Employers offer a variety of different forms of stock incentive compensation. An understanding of the relevant tax rules is essential in designing incentive plans that meet the needs of both employer and employee.
This article will consider the most common type of incentive plan — employee stock options. Employee stock options are popular because they meet a number of business objectives. In particular, they help employers to recruit, retain and motivate employees, without impacting cash flow.
Most of the tax rules governing employee stock options are found in section 7 of the Income Tax Act. A stock option is defined as an agreement to sell or issue shares. It is important to note that section 7 only applies to stock options issued to employees. Therefore, these rules do not apply to option issued to contractors or other non-employees. Corporate directors and officers are considered to be employees for the purposes of these rules.
There are two important exceptions to the above rules. The capital gain would be unchanged. However, there are several others. In future articles, we will consider other stock incentive plans that may be of interest. It is worthwhile to have a discussion with a tax lawyer on any transaction or life event that may involve a significant amount of tax. By being proactive, you can enjoy the tax savings that you are entitled to. Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company.
If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice. By Matthew Clark September 17 The following is a summary of the basic tax rules regarding employee stock options: Option issued to employee on Jan.
Value of Employerco shares at Jan. Employee is not taxed on grant of option, despite option being in the money. Employee exercises option on Jan 1, Employee stock options are the most popular form of employee stock incentive. Invitation for Discussion It is worthwhile to have a discussion with a tax lawyer on any transaction or life event that may involve a significant amount of tax.More...