Essas restrições geralmente expiram com o passar do tempo. Embora as empresas possam adicionar condições de desempenho às suas opções de ações, atualmente isso é pouco frequente. Tal como acontece com as concessões de ações, o ano de concessão e ano de reconhecimento de imposto é normalmente diferente para opções de ações. Eles diferem, no entanto, em que as ações são tributáveis ​​no vencimento das restrições ou no vesting, enquanto as opções de ações não são tributáveis ​​até que o detentor opte por exercer as opções.10 O valor tributável não é o valor justo das ações adquiridas, mas o elemento de barganha ou desconto, ou seja, a diferença entre o valor justo das ações adquiridas menos o exercício ou o preço de compra pago. As opções de ações são consideradas baseadas no desempenho sob a Seção 162 (m) se satisfizerem condições mínimas (por exemplo, aprovação de acionistas, opções concedidas com preço de exercício igual ou superior ao preço de mercado na data da outorga), sendo que o detentor da opção só pode lucrar com a opção se o preço da ação aumentar. Assim, a suposição feita neste estudo é que a compensação de opções de ações é totalmente dedutível para a empresa.
Direitos de valorização de ações.
Embora não sejam tão populares quanto as opções e concessões de ações, algumas empresas concedem direitos de valorização de ações (SARs). Os direitos de valorização de ações são o direito de receber o aumento no valor de um número específico de ações ordinárias ao longo de um período de tempo definido. Economicamente, eles são equivalentes a opções de ações, com uma exceção. Com uma opção de compra de ações, o executivo tem que comprar e depois vender as ações para receber seu lucro. Com um direito de valorização das ações, a corporação simplesmente paga ao executivo, em dinheiro ou ações ordinárias, o excesso do preço de mercado atual das ações sobre o preço de exercício. Assim, o executivo é capaz de perceber os benefícios de uma opção de compra de ações sem precisar comprar as ações. Em muitos casos, os direitos de valorização de ações são concedidos em conjunto com opções de compra de ações, nas quais o executivo, no momento do exercício, pode escolher entre a opção de ações ou o direito de valorização de ações. Para fins de relatório de declaração de proxy, os SARs são combinados com opções de ações. Da mesma forma, eles são tratados como opções de ações para impostos - incluindo a Seção 162 (m) -. Consequentemente, para esta análise, as SARs serão incorporadas à categoria mais ampla de opções de ações.
Pensões e compensação diferida.
Compensação diferida é uma remuneração que é obtida em um período, mas diferida pelo executivo para ser recebida em um período futuro. Se ele atender aos requisitos da Seção 409 (A) do Internal Revenue Code, o reconhecimento fiscal também poderá ser adiado até um período futuro. As pensões são uma forma de compensação diferida (abrangida por várias secções separadas do Código da Receita Federal), em que após a aposentadoria da empresa, o empregado recebe um pagamento ou uma série de pagamentos. Esses pagamentos podem ser definidos pelo plano de pensão (conhecido como plano de benefício definido), ou com base nos valores acumulados na conta de aposentadoria pessoal do empregado (conhecido como plano de contribuição definida, um tipo de qual é 401 (k)). Se os pagamentos forem definidos pelo plano de pensão, eles podem ser baseados em vários fatores, incluindo, entre outros, o número de anos com a corporação, ganhos durante o trabalho e nível dentro da corporação. As pensões podem ser estruturadas de várias maneiras; por exemplo, os pagamentos podem ser fixados em valor, ou podem ser ajustados pela inflação. Devido às limitações do Internal Revenue Code, os executivos geralmente são cobertos por mais de um plano. Isto é, eles participam de um plano primário “qualificado pelo imposto” juntamente com outros funcionários e têm pelo menos um plano não qualificado “suplementar”. O segundo plano é necessário pelas limitações do Internal Revenue Code (Código da Receita Federal) em pagamentos de um plano qualificado. Ou seja, para se qualificar para tratamento tributário favorável, o plano deve ser não discriminatório, ou seja, os benefícios não podem ser distorcidos em favor de funcionários altamente remunerados, e a corporação não pode considerar uma compensação superior a um limite, que foi de US $ 250.000. ano de 2012 (Seção 401 (a) (17)), na determinação de benefícios de pensão, nem efetuar pagamentos superiores a $ 200.000 (Seção 415 (b)). A maioria dos altos executivos faz somas substancialmente maiores.
Para fins fiscais, os planos de contribuição definida e de benefício definido são divididos em planos qualificados e não qualificados. Com um plano qualificado, a empresa pode contribuir ou financiá-lo atualmente e obter as deduções fiscais correspondentes (acima e além das limitações da Seção 162 (m)), enquanto o executivo não reconhece o lucro tributável até o futuro quando ele recebe o imposto. pagamentos. No entanto, dadas as limitações discutidas acima, as empresas recorrem a planos de aposentadoria executiva não qualificados ou suplementares (SERPs) para a maior parte dos pagamentos de aposentadoria a seus executivos. Como esses planos não são qualificados, eles não são financiados, já que o financiamento sujeitaria o executivo à tributação atual.
Resumindo, a maior parte dos pagamentos de pensão e compensação diferida são tributáveis ​​e dedutíveis após a aposentadoria, quando deixam de ser divulgados na declaração de procuração corporativa. Naquele momento, eles serão totalmente dedutíveis, já que o executivo aposentado não estará mais sujeito à Seção 162 (m). Assim, enquanto a próxima seção discutirá os valores informados como aumentos nas pensões e a compensação diferida na declaração de procuração, ela não incorporará nenhum desses valores ao estimar as conseqüências fiscais imediatas da remuneração dos executivos.11.
Todas as outras compensações.
A tabela de compensação de resumo da declaração de proxy contém uma outra categoria, uma categoria abrangente que abrange tudo o que não está incluído nos títulos anteriores: “todas as outras compensações”. Todas as outras compensações incluem itens como esses infames privilégios; Por exemplo, aviões particulares, carros da empresa, etc. Para os fins deste documento, assumimos que os valores reportados como “todas as outras compensações” na declaração de procuração são atualmente tributáveis ​​para o executivo e dedutíveis pela empresa, sujeitos à Seção 162 (m ) limitações, uma vez que não são baseadas em desempenho.
No gráfico de resumo acima, "Componentes do pacote de compensação", usamos a frase "provável de ser totalmente dedutível" # 8221; por uma razão. Como pessoas de fora, retirando dados de um banco de dados de grande escala, não podemos determinar com precisão o que é e o que não é dedutível. Observe acima que a remuneração baseada no desempenho pode se qualificar para a dedutibilidade total se a empresa atender aos requisitos estabelecidos no Internal Revenue Code. No entanto, às vezes, as empresas optam por não cumprir esses requisitos. Considere o seguinte trecho da Goodyear Tire & amp; Declaração de proxy mais recente da Rubber Company:
Dedutibilidade Fiscal do Pagamento.
A Seção 162 (m) do Código estabelece que a remuneração paga ao diretor executivo de uma empresa pública e seus outros três executivos executivos mais bem pagos no final do exercício (além de seu diretor financeiro) acima de US $ 1 milhão não é dedutível a menos que certos requisitos foram satisfeitos. O Comitê de Remuneração acredita que os prêmios do Plano de Incentivo à Gestão e do Plano de Desempenho de 2008 qualificam-se para a dedutibilidade total de acordo com a Seção 162 (m).
Embora a remuneração paga no âmbito do Plano de Desempenho Executivo seja baseada no desempenho, ela não se qualifica para a exceção de dedutibilidade para remuneração baseada no desempenho, uma vez que esse Plano não foi aprovado por nossos acionistas. Portanto, os pagamentos sob o Plano de Desempenho Executivo estão sujeitos à limitação da Seção 162 (m) sobre dedutibilidade. Devido aos nossos significativos ativos fiscais diferidos dos EUA de períodos anteriores, a limitação na dedutibilidade não tem impacto em nossa posição financeira. Ao analisar e considerar pagamentos ou lucros no âmbito do Plano de Desempenho Executivo, o Comitê de Remuneração considerou não apenas o impacto das deduções fiscais perdidas, mas também os ativos tributários diferidos americanos disponíveis para nós de períodos anteriores, bem como os benefícios realizados por nós. e nossos acionistas dos esforços bem-sucedidos de nossa equipe de gerenciamento sênior. Ao equilibrar essas considerações, o Comitê de Compensação concluiu que seria apropriado aprovar pagamentos referentes às subvenções e ganhos de 2009-2011 para o período de desempenho de 2011 em relação aos subsídios de 2010-2012 e 2011-2013.
Sem ler esta passagem, teríamos assumido que a remuneração paga no âmbito do Plano de Desempenho Executivo, que será relatado como compensação do plano de incentivo não patrimonial, seria totalmente dedutível. Uma complicação adicional é que os pagamentos sob o Plano de Incentivo à Gestão, que se qualificam para a exceção baseada no desempenho, e o Plano de Desempenho Executivo, que não o são, são relatados na tabela de compensação sumária da declaração de proxy como um número coluna de incentivo. E embora a Goodyear deva ser elogiada pela clareza de sua divulgação, a maioria das divulgações não é tão clara.
3. Remuneração do Executivo, 2007–2010.
Esta seção fornece uma análise e discussão da remuneração dos executivos paga em 2007-2010. Como mostrado na Tabela 1, a amostra é a população de corporações públicas dos EUA como incluída no Standard & amp; A base de dados Capital IQ da Poor's varia de 8.960 em 2007 a 7.248 em 2010.12 De acordo com os regulamentos atuais da Securities and Exchange Commission, as empresas devem declarar em suas declarações de procurador a remuneração de cada indivíduo que detiver o título de CEO ou CFO durante o ano , indenização dos próximos três indivíduos mais bem pagos, 13 e indenização de até dois indivíduos adicionais que estariam entre os três indivíduos mais bem pagos, exceto que não estavam mais empregados no final do ano. Os relatórios não são necessários se a remuneração de um indivíduo for inferior a US $ 100.000. Passando para a segunda coluna da Tabela 1, vemos que o número de executivos incluídos na análise varia de 38.824 em 2007 para 28.365 em 2010.14 Embora as limitações da Seção 162 (m) se apliquem apenas à remuneração do CEO e às três mais bem pagas. indivíduos, excluindo o CFO, Capital IQ e, consequentemente, nós, incluímos a remuneração de todos os executivos incluídos na declaração de procuração. Para executivos além do CEO e dos próximos três indivíduos mais bem pagos, assumimos que a remuneração é totalmente dedutível.
Amostra de informação
Fonte: Análise do autor dos microdados do Capital IQ.
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A Tabela 2 descreve os vários componentes do pacote de remuneração para 2007–2010 e lista o número de indivíduos que recebem o item em um determinado ano.15 Por exemplo, todos os executivos de nossa amostra recebem um salário (empresas com dados salariais ausentes são excluídas de análise), mas nem todos recebem bônus, e menos ainda recebem incentivos não relacionados a ações e outras formas de compensação. A média da remuneração total foi mais alta em 2007, com pouco mais de US $ 1,7 milhão. A consequente diminuição na remuneração média deve-se à queda acentuada dos preços das ações, o que diminuiu o valor das concessões de ações. Os valores médios de compensação nesta tabela são inferiores aos normalmente observados na imprensa e na maioria dos estudos por dois motivos. A primeira é que a maioria dos estudos se limita à remuneração dos CEOs, ao passo que este estudo expande a amostra para todos os executivos. Como outros executivos normalmente recebem menos que o CEO, isso reduz a média. Por exemplo, em 2007, a remuneração total média dos CEOs era de US $ 3.468.375, enquanto a média dos não-CEOs era de US $ 1.191.828. A segunda razão para médias mais baixas é a amostra mais ampla de empresas utilizadas neste estudo. A maioria dos estudos limita-se às empresas S & P 500 ou S & amp; P 1500, como abrangidas pela Standard & amp; Executiv Compassos, enquanto este estudo incorpora essas empresas e muitas empresas menores de capital aberto. Como a remuneração tende a aumentar com o tamanho da empresa, a inclusão dessas empresas menores reduz nossas médias. Por exemplo, em 2007, a remuneração total média para executivos em empresas S & P 500 foi de US $ 4.994.819, enquanto a média para outras empresas foi de US $ 1,448,167.
Valores médios para remuneração de executivos reportados na tabela de remuneração resumida (dólares; número de executivos abaixo dos valores médios)
Fonte: Análise do autor dos microdados do Capital IQ.
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A Tabela 3 agrega os valores reportados na Tabela 2 para ilustrar o total de remuneração de executivos para todas as empresas de capital aberto. A remuneração total agregada caiu de mais de US $ 66 bilhões em 2007 para US $ 42 bilhões em 2010. Há duas razões para essa queda. Primeiro, o número de empresas / executivos incorporados em nossa análise diminuiu em 2010 (conforme mostrado na Tabela 1 e refletindo o declínio no número de empresas de capital aberto). Em segundo lugar, a compensação média (como mostrado na Tabela 2) também diminuiu.
Montantes agregados para remuneração de executivos reportados na tabela de remuneração resumida (bilhões de dólares; número de executivos está abaixo dos valores agregados)
Fonte: Análise do autor dos microdados do Capital IQ.
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Conforme discutido na Seção 2, o ano de tributação para compensação de capital, ou seja, concessões de ações e opções de ações, difere do ano de concessão. Da mesma forma, os valores serão diferentes dos relatados no ano da concessão, pois o valor informado no ano de concessão será baseado em um valor esperado, enquanto que o valor incluído na receita dos executivos / deduzido das empresas & # 8217; O lucro tributável será baseado no valor real. Os valores informados nas tabelas 2 e 3 são valores de datas de concessão com base nos valores da tabela de compensação de resumo da declaração de procuração. Em contrapartida, os valores da Tabela 4 são baseados no valor da data de exercício das concessões de ações e nos lucros da data de exercício das opções de ações, conforme relatado pelas empresas em suas declarações de procuração. Olhando para os valores médios, ficamos um pouco surpresos ao ver que o número de funcionários com subsídios em ações (Tabela 4) é significativamente menor do que o número de subsídios em ações (Tabela 2). Existem várias explicações possíveis para isso, tais como concessão de ações após a aposentadoria ou concessão de ações sem direito a vesting, porque as restrições não foram cumpridas. Infelizmente, os dados não nos permitem determinar quais são esses motivos. Similarly, for stock grants the aggregate amount recognized for tax purposes in Table 4 is less than the amount reported in Table 3, although the taxable amounts for stock options are generally greater than that reported in the summary compensation table.
Amounts reported for vested shares and exercised options (number of executives are below dollar amounts)
Source: Author's analysis of Capital IQ microdata.
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Table 5 focuses on the impact of Section 162(m) on the deductibility of non-performance-based compensation, which is defined as salary, bonus, stock grants, and all other compensation. As noted above, although the bonus is normally performance-based, if it is not paid pursuant to a written plan that meets Internal Revenue Code requirements, it will not qualify for the performance-based exception (and if it were paid pursuant to a written plan, it should be included in the non-equity incentive column). Stock grants with performance conditions have become more common, and therefore may qualify for the Section 162(m) performance-based exception,16 but constitute a minority of those stock grants that vested during the years 2007 through 2010. Consequently we sum these four items—salary, bonus, stock grants, and all other compensation—by individual and treat the first $1 million as deductible.
Decomposition of non-performance-based compensation into deductible and nondeductible amounts (billions of dollars)
Source: Author's analysis of Capital IQ microdata.
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We shift gears in Table 6 to examine the total deductions associated with executive compensation, performance and non-performance based. On an aggregate basis the deductible components of the compensation package decline from about $39 billion in 2007 to a little less than $28 billion in 2010, with much of the decrease being associated with fewer deductions associated with stock options. In 2010 $15 billion of the deductions were based on performance pay, down from roughly $24 billion in 2007. As discussed in the next section, even at these reduced amounts in 2010 there are substantial tax savings for the companies and revenue foregone to the federal government. The Appendix Table provides more detail underlying the aggregates in Table 6 by delineating the total deductions for CEOs and other executives and doing so for large firms (S&P 500) and other firms.
Total deductible compensation (billions of dollars)
Source: Author's analysis of Capital IQ microdata.
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Compensation, taxation, and deductibility: An illustration.
At this point an illustration comparing the amounts reported in the proxy statement summary compensation table, executive’s tax return, and corporation’s tax return might be informative. Consider the 2011 compensation of Paul S. Otellini, president and CEO of Intel. According to the proxy statement summary compensation table, he received total compensation of $17,491,900 for that year.
Of that amount, stock awards ($7,331,100), option awards ($1,802,800), and change in deferred compensation ($319,000) are not taxable currently. His taxable income from Intel will include a salary ($1,100,000), a bonus ($34,000), non-equity incentive plan income ($6,429,500), all other compensation ($475,500), stock grants that vested during the year ($1,319,600), and exercised stock options ($132,100). His total taxable income was therefore $9,490,700.
The amount currently deductible by Intel includes both non-performance compensation and compensation that qualifies for the performance-based exception. Non-performance compensation includes the salary ($1,100,000), bonus ($34,000), all other compensation ($475,500), and stock grants that vested during the year ($1,319,600), for a total of $2,929,100. With the $1 million cap on deductions, Intel forfeits deductions on $1,929,100 of CEO compensation. At the same time, it can deduct for non-performance-based compensation (the maximum allowable at $1 million), non-equity incentive plan income ($6,429,500), and the exercised stock options ($132,100), for a total deduction of $7,561,600—an amount much less than Mr. Otellini’s $9,490,700 in taxable income.
Mr. Otellini and Intel provide a perfect illustration of the aggregate numbers in Table 5. What is most interesting, to this author, about Table 5 is the magnitude of deductions being forfeited by public corporations for the sake of executive compensation. Over the four-year period examined, executives recognized $96 billion in taxable income from the four categories of salary, bonus, vest value of stock grants, and all other compensation, while companies only deducted $55 billion, forfeiting slightly more than $41 billion in potential deductions!
Hence, one of the problems with Section 162(m), which was adopted ostensibly to reduce excessive, non-performance-based compensation (see U. S. House of Representatives 1993), was that it never touched on compensation directly. Instead, it legislated the deductibility of that compensation and penalized shareholders rather than executives. While corporations have “paid lip service” to the idea of preserving deductions, empirical research has shown only a marginal effect on executive compensation.17 Overall, however, executive compensation has continued to grow, and with it deductions have been forfeited.18 For example, the number of executives receiving salary in excess of $1 million increased from 563 in 2007 to 594 in 2010, and the number of executives receiving non-performance-based compensation in excess of $1 million increased from 3,379 in 2007 to 4,729 in 2010. This is despite a substantial decrease in the number of executives covered from 2007 to 2010 (see Table 1). Seemingly tax-sophisticated corporations seem not to care about the restrictions on deductions.
Consider Apple Inc. Duhigg and Kocieniewski (2012) detail how Apple avoids billions in taxes by setting up subsidiaries in low-tax jurisdictions. Yet when Apple made Tim Cook their CEO in August 2011, they gave him one million shares of restricted stock that vested purely with the passage of time, which therefore is not performance-based. Consequently, this grant, valued at $378 million at the time it was made, would not meet the performance-based exception of Section 162(m) and therefore would not be deductible—costing shareholders more than $100 million in additional taxes!
4. Tax benefits to corporations.
As noted above, compensation is normally deductible as an ordinary business expense under Section 162 of the Internal Revenue Code. This benefit can be large for the corporation and costly for the federal Treasury,19 as the corporate tax rate is 15 percent for taxable incomes under $50,000, 25 percent for those between $50,000 and $75,000, 34 percent for those between $75,000 and $100,000, 39 percent for those between $100,000 and $333,333, and 34 percent for taxable incomes between $333,333 and $10 million.20 Above $10 million, the rate increases to 35 percent (except between $15,000,000 and $18,333,333, where the tax rate is 38 percent). A reasonable assumption is that most public corporations have taxable incomes in excess of $100,000, so their tax rate would either be 34 or 35 percent.
For a number of reasons, such as tax deductions and credits, even large public corporations may pay taxes at a lower rate, or not at all—thus the tax benefit of executive compensation can be overstated. An example is Whirlpool Corporation, which, due to tax credits, did not pay taxes in 2010 and 2011. Whirlpool is not alone in this regard (for example, see the Goodyear excerpt above). So the question becomes: What is the value of the tax deductions associated with executive compensation to companies like Whirlpool? Note that if the corporation has a tax loss, as in the case of Whirlpool, it can use that loss to claim a refund on taxes paid in the previous two years or to shelter taxable income earned in the following 20 years. In theory, even if the company does not have any current taxable income, a $1 additional deduction will either increase this year’s tax refund by 35 cents, or reduce future taxes by 35 cents. But in practice, sometimes a company can’t claim the carryback because it hasn’t paid federal taxes in the past two years, and the existence of taxable income in the future may be uncertain as well. If so, how do we estimate the benefits of these deductions?
Academic researchers answer this question by estimating marginal tax rates, the rate of tax/benefit associated with the next dollar of income/deduction. Professor John Graham of Duke University, who has done extensive research in the area (see Graham 1996), provides estimates of these rates on his website, faculty. fuqua. duke. edu/
jgraham/taxform. html. Unfortunately, he does not provide tax rates for all companies in the Capital IQ data set. But for the approximately 25 percent of observations for which he does provide tax rates, the rates he provides are substantially lower than 35 percent, as the mean of his rates is slightly below 13 percent. As an alternative, in another paper (Graham and Mills 2008) he provides a fairly simple and less data-intensive method of calculating marginal tax rates. Using that algorithm still results in a sample reduction of about 30 percent, but perhaps a more realistic average tax rate of 25 percent. However, both rates are calculated after the impact of executive compensation, and Graham, Lang, and Shackelford (2004), among others, document that the stock-option deduction can significantly decrease marginal tax rates. So when calculating the average tax benefit of the executive compensation deductions, the relevant tax rate to use is something lower than 35 percent, yet is somewhat higher, perhaps significantly higher, than 13 or 25 percent. For this reason, Table 7 provides estimates using three alternative rates—15, 25, and 35 percent—while the following discussion uses what is probably the most realistic estimate, 25 percent.
Estimated tax savings/revenue loss as a result of executive compensation (billions of dollars)
Source: Author's analysis of Capital IQ microdata.
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Table 7 provides some boundaries for the aggregate tax savings to companies and costs to the Treasury using effective tax rates of 15, 25, and 35 percent. Using the 15 percent rate provides the lower bound on our estimate of the tax savings, which ranges from about $3.5 billion in 2009 to just under $6 billion in 2007. In contrast, using the 35 percent statutory federal rate provides an upper bound on our estimate of the aggregate tax benefits/cost to the U. S. Treasury, which ranges from about $13.7 billion in 2007 to $8.3 billion in 2009. If we assume a conservatively estimated 25 percent marginal tax rate, then revenue lost to the federal government in 2010 from deductible executive compensation was about $7 billion, and the total amount lost over the 2007–2010 period was $30.4 billion.
5. Looking back and forward.
While the data provided in this study do show a moderating of executive compensation over the study period 2007–2010, over a longer period it is well known that executive, in particular CEO, compensation has increased at rates far in excess of inflation and the wage growth of rank-and-file individuals. So the question exists: Is the moderating trend observed over the recent past a new paradigm, or is it merely one of the outcomes of the country’s severe financial crisis?
In terms of a new paradigm, 2010 marked a once-in-a-lifetime opportunity for shareholder empowerment. That July, the Dodd-Frank banking bill imposed the long-awaited “say-on-pay” on American corporations, which took effect with annual meetings on or after January 21, 2011. This provision, which was widely opposed by the business community, requires that publicly traded corporations provide their shareholders with a non-binding vote on their executive compensation at least once every three years. While the vote is (1) after the fact, i. e., shareholders are voting to approve compensation provided in the previous year, and (2) advisory, the possibility does exist that the board will moderate compensation to avoid being embarrassed by a negative outcome.21 In fact, Lucien Bebchuk of Harvard University notes in several of his papers that shame is perhaps the only constraint on executive compensation. Academic research in the United Kingdom, where say-on-pay has been in effect since 2002, and in the United States, by this author, suggests that say-on-pay can have a restraining impact on executive compensation under certain circumstances.
Another provision of the Dodd-Frank banking bill, which has not yet been implemented by the Securities and Exchange Commission, is the requirement that companies disclose the ratio of CEO compensation to that of the company’s median employee. This disclosure, which has been opposed by companies, also has the potential to embarrass corporate boards and CEOs, and if put into place, has the potential to restrain executive compensation.22.
But looking back, a reasonable question might be whether mandatory disclosure and tax penalties have worked to restrain compensation. In this author’s lifetime, the first big change in proxy statement disclosure was made in 1993. This disclosure, which dramatically increased the amount disclosed, inadvertently led to increased compensation, as executives at one company were able to more clearly assess what executives at their competitors were making. Section 280(g) of the Internal Revenue Code caused companies to forfeit deductions and imposed penalties on the recipient, if change-in-control payments (i. e., “golden parachutes”) were higher than allowed by the section. This Internal Revenue Code section did little, if anything, to curtail those payments, as companies without change-in-control payments added them, while those with change-in-control payments in excess of that allowed added the now-infamous tax gross-ups, whereby the shareholders would provide additional compensation to pay the executive’s tax penalty as well as the tax on that additional compensation. The same holds true for Section 162(m). Harris and Livingstone (2002) suggest that inadvertently, Section 162(m) may have encouraged increases in cash compensation for executives earning less than $1 million. Balsam and Ryan (2008) find that Section 162(m) resulted in increases in stock option compensation for executives earning more than $1 million in cash compensation. And although stock options were in favor amongst the political class when Section 162(m) was adopted, by the time the 21st century rolled around, the shine had worn off. In discussing the effect of Section 162(m) on the increased use of stock options, a 2006 Wall Street Journal article (Maremont and Forelle 2006) quoted Christopher Cox, the then-chairman of the Securities and Exchange Commission, as saying it deserves a “place in the museum of unintended consequences.”
The belief of this author is that executive compensation will recover in the near future, exceeding levels seen in 2007. Some of that increase will be in the form of deductible performance-based compensation, but the level of non-performance-based compensation will increase as well.
— EPI would like to thank the Stephen Silberstein Foundation for supporting its work on executive compensation.
— Steven Balsam is Professor of Accounting and Senior Merves Research Fellow at the Fox School of Business at Temple University. He has written several books on executive compensation including Executive Compensation: An Introduction to Practice and Theory , as well as published in the top academic and practitioner journals in accounting. Professor Balsam is also a member of the editorial boards of the Journal of Accounting and Public Policy and The International Journal of Accounting . He has been widely quoted in the media and has given expert witness testimony on executive compensation to the U. S. Senate Committee on Finance.
1. Covered individuals were originally defined as the chief executive officer plus the next four highest paid executive officers, as disclosed in the corporate proxy statement. However, in late 2006 the Securities and Exchange Commission changed the proxy statement disclosure requirements, so that corporations had to disclose compensation for the chief executive officer, chief financial officer, and next three highest paid executive officers. Since Section 162(m) does not specify the chief financial officer, covered individuals are now the chief executive officer plus the next three highest paid executive officers.
2. A change in control payment, also known as a golden parachute, is a payment to an executive that occurs when his or her company experiences a change in ownership.
3. For purposes of proxy statement reporting, awards pursuant to a written plan have been incorporated under the heading of “non-equity incentive plan compensation” since the end of 2006. It is common to combine the two categories of bonus and non-equity incentive plan compensation for other purposes.
4. This may not always be the case; even when there is a written plan, the plan may not meet Section 162(m) requirements. In a private letter ruling (irs. gov/pub/irs-wd/0804004.pdf) the IRS informed the company in question that compensation paid under its incentive plan would not qualify as performance-based, because the plan allowed for payments in the event of termination regardless of whether the performance conditions were met.
5. When the compensation is earned over a multiple year period, e. g., a two - or three-year performance period, the deduction would be taken in the last year of the period.
6. Sometimes rather than granting shares, companies grant units, which are then turned into shares upon vesting.
7. In most cases, meeting performance conditions is not a yes/no proposition. Typically, the percentage of shares that vest vary based upon performance, with a lesser number of shares vesting if performance meets the pre-established minimum threshold, the full grant vesting if performance meets the pre-established target, and possibly additional shares being earned if performance exceeds the target, up to a maximum that is usually defined as 200 percent of the original grant.
8. Normally a stock grant is not taxable to the recipient or deductible by the grantor until the restrictions expire. However, under tax code Section 83(b) the recipient may elect to have the grant taxed at the time of grant. Discussions with practitioners confirm these elections are rare in public companies.
9. Companies do not always clearly disclose whether their compensation qualifies as performance-based, nor do they disclose the amounts of deductions forfeited.
10. This discussion ignores Section 422 (tax-qualified or incentive) stock options. A Section 422 stock option provides benefits to its holder, as the tax event is not exercised, but rather the later sale of the shares is acquired upon exercise. Further, if certain conditions are met (for example, the shares are held from two years from the date of grant to one year from the date of exercise), the income is taxed as a capital gain and not ordinary income. While these options are beneficial to their holder, they are costly to the company, because if the holder meets the conditions for capital gain treatment, the company does not receive any tax deduction. However, because these options are limited to $100,000 in nominal value vesting per year and are considered tax-preference items at the time of exercise for purposes of the alternative minimum tax, they are not very useful (or used) in executive compensation. Thus we can safely ignore them in our discussion.
11. While pensions and deferred compensation need to be recognized as financial accounting expenses and disclosed in proxy statements in the year earned, for tax purposes they receive deferred recognition. Consequently, if deferred until the executive is no longer covered by Section 162(m) (e. g., post-retirement), they will be fully deductible for tax purposes.
12. This decrease is consistent with the decrease in publicly traded companies as documented in Stuart (2011). See cfo/article. cfm/14563859.
13. Since 2007, the Section 162(m) limitations only apply to the compensation of the CEO and the next three highest paid individuals.
14. In theory, each company should have a CEO, but not all companies identify an individual as such in their filings. Consequently, the number of CEOs is slightly less than the number of companies in each year.
15. Capital IQ collects and we analyze the values as reported by companies in their proxy statements.
16. But do not have to, as illustrated by the excerpt from the Intel proxy statement above.
17. For example, Balsam and Ryan (2007) show that Section 162(m) increased the performance sensitivity of bonus payments for CEOs hired post-1994.
18. For more discussion on the forfeiture of deductions, see Balsam and Yin (2005).
19. This analysis only incorporates federal taxes. Incorporating state income taxes would increase the benefit associated with compensation deductions.
20. The 39 percent tax rate is intended to remove the benefits associated with the 15 percent and 25 percent rates.
21. In the first two years of say-on-pay, more than 98 percent of companies have had their executive compensation approved by shareholders, with the typical firm receiving a positive vote in excess of 80 percent. However, some well-known companies have had their executive compensation rejected by shareholders, including Hewlett-Packard in 2011 and Citigroup in 2012.
22. While the disclosure only applies to CEO compensation, compensation of other executives is often tied to that of the CEO.
Referências.
Balsam, Steven, and David Ryan. 2007. “Limiting Executive Compensation: The Case of CEOs Hired after the Imposition of 162(m).” Journal of Accounting, Auditing and Finance , vol. 22, no. 4, pp. 599–621.
Balsam, Steven, and David Ryan. 2008. “The Effect of Internal Revenue Code Section 162(m) on the Issuance of Stock Options.” Advances in Taxation , vol. 18, pp. 3–28.
Balsam, Steven, and Qin Jennifer Yin. 2005. “Explaining Firm Willingness to Forfeit.
Tax Deductions under Internal Revenue Code Section 162(m): The Million-dollar Cap.” Journal of Accounting and Public Policy , vol. 24, no. 4, pp. 300–324.
Capital IQ Database. 2012. Standard and Poor’s Financial Services LLC. capitaliq/home. aspx.
Duhigg, Charles, and David Kocieniewski. 2012. “How Apple Sidesteps Billions in Taxes.” New York Times , April 28. nytimes/2012/04/29/business/apples-tax-strategy-aims-at-low-tax-states-and-nations. html.
Graham, John R. 1996. “Proxies for the Corporate Marginal Tax Rate.” Journal of Financial Economics , vol. 42, no. 2, pp. 187–221.
Grassley, Chuck. 2006. “Executive Compensation: Backdating to the Future/Oversight of Current Issues Regarding Executive Compensation Including Backdating of Stock Options; and Tax Treatment of Executive Compensation, Retirement and Benefits.” Closing statement of Senator Chuck Grassley at a hearing of the U. S. Senate Finance Committee, September 6. finance. senate. gov/imo/media/doc/090606cga. pdf.
Graham, John R., Mark Lang, and Doug Shackelford. 2004. “Employee Stock Options, Corporate Taxes, and Debt Policy.” Journal of Finance , vol. 59, no. 4, pp. 1585–1618.
Graham, John R., and Lillian Mills. 2008. “Simulating Marginal Tax Rates Using Tax Return Data.” Journal of Accounting and Economics , vol. 46, no. 2–3, pp. 366–388.
Harris, David, and Jane Livingstone. 2002. “Federal Tax Legislation as a Political Cost Benchmark.” The Accounting Review , vol. 77 (October), pp. 997–1018.
Maremont, Mark, and Charles Forelle. 2006. “Bosses’ Pay: How Stock Options Became Part of the Problem – Once Seen as a Reform, They Grew Into Font of Riches And System to Be Gamed Reload, Reprice, Backdate.” The Wall Street Journal, December 27. online. wsj/article/SB116718927302760228-search. html.
Stuart, Alix. 2011. “Missing: Public Companies: Why Is the Number of Publicly Traded Companies in the U. S. Declining?” CFO, March 22. cfo/article. cfm/14563859.
U. S. House of Representatives. 1993. Fiscal Year Budget Reconciliation Recommendations of the Committee on Ways and Means. U. S. Government Printing Office.
Total deductible compensation (billions of dollars)
Source: Author's analysis of Capital IQ microdata.
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Valuation of American call options on dividend-paying stocks : Empirical tests.
This paper examines the pricing performance of the valuation equation for American call options on stocks with known dividends and compares it with two suggested approximation methods. The approximation obtained by substituting the stock price net of the present value of the escrowed dividends into the Black-Scholes model is shown to induce spurious correlation between prediction error and (1) the standard deviation of stock return, (2) the degree to which the option is in-the-money or out-of-the-money, (3) the probability of early exercise, (4) the time to expiration of the option, and (5) the dividend yield of the stock. A new method of examining option market efficiency is developed and tested.
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Comments and suggestions by Kenneth M. Gaver, Hans R. Stoll, and the referee, Clifford W. Smith, and editorial assistance by Michael C. Jensen are gratefully acknowledged. This research was supported by the Vanderbilt University Research Council.

Mashable
Entretenimento.
Talvez você já tenha ouvido falar sobre os milionários do Google: 1.000 dos primeiros funcionários da empresa (incluindo o massagista da empresa) que ganharam sua fortuna por meio das opções de ações da empresa. Uma ótima história, mas infelizmente nem todas as opções de ações têm um final feliz. Pets e Webvan, por exemplo, foram à falência após as ofertas públicas iniciais de alto perfil, deixando as bolsas de valores sem valor.
Opções de ações podem ser um bom benefício, mas o valor por trás da oferta pode variar significativamente. Simplesmente não há garantias. Então, se você está considerando uma oferta de emprego que inclua uma bolsa de valores ou se você tem ações como parte de sua remuneração atual, é fundamental entender o básico.
Quais tipos de planos de ações estão disponíveis e como eles funcionam?
Como sei quando exercitar, segurar ou vender?
Quais são as implicações fiscais?
Como devo pensar em compensação de ações ou capital em relação à minha remuneração total e outras economias e investimentos que eu possa ter?
1. Quais são os tipos mais comuns de ofertas de ações para funcionários?
Duas das ofertas de ações mais comuns para funcionários são opções de ações e ações restritas.
As opções de ações dos funcionários são as mais comuns entre as empresas iniciantes. As opções dão a você a oportunidade de comprar ações da sua empresa a um preço especificado, normalmente chamado de preço "strike". Seu direito de comprar - ou “exercício” - opções de ações está sujeito a um cronograma de aquisição, que define quando você pode exercer as opções.
Vamos dar um exemplo. Digamos que você tenha 300 opções com um preço de exercício de US $ 10 cada, que seja distribuído igualmente ao longo de um período de três anos. No final do primeiro ano, você teria o direito de exercer 100 ações por US $ 10 por ação. Se, naquele momento, o preço das ações da empresa tivesse subido para US $ 15 por ação, você teria a oportunidade de comprar as ações por US $ 5 abaixo do preço de mercado, que se você exercitar e vender simultaneamente representa um lucro antes de impostos de US $ 500,00.
No final do segundo ano, mais 100 ações serão adquiridas. Agora, no nosso exemplo, digamos que o preço das ações da empresa tenha caído para US $ 8 por ação. Nesse cenário, você não exercitaria suas opções, pois pagaria US $ 10 por algo que poderia comprar por US $ 8 no mercado aberto. Você pode ouvir isso como opções sendo “fora do dinheiro” ou “debaixo d'água”. A boa notícia é que a perda está no papel, já que você não investiu dinheiro real. Você mantém o direito de exercer os compartilhamentos e pode ficar de olho no preço das ações da empresa. Posteriormente, você pode optar por agir se o preço de mercado ultrapassar o preço de exercício - ou quando ele está de volta "no dinheiro".
No final do terceiro ano, as 100 ações finais serão adquiridas e você terá o direito de exercê-las. Sua decisão dependerá de vários fatores, incluindo, mas não se limitando ao preço de mercado da ação. Depois de ter exercido as opções, você pode vender as ações imediatamente ou mantê-las como parte de seu portfólio de ações.
Subvenções restritas a ações (que podem incluir Prêmios ou Units) proporcionam aos funcionários o direito de receber ações com pouco ou nenhum custo. Assim como nas opções de ações, as concessões restritas de ações estão sujeitas a um cronograma de aquisição de direitos, geralmente vinculado à passagem do tempo ou à realização de uma meta específica. Isso significa que você terá que esperar um determinado período de tempo e / ou atingir determinadas metas antes de obter o direito de receber os compartilhamentos. Tenha em mente que a aquisição de concessões de ações restritas é um evento tributável. Isso significa que os impostos terão que ser pagos com base no valor das ações no momento da aquisição. Seu empregador decide quais opções de pagamento de impostos estão disponíveis para você - elas podem incluir pagar em dinheiro, vender algumas das ações adquiridas ou fazer com que seu empregador retenha algumas das ações.
2. Qual é a diferença entre opções de ações de “incentivo” e “não qualificado”?
Essa é uma área bastante complexa relacionada ao código tributário atual. Portanto, você deve consultar seu consultor tributário para entender melhor sua situação pessoal. A diferença reside principalmente em como os dois são tributados. As opções de ações de incentivo qualificam-se para tratamento tributário especial pela Receita Federal, o que significa que os impostos geralmente não precisam ser pagos quando essas opções são exercidas. E os ganhos ou perdas resultantes podem se qualificar como ganhos ou perdas de capital de longo prazo se forem mantidos por mais de um ano.
Opção não qualificada, por outro lado, pode resultar em lucro tributável ordinário quando exercido. O imposto baseia-se na diferença entre o preço de exercício e o valor justo de mercado no momento do exercício. As vendas subseqüentes podem resultar em ganho ou perda de capital - curto ou longo prazo, dependendo da duração detida.
3. E quanto aos impostos?
O tratamento fiscal para cada transação dependerá do tipo de opção de ações que você possui e de outras variáveis ​​relacionadas à sua situação individual. Antes de exercer suas opções e / ou vender ações, convém considerar cuidadosamente as consequências da transação. Para um conselho específico, você deve consultar um consultor fiscal ou contador.
4. Como sei se devo segurar ou vender após o exercício?
Quando se trata de opções de ações e ações de funcionários, a decisão de manter ou vender resume-se aos fundamentos do investimento de longo prazo. Pergunte-se: quanto risco estou disposto a aceitar? A minha carteira é bem diversificada com base nas minhas necessidades e objetivos atuais? Como esse investimento se encaixa na minha estratégia financeira geral? Sua decisão de exercer, manter ou vender algumas ou todas as suas ações deve considerar essas questões.
Muitas pessoas escolhem o que é referido como venda no mesmo dia ou exercício sem dinheiro no qual você exerce suas opções adquiridas e simultaneamente vende as ações. Isso fornece acesso imediato aos seus rendimentos reais (lucro, menos comissões associadas, taxas e impostos). Muitas empresas disponibilizam ferramentas que ajudam a planejar antecipadamente o modelo de um participante e a estimar os resultados de uma transação específica. Em todos os casos, você deve consultar um consultor fiscal ou um planejador financeiro para aconselhamento sobre sua situação financeira pessoal.
5. Eu acredito no futuro da minha empresa. Quanto de seu estoque eu devo possuir?
É ótimo ter confiança em seu empregador, mas você deve considerar sua estratégia de portfólio e diversificação global ao pensar em qualquer investimento - incluindo um em ações da empresa. Em geral, é melhor não ter um portfólio que seja excessivamente dependente de qualquer investimento.
6. Eu trabalho para uma startup privada. Se esta empresa nunca for pública ou for comprada por outra empresa antes de abrir o capital, o que acontece com a ação?
Não há uma resposta única para isso. A resposta é geralmente definida nos termos do plano de ações da empresa e / ou nos termos da transação. Se uma empresa permanecer privada, pode haver oportunidades limitadas para vender ações adquiridas ou irrestritas, mas isso variará de acordo com o plano e a empresa.
Por exemplo, uma empresa privada pode permitir que os funcionários vendam seus direitos de opção adquiridos em mercados secundários ou outros. No caso de uma aquisição, alguns compradores aceleram o cronograma de aquisição e pagam a todos os detentores de opções a diferença entre o preço de exercício e o preço da ação de aquisição, enquanto outros compradores podem converter ações não utilizadas em plano de ações na empresa compradora. Mais uma vez, isso varia de acordo com o plano e a transação.
7. Ainda tenho muitas perguntas. Como posso aprender mais?
Seu gerente ou alguém no departamento de RH da sua empresa provavelmente fornecerá mais detalhes sobre o plano de sua empresa e os benefícios que você qualifica para o plano. Você também deve consultar seu planejador financeiro ou consultor tributário para garantir que você entenda como as concessões de ações, os direitos adquiridos, o exercício e a venda afetam sua situação fiscal pessoal.
Imagens cortesia da iStockphoto, DNY59, Flickr, Fotos de Vicki.

Paying taxes on exercised stock options

This article discusses the pros and cons of stock options vs shares for employees of Canadian – private and public – empresas. The taxation issues are poorly understood and can be very confusing. Current tax regulations can make it difficult for companies to bring new employees and partners in as shareholders.
Stock options are a popular way for companies to attract key employees. They are the next best thing to share ownership. Employees are motivated to add value to their companies in the same way that founder/owners are. Options are also a key part of a compensation package. In larger companies, options contribute substantially – often many times the salary portion – to income. In a recent survey of executive compensation (see vancouversun/execpay), the top 100 BC-based public company executives all earned over $1 million in 2009 income. However, only 5 of them received base salaries over $1 million. Most of the compensation came from stock options – no wonder the CRA (Canada Revenue Agency) wants to tax them!
Unfortunately, tax law can turn stock options into a huge disincentive in attracting key employees. For example , if an employee of a company (private or public) exercises options to buy shares, that employee may have a tax liability even if he sells the shares at a loss. If the company fails, the liability does not disappear. The tax treatment is not the same for Canadian Controlled Private Companies (CCPCs) as it is for public or non-CCPC companies. CCPCs have an advantage over other Canadian companies.
For CCPCs – Canadian Controlled Private Corporations.
This discussion is applicable to Canadian Controlled Private Companies (CCPCs). It addresses how a start-up can best get shares into the hands of employees while being aware of possible tax issues.
To give employees an ownership stake (and incentive) in the company, the best solution is to give them founders shares just like the founders took for themselves when the company was formed. Companies should issue founders shares from treasury as early as possible. Some companies issue extra founders shares and hold them in a trust for future employees. Sometimes, the founders will transfer some of their own founders shares to new partners. As a general rule, try to give employees founders shares early in the company’s life. However, make sure that the shares reverse-vest over time (or based on performance), so that quitters and non-performers don’t get a free ride.
By owning shares in a CCPC (Canadian Controlled Private Corporation) for at least 2 years, shareholders get the benefit of the $750,000 life-time capital gains exemption (i. e. pay no tax on the first $750K in capital gains). This is a HUGE benefit. They also get a 50% deduction on additional gains.
If a company is beyond its start up phase, there is a worry that if these shares are simply given (for free or for pennies) to an employee, CRA (Canada Revenue Agency) considers this an “employment benefit” on which income tax is payable. This benefit is the difference between what the employee paid for the shares and their FMV (Fair Market Value).
This benefit is taxed as regular employment income . For CCPCs, this benefit may be deferred until the shares are sold. If held for more than 2 years, there is also a 50% deduction available on the benefit. If held for less than 2 years, another 50% deduction can be used if the shares where purchased at FMV.
However, if the shares are later sold (or deemed to have been sold by virtue of a liquidation) at a lower price than the FMV at the time of acquisition, the tax on the deferred benefit is STILL DUE. And, although this loss (i. e. the difference between FMV and the selling price) is a “capital loss”, it does not offset the tax owing. It may be possible to claim an ABIL (Allowable Business Investment Loss) to offset the tax owing on the deferred benefit, i. e. if you buy shares in a CCPC, you can claim 50% of your investment loss and deduct from other income.
Other than issuing zero-cost founders shares, the next best approach is to sell shares to employees at a “good” price which one could argue is at FMV considering the substantial restrictions on the shares (eg reverse-vesting and risk of forfeiture). This may work well if the company is still quite young and has not raised substantial sums from independent investors.
(In the case of publicly-listed companies, options grants are the norm since FMV can be readily determined – and a benefit assessed – and because regulations often prevent the issuance of zero-cost shares. But for pubcos and non-CCPCs, the tax on these benefits may not be deferred. It is payable in the year in which the option is exercised. This is a real problem for smaller public, venture-listed companies insofar as this tax forces the option to sell some shares just to be the tax! It discourages ownership. )
Some disadvantages of issuing stock are:
Deferred tax liability if shares are bought below FMV (if you can figure out what FMV is – remember, these shares are highly restrictive and are worth less than those purchased by angels and other investors.) A CRA assessment of the deemed benefit is a remote possibility. May need to defend the FMV. May need independent valuation. (I’ve never heard of this happening.) Need to make sure that shareholder agreement provisions are in place (eg vesting, voting, etc). Issuance of shares at very low prices on a cap table may look bad to new investors (whereas option exercises are considered normal) More shareholders to manage.
The benefits of owning shares are:
Can get up to $750,000 in life-time tax-free capital gains 50% deduction on gains if shares held for more than 2 years OR if shares where issued at FMV Losses in a CCPC can be used as allowable business losses (if the business fails) Can participate in ownership of company – voting, dividends, etc Less dilution than if stock options are issued.
Getting cheap shares into the hands of employees is the best way to go for a CCPC. The only downside risk arises if the company fails in less than two years. (See Bottom Line below) .
[NOTE: Companies can issue shares (instead of options) to employees at any price and not trigger an immediate taxable event – it’s the same as giving an option grant that is immediately exercised. If shares (instead of options) are given at a very low (e. g. zero) price, fewer shares can be issued than when granting options with a higher exercise price.]
To avoid the risk of having to pay the tax on the deferred benefit if shares are issued to an employee below the FMV, options are often granted. This is only a risk if shares are ultimately sold below the FMV, as may be the case in a bankruptcy . Stock options, if unexercised, avoid this potential problem. An option gives one the right to buy a certain number of shares for a stated price (the exercise price) for a given period of time. The is no liability at the time that options are granted. Only in the year that options are exercised, is there is a tax liability. For CCPCs this liability can be deferred until the shares are actually sold. If the shares are held for more than 2 years, this tax liability is calculated at 50% of the benefit. That is, both a deferral and a deduction of 50% are available to those having exercised options. (If shares are held for less than 2 years, a 50% deduction is available if shares were purchased at FMV.)
Some disadvantages with stock options are:
The tax liability (if options are exercised) is never erased – this is exactly the same scenario as if shares were given. The lifetime capital gains exemption cannot be used unless the shares – not the options – are held for 2 years after exercising. Capital gains are calculated on the difference between the selling price and the FMV when exercised. Must hold the shares for 2 years, after exercising the option to get the 50% deduction. (If exercise price of option = FMV at date of option grant, a 50% deduction is also available). The benefit is considered “income”, not a capital gain and if shares are subsequently sold at a loss, the income benefit cannot be reduced by this capital loss. The tax risk increases over time since it is the difference between FMV and exercise price at the time of exercise that sets up the contingent tax liability, so the longer you wait to exercise (assuming steadily increasing FMV), the greater the potential tax liability. Options do not constitute ownership; optioned shares cannot be voted. Large option pools are negatively viewed by investors because they may cause substantial future dilution (unlike public companies that are generally limited to 10% in options, private companies can have very large option pools). Still need to have a defensible FMV; may need independent valuation. It may become a real headache if CRA requires that this be done retroactively when an exit is achieved. They could expire too soon. May need to have a very long term, say 10 years or more. Showing lots of stock options on the company’s cap table directly impacts (negatively) the per-share valuation in on-going financings since investors always look at all outstanding options as outstanding shares.
Some benefits with stock options are:
No tax liability when options are received, only when they are exercised. No cash outlay required until exercised and even then, it may be minimal. Can exercise options to buy shares immediately at discounted prices without having to pay any tax until shares are sold. An early exercise avoids a higher FMV, and hence avoids a greater taxable benefit, later.
From the company’s perspective, granting shares (instead of options) at a very low price means that fewer shares need to be issued – which is good for all shareholders. For example, giving shares at a penny instead of granting options exercisable at 50 cents means that more options must be granted which means greater dilution later when an exit is realized . The extra 49 cents doesn’t do much for shareholders as the exercise amount by then is nominal compared to the exit value. That amount will go right back to the new owner of the company meanwhile diluting all shareholders participating in the exit!
Action item for investors: check your company’s cap table for options and get rid of them! Give shares instead that are notionally equal to the Black-Scholes value of the option. Example, Joe Blow holds an option to buy 100K shares at 60 cents. The shares are currently valued at 75 cents (based on recent investments). The value of the options is determined to be 35 cents (i. e. $35K in total value). The 35 cents is based on the value of the option (say 20 cents) plus the in-the-money amount of 15 cents. As a rule of thumb, when an option is issued with an exercise price equal to current share price, an approximate determination of the options value is taken by dividing the price by 3 which in this example is 60/3 = 20 cents. Now, take the total value of $35K and issue 46,666 shares for $1.00 (because 46,666 shares at 75 cents = $35K). This is better than showing 100K shares as options on the cap table!!
RECOMMENDATION FOR CCPCs :
Grant stock options, exercisable at a nominal cost, say 1 cent – good for at least 10 years or more. Suggest that option holders exercise their option and buy shares immediately (just skip step #1 altogether) Make sure that grantees understand that if they exercise early or immediately, they start the 2-year clock on the deduction and also get the lifetime capital gains exemption. (They should also understand that there may be a possible downside in so doing – i. e. the liability on the “benefit” when options are exercised is still taxable even if the company fails – in which case, they can still claim the ABIL offset. Grantees may elect to trade-off this potential liability by forfeiting the deduction and exemption and not exercising until there is an exit in which case they take no risk but have a much lower – as much as 50% lower – profit).:
An employee is given an option to buy shares for a penny each. Shares are currently being sold to investors for $1.00 each (CRA would argue that the $1.00 price is the FMV). If the employee exercises the option immediately and buys shares, then he is deemed to have received an employment benefit of 99 cents which is fully taxable as income BUT both a DEFERRAL and a DEDUCTION may be available. First, the tax on this income can be deferred until the shares are sold (if the company fails, they are considered to be sold). Companies must file T4 slips with CRA (so you can’t hide this sale). Second, if the Shares (not the Option) are held for at least 2 years, then only 50%, i. e. 49.5 cents is taxed as income. The difference between the selling price (and the FMV at the time the shares were acquired) is taxed as a capital gain which is also eligible for a $750K life-time exemption! If the shares are sold for $1.00 or more – no problem! But, if the shares are sold for less than $1.00, the employee is still on the hook for the 99 cent (or .495 cent) benefit and although he would have a capital loss , it cannot be used to offset the liability. He can mitigate this by claiming an Allowable Business Investment Loss (ABIL). 50% of the ABIL can be reduced to offset employment income. In this example, 49.5 cents would be allowed as a deduction against the 49.5 cents that is taxed as income, leaving the employee in a neutral position with respect to tax liability. Caution – claiming an ABIL may not work if the company has lost its CCPC status along the way.
(Note: I’ve heard of people in this situation claiming that the FMV is exactly what they paid since it was negotiated at arms-length, the shares could not be sold, the company was desperate, etc, etc. Their attitude is let CRA challenge it. That’s OK as long as the Company didn’t file a T4, as it should but likely won’t if it’s bankrupt.)
On the other hand, if the company succeeds, employees can enjoy tax-free gains (up to $750K) without having to put up much capital and taking only a limited risk.
If the employee holds an option until the company is sold (or until the shares become liquid) and then exercises the option and immediately sells the shares, the employee’s entire gain (i. e. the difference between his selling price and the penny he paid for each share) is fully taxed as employment income and there is no 50% deduction available (unless the exercise price of the option = FMV when the option was granted).
THE BOTTOM LINE:
The best deal for both the company (if it’s a CCPC) and its employees is to issue shares to employees for a nominal cost, say 1 cent per share. If this grant is to garner an employee’s commitment for future work, reverse-vesting terms should be agreed to before the shares are issued. To determine the number of shares, start by arbitrarily setting the price per share. This could be the most recent price paid by arms-length investors or some other price that you can argue is reasonable under the circumstances. Let’s say that the price per share is $1.00 and you want to give your recently recruited CFO a $250K signing bonus. Therefore, he’d get 250K shares as an incentive (these should vest daily over a 3-year period). He pays $2,500 for these. Tax-wise, he is now liable for the tax on $247.5K in employment income . However, he can defer payment of this tax until the shares are sold.
Here are the possible outcomes and consequences:
a)Shares are sold for $1.00 or more after holding the shares for at least 2 years: he is taxed on income of 50% of $247.5K (i. e. $250K minus the $2,500 paid for the shares), i. e. the deferred benefit, less the 50% deduction PLUS a capital gain on any proceeds above his $1.00 per share “cost”. This gain is taxed at a rate of 50% and, if not previously claimed, his first $750K in gains is completely tax-free.
b)Shares are sold for $1.00 or more but in less than 2 years: he is taxed on income of $247.5K, i. e. the deferred benefit, as there is no deduction available PLUS a capital gain on any proceeds above his $1.00 per share “cost”. He does not benefit from the 50% deduction on the employment benefit nor the 50% capital gains deduction. This is why it makes sense to own shares as soon as possible to start the 2-year clock running.
c)Shares are sold for less than 1.00 after holding the shares for more than 2 years: he is taxed on income of 50% of $247.5K, i. e. the deferred benefit less the 50% deduction. He can offset this tax by claiming an ABIL. He can take 50% of the difference between his selling price and $1.00 and deduct that from his employment income – this is a direct offset to the deferred benefit. If the company fails and the shares are worthless, he is taxed on employment income of 50% of $247,500 MINUS 50% of $250K – i. e. no tax (indeed, a small refund).
d)Shares are sold for less than 1.00 after holding the shares for less than 2 years: he is taxed on income of $247.5K, i. e. the deferred benefit as there is no deduction available. He can offset this tax by claiming an ABIL. He can take 50% of the difference between his selling price and $1.00 and deduct that from his employment income – this is a partial offset to the deferred benefit. If the company fails and the shares are worthless, he is taxed on employment income of $247,500 MINUS 50% of $250K = $122,500. NÃO É BOM! This is the situation that must be avoided. Why pay tax on $122.5K of unrealized income that has never seen the light of day? Como? Make sure you let 2 years pass before liquidating if at all possible. You can also argue that the benefit was not $247,500 because there was no market for the shares, they were restricted, you could not sell any, etc. Let CRA challenge you and hope they won’t (I’ve not heard of any cases where they have – in the case of CCPCs).
Why bother with options when the benefits of share ownership are so compelling? And the only possible financial risk to an employee getting shares instead of stock options arises in (d) above if shares are sold at a loss in less than 2 years. If the company fails that quickly, the FMV was likely never very high and besides, you can stretch the liquidation date if you need to.
Contractors and Consultants.
The deferral of tax liability in respect of CCPCs is granted only to employees of the CCPC in question (or of a CCPC with which the employer CCPC does not deal at arm’s length). Contractors and consultants are not entitled to the benefit of the deferral. Consequently, contractors and consultants will be liable to pay tax upon exercise of any options.
Never underestimate the power of the Canada Revenue Agency. One might expect them to chase after the winners – those with big gains on successful exits but what about the folks that got stock options, deferred the benefit and sold their shares for zip? Will CRA kick the losers when they’re down?
For Publicly Listed Corporations and non-CCPCs.
In the case of public companies, stock option rules are different. The main difference is that if an employee exercises an option for shares in a public company, he has an immediate tax liability.
Up until the Federal Budget of March 4th, 2010, it was possible for an employee to defer the tax until he actually sells the shares. But now, when you exercise a stock option and buy shares in the company you work for, CRA wants you to pay tax immediately on any unrealized “paper” profit even if you haven’t sold any shares.
Furthermore, CRA now wants your company to withhold the tax on this artificial profit. This discourages the holding of shares for future gains. If the company is a junior Venture-Exchange listed company, where will it find the cash to pay the tax – especially if it is thinly traded?
This process is not only an accounting nightmare for you and the company – it’s also fundamentally wrong in that CRA is making your buy/sell decisions for you.
It is also wrong in that stock options will no longer be an attractive recruiting inducement. Emerging companies will find it much harder to attract talent.
It will also be a major impediment to private companies that wish to go public. In the going-public process, employees usually exercise their stock options (often to meet regulatory limits on option pools). This could result in a tax bill of millions of dollars to the company. Also, it won’t look good to new investors to see employees selling their shares during an IPO even though they have to.
Before the March 4th budget, you could defer the tax on any paper profit until the year in which you actually sell the shares that you bought and get real cash in hand. This was a big headache for those who bought shares only to see the price of the shares drop.
The stories you may have heard about Nortel or JDS Uniphase employees going broke to pay tax on worthless shares are true. They exercised options when shares were trading north of $100, giving them huge paper profits and substantial tax liabilities. But when the shares tanked, there was never any cash to cover the liability – nor was there any offset to mitigate the pain. The only relief is that the drop in value becomes a capital loss but this can only be applied to offset capital gains. In the meantime, though, the cash amount required to pay CRA can bankrupt you.
CRA argues that the new rule will force you to sell shares right away, thereby avoiding a future loss. (Aren’t you glad that they’re looking after you so well?) But, that’s only because the stupid “deemed benefit” is taxed in the first instance.
Example: You are the CFO of a young tech company that recruited you from Silicon Valley. You have a 5-year option to buy 100,000 shares at $1.00. Near the expiration date, you borrow $100,000 and are now a shareholder. On that date, the shares are worth $11.00. Your tax bill on this is roughly $220,000 (50% inclusion rate X the top marginal tax rate of 44%X $1 million in unrealized profit) which you must pay immediately (and your Company must “withhold” this same amount). Unless you’ve got deep pockets, you’ll have to sell 29,000 shares to cover your costs – 20,000 more than if you did a simple cashless exercise. So much for being an owner! In this example, if the company’s shares drop in price and you later sell the shares for $2.00, you’ll be in the hole $120,000 ($200,000 less $320,000) whereas you should have doubled your money! Sure, you have a capital loss of $9 (i. e. $11 less $2) but when can you ever use that?
As part of the March 4 changes, CRA will let the Nortel-like victims of the past (i. e. those that have used the previously-available deferral election) file a special election that will limit their tax liability to the actual proceeds received, effectively breaking-even but losing any potential upside benefit. I guess this will make people with deferrals pony up sooner. The mechanics of this are still not well defined. (see the paragraph titled “deferrals election” below)
Interestingly, warrants (similar to options) given to investors are NOT taxed until benefits are realized. Options should be the same. Investors get warrants as a bonus for making an equity investment and taking a risk. Employees get options as a bonus for making a sweat-equity investment and taking a risk. Why should they be treated less favorably?
I don’t understand how such punitive measures make their way into our tax system. Surely, no Member of Parliament (MP) woke up one night with a Eureka moment on how the government can screw entrepreneurs and risk takers. Such notions can only come from jealous bureaucrats who can’t identify with Canada’s innovators. What are they thinking?
A common view is that large public corporations, while it creates more accounting work for them, aren’t that upset about this tax. They do see it as a benefit and for them and their employees, it might be better to sell shares, take the profit and run. For smaller emerging companies – especially those listed on the TSX Venture exchange, the situation is different. For one thing, a forced sale into the market can cause a price crash, meaning having to sell even more shares. Managers and Directors of these companies would be seen as insiders bailing out. Não é bom.
The rules are complex and hard to understand. The differences between CCPCs, non-CCPCs, public companies and companies in transition between being private and non-private give you a headache just trying to understand the various scenarios. Even while writing this article, I talked to various experts who gave me somewhat different interpretations. Does your head hurt yet? What happens if you do this…or if you do that? It’s messy and unnecessary.
The solution: don’t tax artificial stock option “benefits” until shares are sold and profits are realized. For that matter, let’s go all the way and let companies give stock – not stock option – grants to employees.
I wonder how many MPs know about this tax measure? I wonder if any even know about it. It’s a complex matter and not one that affects a large percentage of the population – certainly not something that the press can get too excited about. I’m sure that if they are made aware of it, they’d speak against it. After all, on the innovation front, it’s yet another impediment to economic growth.
For another good article on the subject, please read Jim Fletcher’s piece on the 2010 Budget on BootUp Entrepreneurial Society’s blog.
For those who exercised an option before March 2010, and deferred the benefit, CRA is making a special concession. On the surface it looks simple: You are allowed to file an election that lets you limit your total tax bill to the cash you actually receive when you sell the shares (which will likely leave you with nothing for your hard work) rather than be subject to taxes on income you never realized (as is the case before March 2010). Indeed, CRA thinks it’s doing everyone a big favor because it’s being kind in helping with a mess that it created in the first place!
There’s a detailed and lengthy discussion in an article by Mark Woltersdorf of Fraser Milner Casgrain in “Tax Notes” by CCH Canadian. The key point in the article is that you have until 2015 to decide how to handle any previously deferrals. The decision is not straightforward because it depends on an individual’s specific circumstances. For example, if there are other capital gains that could be offset, filing the election would result in not being able to offset these. The article states: “On filing the election, the employee is deemed to have realized a taxable capital gain equal to one-half of the lesser of the employment income or the capital loss arising on the sale of optioned shares. The deemed taxable capital gain will be offset (partially or in full) by the allowable capital loss arising from the disposition of the optioned share. What is the value of the allowable capital loss that is used, and therefore, not available to offset other taxable capital gains?” The article gives a few good examples to illustrate various scenarios. So, if you’re in this situation – do your analysis. I tried to link to the article, but it’s a pay-for publication, so that’s not available. Your tax accountant might give you a copy.
Thanks to Steve Reed of Manning Elliott in Vancouver for his tax insights and to Jim Fletcher, an active angel investor, for his contributions to this article.
Footnotes (the devil is in the details):
1.”Shares” as referred to herein means “Prescribed Shares” in the Income Tax Act. Generally this means ordinary common shares – MAS & # 8211; if a Company has a right of first refusal to buy back shares, they may no longer qualify for the same tax treatment.
2.There are really two 50% deductions are available: The regular capital gains deduction which permits a 50% deduction on capital gains made on shares that are acquired at FMV and the 50% deduction available to offset the employment income benefit on shares that are held for more than 2 years. (Of course, only one 50% deduction is available. )
3.CCPC status may unknowingly be forfeited. For example, if a US investor has certain rights whereby he has, or may have, “control”, the company may be deemed to be a non-CCPC.
37 Responses to “Shares vs Stock Options”
Mike & # 8211; thanks for this very valuable contribution to the community. Options are one of the most common mistakes I see in corporate structures. A couple of additional points:
1. When companies use options, or vesting stock, they are subject to the stock based compensation rules. This makes the preparation of financial statements much more complicated and expensive.
2. Options are also much more dilutive. Few people actually ‘get this’ but the short description is that everyone I’ve met always counts all of the options into the fully diluted calculation without considering the additional cash from the exercise. That makes the dilution effectively equal between a share or option.
But employees consider an option as worth much less than a share. So to get the same incentive, in practice, you have to allocate more options than shares.
3. The additional governance complexity you point out is a consideration. I prefer to make the employee shares a different class with equal economic advantage, but without votes.
In the US, options have become so much less desirable that many companies, for example Microsoft, have just stopped using them as a way to motivate the team.
It would be interesting to see comments here from some of our friends in the legal and accounting professions. They are often the ones advising young companies on this.
Thanks again for the excellent summary.
Your input is excellent but I am curious about the implications of FMV and the Issuance of extra founders shares set aside in Trust. Although we have been ‘doing business as’… for over a year now, we are now preparing to incorporate and issue founders shares. Are you saying that although I can issue additional founders shares without tax implication, in the beginning, in trust to be issued to new staff at a later date, if I transfer them at a later date they may have serious tax implications? Re-worded, do these shares even though they have already been issued and all new shareholders would be aware of the dilution factor of those shares, once a major investor comes on board, does the transfer of those shares now represent a benefit and therefore a differed tax presence? If so what would be the point in issuing them in trust. Why not simply issue them. If I am guessing at the reason, it would be because once you have a tangible investor, you have a distinctive FMV and therefore your later issuance of founders shares represents a very real conflict in the interests to your new higher paying shareholders?
Boas perguntas. A trust may be useful in that you would allocate shares in your cap table and all shareholders would regard them as part of the founders block.
As a CCPC you can issue shares at any time at any price (just make sure you comply with the securities regulations). Suppose that an investor has just paid $1.00 per share. If an employee gets 100,000 shares for free (say $.0001 per share), she has a “deferred employment benefit” of $100K on which she has to pay tax WHEN she sells the shares. You might be thinking that the investor who just paid $1.00 will be annoyed if someone else gets shares for free, right? In this case you have to explain to the investor that a) the employee is getting this break as part of her compensation package (and working for a low salary) and b) it’s a good deal for all shareholders because if you issued options at $1.00, you’d likely have to issue more than 100,000 which means more dilution later to all shareholders. Also, by her holding CCPC shares for 2 years, she gets up to $750K in capital gains tax-free!
I believe that I read in your article that the founders block in a publicly held corporation can be as much as 10% of the shares in a company, or maybe that was the block which was allocated to options in a public company. Anyways, is there a maximum percentage of shares that can be issued into trust or is this simply a common sense issue where if you have way too many shares in trust that you will more than likely make some of your early investors a bit concerned about investing in your company with so many shares outstanding?
10% is a kind of a rule of thumb for public and private companies. Public companies are restricted – usually to a max of but more normally 10%. There’s no limit on private companies. If the shares are all issued, it shouldnt make investors nervous – it’s when they get diluted from stock option exercises that they get nervous.
Thanks very much for the super helpful post! I have been trying to figure this all out for the past year, reading so many different articles and sources that left me completely confused. Your article was amazing summary of all the scenarios, written in easy to understand style and will really help me with my venture plans… and also help my students I teach as well in an entrepreneurship class.
Mike thank you for your input. Do you know if a public Canadian Company can grant its Directors the stock option on the name of the Director’s private company and not in the name of the director him/herself?
I don’t see why not. But, check with a secuties lawyer. Also, check any tax implications either way. Mike.
Do these rules apply regardless of the company being public or private? My accountant seems to think so…
The rules are quite different for public vs private companies. They are more favorable to private companies because stock option benefits can be deferred whereas there is no deferral for public companies. It means that, in a public company, you are forced to sell some shares immediately so that you can pay the taxes. It discourages ownership which is unfortunate.
What are the tax implications for purchase, nominal value transfer or gifting of shares in a CCPC between two shareholders of the CCPC? Thx–this article seems to be one of the best around on this topic.
I think it depends on the nature of the transaction and the current value of the shares.
If you make a disposition, e. g. as a gift, you might have to pay tax on the appreciated value. The recipient wouldn’t have a tax issue until the shares are sold.
If you give shares to someone in lieu of pay, then they will have to pay tax on the benefit (diff between fair value and their cost) and you will have to pay tax on the appreciated value.
I have vested share options in a private canadian corporation that I VERY recently exercised at a penny a share. The fair market value is 70 cents a share. In the next month or two we expect the company to be sold to some corporation overseas for at least $1 a share. Am I right in expecting that the 69cents between the fair market value (70cents) and my exercise price (1 cent) will be taxed as income, while the gain between 70cents and the $1+ per share the company is sold at will be taxed as captial gains?
There is absolutely no 2 year hold period possible, but some people think the quick time period (1-2 months) between exercising options and the sale of the company might somehow be ‘exempt’ from going the capital gains route and instead just be treated as regular income.
Thanks so much for the article Mike. It is very clear.
What happens if say you hold the shares of a CCPC for 1.5 years and at that point it becomes public (IPO) and is no longer CCPC? Do you not get the 750K tax exemption or the other goodies? Even if you wait another 0.5 year before selling so it’s 2 years in total?
I’m pretty sure you’re stuck. And, it’s just not being a CCPC that’s required – the CCPC has to be a QSB (Qualified Small Business-check CRA Website).
What are the benefits of receiving “no-cost founder shares”?
Are the shares deemed to have a different FMV, ex. the FMV when the company was established?
Great article, I’m just a little unsure of the definition for founder shares.
The benefit is that they cost you nothing and will someday, hopefully, be very valuable. The FMV (Fair Market Value) is what they are worth on the day you get them. Founders shares are usually issued when the company is founded (started) and at its early stages when partners are brought in to work in the company long before investors are brought in. At this stage, they are usually considered to be of zero value (at least for tax purposes).
Mike…. thank you (again) for your helpful post (May 2011!).
I am interested in the SHARE issue concept (“founders shares”) – specifically the opportunity for the recipient employee to defer tax for 2 years or more. We have recently awarded two employees with share ownership, but everything I can find on CRA web site indicates that such awards are immediately taxable.
I can not find any CRA reference to the defef\rrment opportunity. Specifically CRA bulletin IT113R4 provides advice on this – but not about deferrment.
Can you point me to a CRA reference in this regard?
On CRA’s website, there are instruction on completing the tax return Line 101 Security Option Benefits where it says: “If your employer is a Canadian controlled private corporation (CCPC), which you deal with at arm’s length, you only have to report this taxable benefit on your tax return for the year you sell the securities. If your employer is not a CCPC you may have to report taxable benefits you received in (or carried forward to) the year you exercise your stock option.”
MAS & # 8230; the sentence you quoted: “On CRA’s website, there are instruction on completing the tax return Line 101 Security Option Benefits where it says: “If your employer is a Canadian controlled private corporation (CCPC), which you deal with at arm’s length, you only have to report this taxable benefit on your tax return for the year you sell the securities.” & # 8230;
is preceded by “A security option benefit results when you buy securities through your employer at apre-established price which is less than the fair market value of the securities.”
So … doesn’t that mean this reference is related to stock option plans (i. e. “a pre-established price”)…. not to a general award or gift of shares ?
If you get below-cost shares in a QSB (regardless of whether they are a gift, a discount, bonus, etc) then you have a benefit. This benefit can be defered until you sell the shares.
For the first time in many years I have exercised options of a public company. I have “Security Options Benefits” and “Security Options Deductions” on my T4, leaving me with 50% of the gain on the option sale within my income.
I also have a tremendous amount of carryforward capital losses. I was hoping the the option gain could be fully offset by these losses, as they both arise from publicly traded stock.
But I can find no method of “deducting” my capital losses against the income that has been built into my T4. This income IS the result of a capital gain on the disposition of the share options, so why can’t I find a way to use my loss carryforward against it?
To add insult to this, last year I had “qualified” gains on the disposition of farm property. Instead of allowing me to deduct the gain from my “lifetime exemption”, the CRA forced me to us my carryforward capital losses. When I do finally have gains on shares, my losses won’t be there to limit the tax.
Wouldn’t be so awful, except I made those losses on borrowed money, and I need all the gains to pay back the loans. I have loans outstanding after the underlying asset has gone – sold at a loss. It’s simply crazy!
Now here I am with legitimate gains, but can’t find a way to exercise the losses against them.
I sympathize with you! The only thing I can offer is that you can at least deduct the interest on your loan. Also, let’s hope you have lots of capital gains in the future against whcih you can use your accrued losses.
Excellent post Mike! Muito informativo.
If a corporation was created 17 years ago and some employees worked there for 15 years, can founder shares still be created and assigned to these employees?
Is there a tax benefit of getting these shares assigned to a corporation the employee owns? Instead of big corporation providing shares to directly to the employee they first go to another corporation that the employee owns?
Regardless of the above, “the bottom line” section of your post still sounds like an amazing deal. Most taxes deferred. Assuming no change in valuation eventually taxed at normal employment income like figure of gifted shares in the event of a sale. Seems too good to be true!
Can you recommend further reading materials? I am especially interested in private established corporations gifting shares to their employees.
Rob, you can create “founders” shares any time you like – that is, by founders shares I trust you mean zero-cost shares. I believe that if the shares are issued to a corporation, there’d be taxable benefit although I’m not sure if it can be deferred. I suggest that you check with your own accountant about your particular situation – just to be safe.
a CCPC grants share to employee with an FMV and the employee could defer the tax benefits till selling the shares. If the employee never sells the shares because the later share value is lower than the previous FMV when shares granted, will deferred tax be erased?
I don’t think the benefit ever gets erased. And there’s never a “never sell” because either the company or the shareholder will die someday (and then there’s a deemed disposition).
thanks Mike! Oh, yes, the shares could be sold passively. how CRA could determine the FMV of a shared granted by a CCPC 5 years ago?
Yes, that’s the challenge. I’ve never actually heard of CRA determining this for a small CCPC startup. I’d love to hear from anyone that has.
Hi Mike, Thanks for the very informative article. Can you please refer me to the section of the Income Tax Act that allows for a deferral AND/OR 50% deduction as it relates to the taxable benefit under a SHARE sale. I believe what you are looking at covers Options and not shares. Thanks, Levi.
Follow up the questions above from Ken and Levi, has this been resolved re whether these rules only apply to options and not shares? Ken and Levi were looking for confirmation/references to the tax act allowing the deferral relating to shares (not stock options). Thanks for any comments on this.
The rules relate to shares. Options are just a right to buy shares. If you acquire shares below the so-called market value, this could be due to an option that you’ve exercised or simply due to an agreement (eg employment agreement). Regardless of how or why you got “cheap” shares, the tax liability kicks in when you get the “benefit”. This benefit is taxable but it can be deferred (for a private company) until you sell the shares. There is no tax due when you receive stock options – regardless of the terms of the option grant.
Hi, Mike, excellent article. I’m wondering if Founders Share should be hold by founder or company, if hold by founder, can deferred rules apply?
Companies don’t hold shares in themselves. Founders shares would be held by individual “founders” which could really be anyone you wish to deal in.
Ótimo artigo. Have any of these provisions been updated in the 6 years since the article was originally published? We’re based in Toronto and setting up a new tech startup. We’ve decided to incorporate in Delaware as we want to eventually attract money from the valley. But for founders and key employees it seems that both options and founders shares could be problematic? as a non CCPC, Canadian employees who receive options would be in a situation similar to your CFO with 100,000 options in a Silicon Valley startup – they would have a tax liability on the FMV at time of exercising, due immediately. Is this still the case?
If we issue shares (founder shares?) as a non-CCPC, even with reverse vesting (or RSU equivalents), it seems there would be an immediate tax liability based on FMV at the time the shares are issued – am I understanding that correctly?
I’m not aware of any changes in the past 6 years since I wrote the post. Yes, the rules are different in the USA. Not as good as in Canada. Many startups I know have no trouble attracting Valley Capital because they are CCPCs. In your case, if the recipients of the founders shares (in the Delaware Corp) are Canadian, I believe that the Canadian rules are applicable and they have no immediate tax liability. MAS & # 8211; they do not get a shot at the $835K Cap Gains exemption. Then, of course, there’s also the question of what is the FMV. If no capital has been raised, and if the company is brand new, I’d argue that the FMV is zero. Even for later stage issuances, I’ve not heard of CRA setting an FMV.
Thanks Mike! Again, great article – muito informativo.

Tributação de Opções de Ações para Funcionários no Canadá.
Allan Madan, CA.
Você recebeu opções de ações do seu empregador canadense? Se sim, é altamente recomendável que você repasse os pontos deste artigo. Neste artigo, explico como as opções "Tributação de Ações de Ações para Funcionários no Canadá" # 8221; afeta diretamente você.
Uma opção de ações para funcionários é um acordo em que o empregador concede a um funcionário o direito de comprar ações da empresa na qual ele trabalha normalmente a um preço com desconto especificado pelo empregador. Existem diferentes tipos de opções de ações que podem ser emitidas para os funcionários - mais informações podem ser encontradas no site da Agência de Receitas do Canadá.
Para os empregadores que desejam vender as ações de sua empresa, consulte nosso artigo "Planejando a venda de um negócio".
CCPCs (empresas privadas canadenses controladas) - opções de ações de funcionários.
Um CCPC é uma empresa incorporada no Canadá, cujas ações são de propriedade de residentes do Canadá. Por definição, um CCPC é uma "empresa privada" e, portanto, não é listado em uma bolsa de valores pública como a Bolsa de Nova York ou a Bolsa de Valores de Toronto.
Quando seu empregador concede ou dá uma opção de ações para você, você não precisa incluir nada em seu lucro tributável naquele momento. Em outras palavras, não há nenhuma conseqüência fiscal para você na data da concessão.
Quando você exerce uma opção de compra de ações, o que significa comprar as ações através de seu empregador, você deve incluir um benefício tributável em sua receita. O benefício tributável é igual à diferença entre o preço de exercício (ou seja, o preço que você pagou para comprar as ações) e o valor de mercado das ações no momento da compra.
Há um diferimento de imposto especial para funcionários de CCPCs. O benefício tributável pode ser adiado para a data em que as ações são vendidas. Isso torna mais fácil para os funcionários pagar impostos porque eles terão dinheiro disponível com a venda das ações.
Opções de ações do empregado CCPC.
Vamos ver um exemplo. Suponha que o preço de exercício seja de US $ 3 / ação e o valor de mercado seja de US $ 10 / ação. Quando você exerce o seu direito de comprar as ações, um benefício tributável é realizado por US $ 7 / ação (US $ 10 menos US $ 3). Lembre-se, para os funcionários da CCPC, o benefício tributável é adiado até que as ações sejam vendidas.
Se você atender a uma dessas duas condições, poderá reivindicar uma dedução de imposto igual a ½ do benefício tributável, ou US $ 3,50 neste exemplo (50% x US $ 7).
Você manteve as ações por pelo menos dois anos depois de comprá-las. O preço de exercício é pelo menos igual ao valor justo de mercado das ações quando elas lhe foram concedidas. Implicações fiscais para opções de ações de funcionários CCPC.
Empresas Públicas - Opções de Ações para Funcionários.
Agora, vamos passar para a tributação de opções de ações para empresas públicas.
Na data em que você recebe ou recebe opções de ações em um empregador que seja uma empresa de capital aberto, você não tem uma consequência tributária pessoal. Entretanto, na data em que você comprar as ações, você receberá um benefício tributável igual à diferença entre o preço de exercício das ações e o valor de mercado das ações naquela data. Você não pode adiar o tempo desse benefício tributável.
Suponhamos que você trabalhe para a Coca-Cola Canadá e o valor justo de mercado das ações hoje seja de US $ 30 / ação. De acordo com o contrato de opção, você pode exercer ou comprar as ações por US $ 10 / ação. Portanto, o benefício tributável que será incluído na sua renda no momento do exercício é de US $ 20 / ação.
Depois de comprar as ações, você tem duas opções: (A) Você pode vender imediatamente as ações ou (B) Você pode segurá-las se você acredita que elas aumentarão em valor no futuro. Se você optar por manter as ações e vendê-las no futuro com lucro, o lucro obtido com a venda será classificado como ganho de capital e sujeito a imposto. Independentemente de você vender as ações ou retê-las, os impostos serão deduzidos do seu salário para contabilizar o benefício tributável que você percebeu na compra das ações.
Árvore de decisão para opções de ações de funcionários para empresas públicas.
No entanto, não segure os compartilhamentos por muito tempo depois de comprá-los. Isso ocorre porque, se o preço do estoque cair, você ainda será responsável pelo benefício tributável realizado na data da compra.
Você pode reivindicar uma dedução fiscal para ½ do benefício tributável realizado na data do exercício. Para fazer isso, todas essas três condições devem ser atendidas:
Você recebe ações ordinárias normais mediante exercício O preço de exercício é pelo menos igual ao valor justo de mercado das ações no momento em que as opções foram concedidas Você negocia de maneira direta ou de terceiros com seu empregador.
Aviso Legal.
As informações fornecidas nesta página destinam-se a fornecer informações gerais. A informação não leva em conta sua situação pessoal e não se destina a ser usada sem consulta de profissionais contábeis e financeiros. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.
SOBRE O AUTOR.
ALLAN MADAN
Allan Madan é um CPA, CA e fundador da Madan Chartered Accountant Professional Corporation. A Allan fornece valiosos serviços de planejamento tributário, contabilidade e preparação de imposto de renda na área da Grande Toronto.
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Comments 113.
Thank you for the very detailed explanation.
Another question is will [50% of] the gain from public traded company stock option be able to offset the previous year’s capital loss?
Very insightful article,
I was wondering if there is any capital gains tax on appreciated stocks when giving it to someone else as a gift?
Stocks when given as a gift are not subjected to any capital gains tax even if they have appreciated in value.
Allan Madan and Team.
Do I have to pay taxes on capital losses when I exercise my shares?
No you don’t have to pay any taxes because there is no capital gains, but rather you get tax benefits for selling it at a loss.
Allan Madan and Team.
Hi Allan, just to clarify, if I have capital losses on my stocks, I can deduct that from my capital gains to minimize my taxes on the capital gains even if they were separate stocks?
Yes the source of either the capital gain or loss is irrelevant, since you are expected to report your total capital gains and capital loss on your income tax return. It is important to note that for tax purposes, capital losses are only reported on items that are intended to increase in value. Eles não se aplicam a itens usados ​​para uso pessoal, como automóveis (embora a venda de um carro com lucro ainda seja considerada receita tributável).
Allan Madan and Team.
How would the CRA calculate the appreciated price of stocks to coincide with inflation?
The CRA has there own calculation methods especially for stocks that individuals may have held for long periods of time. It is best to directly contact the CRA for more specific information.
Allan Madan and Team.
Hi Allan, are there any taxes on stocks received from a deceased individual through their will in cases where the stocks have dramatically increased in value?
The stocks will only be subjected to capital gains tax when and if you decide to exercise/sell the stocks. There are no taxes on the transfer of assets through wills.
Shouldn’t the assets on death be deemed disposed of, hence there will be gains on the stock?
What would happen if the options were still not exercised by the time of death?
Obrigado pela sua pergunta. Upon death there is a deemed disposition of all of your assets at their fair market value at that time, except for assets willed to your spouse. If you did not exercise your stock options before your death, then they will likely expire and become worthless, unless the options agreement states that a surviving beneficiary can assume the options in your place.
Hi Allan, as part of my employment contract, I have an option to receive shares or $10000. If I chose to receive the shares but later changed my mind since the values of the stocks are projected to be decrease in value, would I be taxed on the $10,000?
If you choose to re-take the $10,000 then it would be included as part of your total taxable income as long as you received it within the taxation year. If it is a possible option, you can choose to defer the received income for next year as to avoid paying less taxes on it this year if you project your income to be lower.
Allan Madan and Team.
Are there capital gains loss for issued stocks in cases where the company has filed for bankruptcy?
Capital loss is only applied to cases where you have actually sold the stock. Luckily, for you there is a provision under section 50(1) of the income tax act that does allow for some tax relief. When this is applied, the shares will be deemed to have been disposed of for proceeds of nil at the end of the year, and to have been recacquired for adjusted cost base (ACB) of nil immediately after the end of the year. As a result, you will be able to realize the capital loss on the stock. The superficial loss rule does not apply in situation.
Allan Madan and Team.
What if my company is being taken over by several investors and is going from a public to a private company, when they own 90% of the shares, I am force to sell mine at below market value, do I get any tax relief in terms of capital losses?
IF you are force to sell your shares then it is illegal for them to pay at below market value for the remaining shares, you should be able to get at least market value you for them. IF not, you can deduct your capital loss against your capital gains for tax relief.
Allan Madan and Team.
I did some contracting work for a small startup tech company. Since they had no money they paid me in shares, if and when they take the company public, would I have to pay taxes then?
You would only have to pay capital gains tax when and if you decide to exercise/sell your shares. If you continue to hold onto them, you will not be subjected to any taxes.
Allan Madan and Team.
Is it possible to hold my stocks within a TFSA account? how would the accrued interest on these stocks be taxed?
Yes common shares generally qualify for TFSA investments, however those shares must be listed on a designated stock exchange. If they are not listed, then they will be categorized as a non-qualified investment inside your TFSA and you will be hit with some severe penalties.
The taxation of the accrued interest would be the same for any type of investment contributions made to your TFSA.
Allan Madan and Team.
What would be classified as a designated stock exchange? what about penny stocks?
Hi Mahmoud, the Canadian Department of Finance has a list of 41 designated stock exchange on it website here fin. gc. ca/act/fim-imf/dse-bvd-eng. asp.
Penny stocks traded on pink sheets are not on a designated stock exchange but any penny stocks (people disagree on its definition) that are listed on any of the designated stock exchange are eligible for TFSA investments.
Allan Madan and Team.
What if a stock is listed on multiple exchanges some of which are not listed, how would the department of Finance categorize this?
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.
Allan Madan and Team.
I currently work for a CCPC, and they have offered me $5000 in stock as compensation. 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. Here’s how they work. 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 2003 that had an IPO. Employees were awarded stock options, and I was given 2,000 shares. I still have the letter from the man who was then president and CEO. The length of the contract was 25 years. However, I ended up leaving the company a few months later, so it appears as if I am only 25% vested. The company has now been split into two separate companies.
Do any of my stock options have value today? Can I cash out my vested portion?
In your case, you would have 25% of the original contract for 2000 shares. 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 2,000 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 2003, 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.
Oi Allan 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). Normally, you’ll exercise your right to buy shares only when the fair market price is higher than your exercise price. After all, if your exercise is 15$ a share and the market value is only 12$, you are overpaying! 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.
Allan Madan and Team.
Oi Allan I’ve signed up for an employee stock sharing plan on TFSA with my employer. As per the agreement, he matches 5% of my contributions. I have received a T4PS with an amount on box 35 that I need to include on my tax return. I thought the money you earn from a TFSA is tax free, was I wrong?
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. Because of your employer’s contributions, it is quite easy to over contribute to your TFSA’s. 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.
Allan Madan and Team.
I’m not very familiar with stocks or how they work but they seem intriguing to 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.
So if I’m married or living with a common-law partner, and she is making considerably less than I am. 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?
Under the Canadian tax system, there is a provision that allows you to transfer all of your dividend income to your spouse so that your spouse can recognize 100% of your dividend income if certain conditions are met. This may or may not be advantageous depending on you and your spouse’s tax situation and we’ll need more information.
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. From there he sells the shares, puts the money in his RRSP and then buys the shares again within the RRSP. He says this doesn’t save him much on taxes but it does help the return as he’s able to store money in his RRSP and watch it go untaxed. 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.
There really isn’t any way to avoid paying taxes on public corporation employee shares, but there is a way to avoid taxes in the future on those amounts. 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. Hope this Helps.
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. Will she have to report this income to the CRA, and will it reduce her EI 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. Also, they are subject to a “security option deduction” (line 249 on your tax return) if certain conditions are met. Half of your wife’s benefit she receives from cashing the option is included in her taxable income for the year. If she is in the top bracket, one-half of her option benefit could be taxed at 46%.
Allan Madan and Team.
Last year, I have exercised some deferred stock options. How do I report these?
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 41). In addition, you will be able to claim 50% of the amount from line 4 of Form T1212, Statement of Deferred Security Options Benefits.
Allan Madan and Team.
I received employee stock option when my company was private and now it went IPO. So its publicly traded, I still haven’t “exercised” my stock options and it is set to expire soon. I am thinking of doing “Exercise and hold”, when I do that I will have to pay the company the excessive price but will I also have to pay tax right away (even if I am not selling, just holding?). Also how can I deffer the taxes so I can split the taxable profit to multiple years so I pay less taxes?
Any info of the “Exercise” and hold” option would be good.
I received employee stock option when my company was private and now it went IPO. So its publicly traded, I still haven’t “exercised” my stock options and it is set to expire soon. I am thinking of doing “Exercise and hold”, when I do that I will have to pay the company the excessive price but will I also have to pay tax right away (even if I am not selling, just holding?). Also how can I differ the taxes so I can split the taxable profit to multiple years so I pay less taxes?
Any info of the “Exercise” and hold” option would be good.
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?
50% of your gains are counted as taxable income. You can deduct past capital losses from current capital gains. After factoring in capital gains, if your personal income is below the exemption level you won’t pay any taxes on it. You also don’t have to pay taxes if you haven’t sold the stock this year. 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.
Allan Madan and Team.
I received a company stock option some time ago. It has a strike price of $3.10, and a vest of $30,000 after each of three years. The most recent yearly dividend was $0.69, and six months ago the company offered to buy it back. Though they offered $2.80, nobody sold their shares. What, if anything should I do with these? What are the tax rules surrounding my situation?
Tax rules for stock options in Canada differ, depending on whether the company is a CCPC. 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. The difference between the market value at the time of exercise and the value at the time of sale is taxed as income for non CCPC’s.
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.
Allan Madan and Team.
I work in Canada for a company that trades in the US. One of the benefits I get from my job is that I get restricted stock units (RSUs) once a year. 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.
I just found out that there was an automatic ‘sell to cover’ action that sold enough stock to account for 40% of the value that had vested. 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? I asked an accountant, and he said that since it is a capital gain that the CRA would tax me on 50% of the value…is this correct?
Also, the stock vested at 25.61 (which is the value at which the sell-to-cover happened), but by the time I could sell, the stock was at 25.44. 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. 40% should be enough withholding to satisfy your personal income tax, depending on what your total income for the year is. Since it vested at $25.61 but you sold it at $25.44, you’ll be able to claim a capital loss (or carry it forward to a year where you have gains you can offset with it).
Allan Madan and Team.
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. Isso está correto? If so, I would end up losing a large percentage in taxes.
Is it possible to exercise the options sheltered inside a TFSA or RRSP to avoid capital gains? Is there anything I’d need to do beforehand (e. g. “transfer” the options un-exercised into a TFSA) to prepare for that?
Your options are taxed at capital gains rates (i. e. 50%) since you get a 50% deduction on the income inclusion assuming you meet certain conditions. Regarding holding them in a TFSA or RRSP, make sure that you ensure they will not be considered a non-qualified and/or prohibited investment. In general, you need to ensure that you and non-arm’s length parties (such as relatives) will not own more than 10% of the company.
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.
Allan Madan and Team.
Hello, in 2012, I bought 1,000 shares at my company at $10 each. In 2013, the stocks shot up to $40 a share. Some of my co-workers and I decided to sell the shares, but then the stocks declined back down to $10 a share. How should we handle this situation?
Hi, In this case you should report a taxable employment benefit of $30,000 on your T1 return. This represents the profit earned on the shares up to the date of exercise. In addition, you should report a capital loss of $30,000 because the shares dropped in value when you sold them. The bad news is, the capital loss of $30,000 cannot be offset with the taxable employment benefit of $30,000.
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.
Allan Madan and Team.
My wife will need to exercise some options from her former employer this week. It’s a publicly traded company. 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.
If it’s the employer, does that mean they can withhold some of the shares as payment to the CRA?
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. e. it is added onto the T4 just like a salary or a bonus).
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. It’s always beneficial to get professional help so that you don’t run into any problems.
Allan Madan and his team.
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. Does that mean a US tax return needs to be filed for the income earned in USA?
Under the Canada – US tax treaty, Canadian residents that incur capital gain on US stock investments are not required to file US tax return. 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.
Under a stock option plan, at the time the stock option right is transferred to the employee, there is no effect on the employee’s tax situation until the employee exercises or disposes of the option. 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.
As an employer, stock option plans are non deductible unless they are paid in cash.
Hello Allan, I own a start-up company and will be hiring employees soon. I just want to plan ahead so I don’t run into problems down the road. What options should I have for employee stock?
Hi Veronica, there are three main plans that you can deploy for your employee stock options. Eles são os seguintes:
1) Employee stock purchase plan (ESPP): This plan will allow your employees buy shares at a discounted price. Many ESPPs provide a buffer in the purchase of the shares: an employee will pay a certain amount over a period of time and at pre-specified periods, the employees can purchase shares at a discount using the accumulated payments. O benefício é igual ao valor das ações, menos o valor pago.
2) Stock bonus plan: under this plan, you will have to agree to give the shares to your employee(s) free of charge. In turn, you agree to sell or issue shares to the employee for no cost.
3) Stock option plan: This plan allows your employee(s) to purchase shares of your company or of a non-arm’s length company at a predetermined price.
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.
Hi Allan, is there a tax advantage to selling shares of my corporation?
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. The capital gains exemption is $800,000 in vale for dispositions occurring on or after January 1st, 2014. This one idea could save you around $200,000 in income taxes.
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 Allan, is there any way to defer the taxes I pay on my stock options until I sell them?
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. The CRA realizes that most people cannot find a way to pay tax on $50,000 of noncash compensation, which is why they allow you to defer the tax. 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. The stock value has since declined and I don’t have enough money to pay the income taxes that I have deferred. 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?
Hi Dan, here is a list of potential disadvantages for issuing shares to your employees.
• Deferred tax liability if shares are bought below fair market value.
• May need to defend the fair market value. You may also need an independent valuation, although that is very rare.
• You need to make sure that shareholder agreement provisions are in place.
• Issuing shares at very low prices on a cap table may look bad to new investors.
• More Shareholders to manage.
Here are some advantages of giving out shares.
• You can get up to $800,000 in life-time tax-free capital gains.
• 50% deduction on gains if shares held for more than two years or if shares were issued at FMV.
• Losses in a CCPC can be used as allowable business losses if the business fails.
• Can participate in Ownership of company.
• Less dilution than if stock options are issued.
I work for a public company and received 1000 shares of stock options. Let’s say the exercise price was $10/share, and the market value of the share was $13/share (at the time the shares were exercised). I paid necessary tax at the time of exercise, but I did not immediately sell my shares. If the shares go up in value to $15/share and I sell all my shares at this time, do I have to pay any taxes further taxes?
In your example, if you decide to sell your shares at $15, you will be taxed on the capital gain as follows:
Adjusted Cost Base: $13 (FMV of when you exercised your shares)
Proceeds of Disposition: $15 (FMV of when you sold your shares)
Inclusion Rate: 1/2.
Taxable Capital Gain: $1 / share you sell.
You record a gain of $2 for each share you sold and will have to pay $1 in taxable capital gains for each share you sold.
I have a question concerning taxation of stock options.
I work for a public company and was granted 1000 shares of stock options at the exercise price of $10/share (according to the agreement). The market value of the shares was $13/share (at the time the option was exercised). I paid the necessary taxes at the time of exercise and the employment benefit was included in my income on my T4 slip. If I hold on to the shares and the shares go up in value, and then I sell the shares at $15/share, do I need to pay taxes for the additional gain of $2/share?
Capital gains tax will apply to the additional $2 per share that you profited on sale.
Can I transfer Stock Options given to me to my personal company 100% owned by myself and my wife? Or to a company 100% owned by myself?
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. If your employer issued the stock options to you, it’s imperative that you read the options agreement to ensure that there are not any restrictions on transferring them.
There’s no tax savings in making a transfer of stock options to a corporation.
Quick question about employee stock options. I was wondering what the requirements are to deduct the stock option employment benefit?
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:
& # 8211; the employer corporation is the issuer of shares.
& # 8211; the shares are not “preferred shares” but instead “prescribed shares”
& # 8211; the option exercise price must not be less than the fair market value of the shares at the time the option is granted.
& # 8211; the employee deals closely with the employer corporation.
I hope this helped,
I am ready to declare my security option benefit and I work for a private Canadian corporation – how do I go about this?
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? Isn’t it the companies responsibility to report this as income on my T4?
It’s the company’s responsibility to report the taxable benefit realized upon exercising employee stock options. You should speak with your employer and ask them if they will be issuing amended T4 slips to their employees.
I was just wondering what kind of stock options can people generally choose from?
Employees are generally issued a variety of different options under one of three types of plan. There is the Employee Stock Purchase Plan (ESPP), Stock Bonus Plan, and the Stock Option Plan. For further details about each of these options, please visit the Canada Revenue Agency website.
I have read a lot about stock options for workers in Canada. I am just wondering why Canadian employers initially grant these options to their employees.
By granting stock options it ensures keeping good workers. Employers typically want their employees to feel like owners in the business. They also want skilled individuals, thus offering compensation beyond a salary is an incentive to stay loyal.
Quick question! What makes a stock option very “tax-efficient”?
Let’s use an example to answer this question! Suppose you exercise your stock option for $30,000 while the market value is $40,000 – this ultimately means you’ve received a benefit from your employment! You will face tax on the $10,000 benefit, – this is where the idea of ‘stock options’ should be of interest to you. Considering certain conditions are met, you can claim a deduction equal to 50% of the stock benefit. By including this $10,000 on your tax return, you could deduct $5,000. Thus, making a stock option very “tax-efficient”!
What conditions exist to ensure that I am entitled to the 50% deduction?
There are three conditions that must be met for you to be able to claim an offsetting deduction equal to 50% of the stock option that you report as income. The three conditions are as follows:
Eu. You cannot be in control of the corporation – you must deal with the company at arm’s length; on a third party basis.
ii. The shares must be common shares, not preferred shares.
iii. The stock options cannot be in the money on the the money on the day the option is granted.
I work for an NYSE listed company and received stock options as part of my compensation plan. I went on maternity leave last year and they had extended my vesting for the same amount of time (i. e. extended the year). Is this the same treatement in Canada or is this a US common occurance, perhaps company specific? Qualquer ajuda seria muito apreciada. - C.
As far as I am aware, this appears to be a company specific policy.
What is your take on the Liberal government’s pre-election promise to change how stop options are taxed?
I have unexercised employee options granted to me before the company I work for went public (IPO). Eu sou.
concerned that the changes can have a significantly negative effect on the tax on the gains of those options.
if/when exercised next year (stock price is currently too low to exercise now, or I would).
1) Do you think the federal government will go ahead with these changes? I have read articles that make it.
sound like it may not be worthwhile to go ahead as companies would logically have to be given the ability to.
deduct options as an expense, which is now not the case.
2) Do you think there will be any grandfathering that may benefit situations such as mine?
3) Do you think the changes will apply to pre-IPO companies as well as public companies?
4) If the federal government does go ahead with changes, do you think the changes will be exactly as.
promised, or might there be some lessening of their impact (e. g. higher annual exclusion)?
These are excellent questions. While the liberal government has expressed its intention to make employer stock option benefits 100% taxable, they have said that this high inclusion rate will only apply on gains in excess of $100,000. Therefore, most Canadians will not be affected. I suspect that the liberal government will go head with these plans, but I’m not completely certain.
The finance minister announced that options granted prior to the date on which the new stock option rules come into effect will be grandfathered. He did not specify whether the rules will be different for pre-IPO companies or public companies.
i work for a company that allows me to purchase stock options. they will match up to 30%. i am about to be laid off. better to cash out now? not sure if ei benefits will be reduced if i was to cash out while claiming ei.
Obrigado pela sua pergunta. If your total income for the year including taxable stock option benefits and EI payments does not exceed $61,000, then your EI payments will not be clawed-back. I suggest that you first calculate the total taxable benefit from cashing our your stock options before you decide whether or not it makes sense to cash out.
Hello Allan, can either stock option proceeds (or the options themselves) or ESPP stocks or proceeds be transferred or gifted to as spouse for taxation purposes ? The stock are in an American company which has been purchased and these stocks will be paid out all at the same time.
They can be gifted to a spouse at cost, so that a capital gain will not arise on the transfer. BUT, any income or gains earned by the recipient spouse on the transferred stocks / shares must be attributed back to the transferor spouse. So you can’t save taxes by way of a gift to a spouse.
So what if you have a taxable benefit on your t4 in 2015 and then in 2016 the company goes bankrupt. Can I claim a loss for those shares on my personal tax in 2016?
In that case, claim a capital loss. Capital losses are only deductible against capital gains.
Taxable Compensation on Statement on Publically traded – Employee Stock Option is it part of Purchase Price?
The taxable portion of stock-based compensation included in your T4 becomes your cost basis for the shares you received, assuming you have not cashed out and are still holding these shares.
I realized a gain of the sale of a non-qualified stock option from a US public company. I am a Canadian citizen working for a subsidiary of the US public company, in Canada. ON the sale of the options, my broker withheld income taxes at 37%. How do I report these taxes paid on my canadian return?
Claim a foreign tax credit on form T2209.
If I transfer my shares to my wife as a gift will I be able to avoid taxes on them?
Hi Paul, you can automatically rollover your shares to your wife at cost. However, any gains realized upon their sale will be taxable to you.
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