Do your employee stock options qualify for the 50% stock option deduction? The rules have changed in Canada and could impact how much money you get to keep!
Brendan Greenwood, CFP, CIM, B.Comm | June 27, 2023
Do you work for an American or international company and have an employer stock option plan? Did you know that the rules around taxation of your plan are different in Canada and should play an important role in how you manage your plan?
Canada has long had more favourable taxation rules than the US and other jurisdictions with respect to employee stock options. Some of these rules have recently changed. In the past, the difference between the stock option exercise price and the fair market value of the shares being acquired at the time of exercise had been taxed as income and eligible for a 50% stock option income deduction. New rules in Canada, passed into law in 2021 mean any options granted on or after July 1, 2021 will be subject to a $200,000 annual vesting limit. This means any options vested in a given year above the $200,000 annual vesting limit will not be eligible for the 50% stock option deduction benefit.
For example, a company grants an employee 9,000 options on 1 September 2021, with the options vesting one-third, one-third, one-third in each of 2022, 2023 and 2024. The exercise price of $50 is equal to the fair market value of the shares at the time of the grant.
The following year, the company grants the exact same incentive to the employee: 9,000 options with a fair market value of $50 vesting equally over 2023, 2024 and 2025.
In the example above, the employee will exceed their $200,000 limit in each of 2023 and 2024. This means the employee will not be able to claim the 50% stock option deduction on $100,000 of their options from these years. (source: Ernst & Young)
In addition, employers can designate certain stock options as ineligible for the 50% deduction. If certain stock options have been designated by your employer as ineligible for the 50% deduction, the company would have to notify you in writing no later than 30 days after the day the securities option agreement was entered into.
Being aware of how the current and changing regulatory rules impact your stock compensation plan will help ensure you get the most value out of your plan and reduce the risk of unforeseen costs.
Stock compensation plans can be complicated, an advisor that specializes in this area can save you a lot of time, money and grief when it comes to managing your plan.
Brendan Greenwood is an Investment Advisor and Financial Planner with Worldsource Securities Inc. specializing in employee stock compensation plans. He helps individuals navigate the complexity of their plans saving time and money while helping them secure financial independence.
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