Don’t let your employer stock option plan turn to fool’s gold
Brendan Greenwood, CFP, CIM, B.Comm | June 16, 2022
Stock options are becoming a more common part of the compensation program for emerging companies with strong growth prospects. They can make a big difference if managed effectively. Don’t leave yours on autopilot. It could be costly.
You may have one or more programs available to you. As the list below suggests, there’s a variety of programs that exist with different features, benefits and tax treatment.
Employee Share Purchase Plans
Matching Programs
Loan Programs to Purchase Stock
Restricted Stock Units
Stock Options
Phantom Stock Plans
It is important that you take the time to understand the details of your program to protect and get the most value from it. A knowledgeable advisor can guide you through the process and help you make decisions that best suit your specific financial situation.
How much concentration risk makes sense?
Having all your money in the stock of the company that pays you, leaves you financially over-exposed. Your employer can experience business setbacks, reducing or eliminating the value of the equity you’ve worked hard for. For example, in Canada, Nortel a very large, well-known company lost all its value over a very short period of time resulting in a large loss of equity for many Canadians. Worldcom, Enron, Adelphia Communications and Pan Am are other examples of companies that were growing leaders in their respective industries before running into trouble and experiencing a rapid decline in their values before shutting down for good.
Have you thought about the consequences of job loss?
Nobody is immune to job loss. A job can be lost for many reasons including macro economic factors that are beyond your control. Have you read the fine print in your stock compensation agreement? It’s important to understand how your plan is treated after termination. For example, stock options usually have a post termination exercise period after which you will lose the right to exercise your options and realize any remaining value in them.
What is your Tax Liability?
Stock option plans create tax liabilities which are important to understand and manage. While certain activity will result in preferential capital gains tax, parts of your plan will be taxed as an income benefit. Income benefits are taxed at higher personal tax rates, but you may be able to reduce the tax you owe through a 50% deduction on up to $200,000 of vested benefits annually.
Understanding the difference between capital gains and income benefits across your plan and where each applies will help you avoid paying unnecessary income tax and aid in choosing when to exercise blocks of options.
If you received a loan to purchase your company’s stock, the interest rate on the loan should be recorded to prevent the loan amount from being included in taxable income.
If you own a foreign stock including one that is American, foreign exchange rate movement can also impact tax liabilities and should be reported properly.
If you work for a US company or other foreign entity and participate in a stock compensation plan, make sure you understand how much foreign equity you own. If it’s over $100,000 it should be reported on a T1135 to avoid penalties with CRA.
Plan to get the most out of your stock compensation arrangement
Sound planning starts with doing an inventory of all parts of your arrangement and reviewing:
How much to liquidate and how often
Optimal order to liquidate various components
Optimal amount to liquidate in each tax-year
A cost-efficient strategy to convert funds to home currency (CAD)
Suitable options to build your diversified investment pool of assets
Ongoing changes to your stock compensation program impacting future benefits
If your stock compensation plan is on autopilot. Consider working with an advisor to ensure you get the most out of your stock compensation program. Having a strategic divestment and reinvestment road map that addresses your personal situation and the intricacies of your stock compensation arrangement will go a long way in securing your future.
Brendan Greenwood is an Investment Advisor and Financial Planner with Worldsource Securities Inc. focused on personal pension strategies and leveraging technology to provide progressive institutional style investment solutions for professionals, incorporated individuals, business owners, retirees and their families.
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