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Make sure you have a handle on your stock-based compensation plan

Are you working for an emerging technology company? – Make sure you have a handle on your stock-based compensation plan

Brendan Greenwood CIM, B.Comm | February 7, 2020

If you work for an emerging technology company, part of the reason you likely joined was for the stock-based compensation plan awarded to you. Depending on the success of the company a stock-based compensation plan can be a very attractive tax advantaged form of compensation, that can make a difference in building your financial independence.

New government rules

Government regulation around stock compensation plans is constantly changing. Most recently the government introduced new legislation to limit the amount of employee stock options that may vest with an employee in a single year and continue to qualify for the 50% stock option deduction to $200,000. The details of who will be impacted by the cap are still being worked out (stay tuned).

Stock-based compensation structures vary

Companies continue to be creative in the way they issue stock compensation to attract and retain the best talent. It is important that you have a comprehensive understanding of the different types of stock-based compensation arrangements, you could benefit from. There are many variations. Here are just a few examples:

· a loan to purchase stock,

· stock options,

· an employee purchase plan,

· phantom stock plan.

Sources of tax liabilities

Most stock compensation plans will have an income benefit. The income benefit does not have special preferential tax treatment, but in many cases your tax liability can be reduced.

If you have a stock option plan, you’ll want to make sure you’re making appropriate use of the employee stock option deduction.

If you’ve been given a company loan to purchase stock, make sure you record all your interest payments to avoid a taxable employee benefit. Typically, you will be charged the prescribed rate on the loan.

If you have an employee share purchase plan, make sure you understand how the taxation works in order to avoid paying unnecessary income tax.

Managing downside risk

With stock option plans, when employees exercise their options, they realize significant gains on paper incurring a tax liability, but not benefitting from them, until they sell the shares. Growth stage companies can often be extremely volatile, especially after an IPO. Some high profile IPOs of 2019, such as Lyft and Smile Direct Club are still trading over 30% below their IPO prices. It is important to consider the timing of the share sale to avoid creating an unfunded liability.

If the share price falls below the exercise price and you’re forced to sell at a loss in the future, you won’t be able to offset your income benefit from the exercise with your loss in share value.

Option expiry and foreign exchange rate exposure

Some additional factors that need to be understood and managed include option expiry dates and foreign exchange rate exposure. Letting options that are in the money expire can happen if you don’t understand all the intricacies of the stock compensation arrangement. Foreign exchange rates can have a significant impact on taxable income if you own US or other foreign stock, and it should be understood how this needs to be reported.

Get a handle on your stock stock-based compensation plan

If you have a stock compensation arrangement with your employer and the company you work for has IPO’d creating substantial wealth for you on paper, consider working with an advisor that specializes in this area to help lay a roadmap for a divestment strategy that can reduce your tax, manage downside risk and help ensure your financial independence. You may not be able to secure the future of your company, but you can secure your own.

Brendan Greenwood is an Investment Advisor with Worldsource Securities focused on personal pension strategies and leveraging technology to provide progressive institutional style investment solutions for professionally incorporated individuals, business owners, tech professionals and retirees.

For other articles authored by Brendan Greenwood on issues impacting business owners and investors see

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Neither Brendan Greenwood nor Worldsource Securities Inc or its affiliates provide tax, legal or accounting advice. This material is based on the perspectives and opinions of the writer only and does not necessarily reflect views of Worldsource Securities Inc. The opinions or analyses expressed herein are general, and do not take into account an individual’s or entity’s specific circumstances. Investors should always consult an appropriate professional regarding their particular circumstances before acting on any of the information here. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Investments are provided through Worldsource Securities Inc., sponsoring investment dealer and Member of the Canadian Investor Protection Fund and of the Investment Industry Regulatory Organization of Canada.

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