Cra stock option deferral

Cra stock option deferral

Author: Fib Date: 12.07.2017

Please contact customerservices lexology. Draft legislation released in August by the Canadian Department of Finance proposes changes that are expected to cause companies that grant stock options to review carefully their current stock option plans and perhaps look to alternative methods to compensate their employees.

The draft legislation follows the announcements made as part of the Canadian budget and incorporates changes which are expected to affect employee stock options in at least three ways.

The taxation of stock options | The tax planning guide

These are considered in turn below. Currently, Canadian employees may elect to defer at least in part the charge to income tax that would ordinarily arise on the exercise of their stock options until the earliest of i the year that the resulting shares are sold, ii the year the employee dies, or iii the year the employee ceases to be resident in Canada for Canadian tax purposes.

One of the notable disadvantages of this arrangement is that the tax liability will always be assessed by reference to the market value of the stock under option at the time of exercise.

Proposed Changes to Deferred Stock Option Benefits (Oh what a relief it is … Or is it?)

Consequently, if an employee elects to defer recognition of the employment benefit and the value of the stock subsequently decreases, the employee may not have sufficient proceeds from the sale or other disposal of the securities to satisfy his or her tax obligation.

The revised legislation introduces a special elective tax treatment for tax payers who have elected to defer tax, which will ensure that the tax liability on a deferred stock option benefit does not exceed the proceeds of sale of the underlying option securities following exercise, taking into account tax relief resulting from the use of capital losses on the option securities against capital gains from other sources.

cra stock option deferral

Any year in which the tax payer is required to include in income a qualifying deferred stock option benefit, the tax payer may elect to pay a special tax for the year equal to the proceeds of the sale, or other disposal, of the option securities in the case of residents of Quebec, the special tax will be two thirds of such proceeds. In applying these new rules it should be noted that only stock option benefits for which an election to defer taxation has already been made will qualify for the special elective tax treatment.

It should also be noted that: Finally, in relation to tax deferral, no deferral elections may be filed for publicly listed shares acquired after 4pm EST on 4 March The tax rules currently ensure that when an employee acquires securities under a stock option agreement, only one deduction at the employee level is provided.

T - Statement of Deferred Stock Option Benefits

This is because employers are, in this context, prevented from claiming a tax deduction for the issuance of a security. However, where employee stock option rights are not exercised but, instead, exchanged for a cash payment from the employer i. In line with the budget announcements, the revised legislation proposes to prevent employees and employers from both securing tax deductions for the same employment benefit. In addressing the situation, the stock option deduction will generally only be available to employees in situations where they exercise their options and acquire securities rather than giving up their rights in exchange for a cash equivalent.

An employer may continue to allow employees to cash out their stock option rights without affecting their eligibility for the stock option deduction but, in these circumstances, the employer must make an election to forgo the deduction for the cash payment and file copies of this election with the Canada Revenue Agency CRA. As a consequence of these legislative proposals there are a number of actions which employers may wish to take to the extent that existing option plans have been, and may continue to be, operated on a cashed-out basis, including: For securities issued on or after 1 January , any withholding income tax will need to be treated as if the employee had received the benefit as a cash-paid bonus.

It will be important for employers to consider the current measures they employ when withholding tax on options.

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cra stock option deferral

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cra stock option deferral

Register now for your free, tailored, daily legal newsfeed service. Canada November 13 Stock option benefits — tax deferral Pre-budget position Currently, Canadian employees may elect to defer at least in part the charge to income tax that would ordinarily arise on the exercise of their stock options until the earliest of i the year that the resulting shares are sold, ii the year the employee dies, or iii the year the employee ceases to be resident in Canada for Canadian tax purposes.

Proposed position The revised legislation introduces a special elective tax treatment for tax payers who have elected to defer tax, which will ensure that the tax liability on a deferred stock option benefit does not exceed the proceeds of sale of the underlying option securities following exercise, taking into account tax relief resulting from the use of capital losses on the option securities against capital gains from other sources. Stock option benefits — cashed out options Pre-Budget position The tax rules currently ensure that when an employee acquires securities under a stock option agreement, only one deduction at the employee level is provided.

Proposed position In line with the budget announcements, the revised legislation proposes to prevent employees and employers from both securing tax deductions for the same employment benefit. Latin American truth commissions: Real Estate Canada Greece Australia More Back to Top RSS feeds Contact Submissions About.

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