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Canada: Employee stock options, tax opportunities with proper planning

Canada: Employee stock options, tax opportunities

Many private companies offer stock options to employees as part of a plan to attract and retain key employees. However, the tax implications related to stock options can be complicated—in particular for stock option plans provided by Canadian controlled private corporations (CCPCs). Stock options offered by CCPCs are treated differently than those offered by other types of companies.


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Under most stock option plans, a company can provide certain employees the right to invest in its shares at a given price. If a company is a CCPC, the employees may be able to defer the payment of tax on the difference between (1) the price they pay when they exercise the option to acquire the share and (2) the value of the share at the time the stock option is exercised (i.e., the "employment benefit") until they eventually sell their shares, instead of when they acquire the shares. This special treatment is designed to stimulate employee ownership in small businesses and also recognizes that valuing private company shares is more difficult than valuing public company shares.

This special tax treatment may make stock option plans attractive for many CCPCs, but there are other tax factors that need to be considered. For example, CCPCs need to obtain a reliable valuation of the company's shares and also consider special provincial tax rules that apply for Quebec businesses. In addition, employees who eventually sell their shares may be able to reduce the tax they owe on the sale of the shares by qualifying for the capital gains exemption for qualified small business corporation shares, or by claiming a partial deduction on the employment benefit for shares sold after they have been held for a certain amount of time, among other considerations.

Establishing a stock option plan is a possible method of helping to reward and retain key employees. Not only can such plans be tax-effective, but they can also be implemented without reducing the company's cash flow, and can even bring investment funds into the corporation. However, the benefits need to be weighed against the potential costs, including diluted ownership for existing shareholders. In addition, the Department of Finance recently announced that it would introduce new changes to the stock option rules to cap stock option grants for employees of certain companies in 2019.

Read a June 2019 report prepared by the KPMG member firm in Canada

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