A g a liquidating trust

29 Apr

This article discusses the pros and cons of stock options vs shares for employees of Canadian – private and public – companies.

The taxation issues are poorly understood and can be very confusing.

Stock options, if unexercised, avoid this potential problem.

An option gives one the right to buy a certain number of shares for a stated price (the exercise price) for a given period of time. Only in the year that options are exercised, is there is a tax liability.

As a general rule, try to give employees founders shares early in the company’s life. If a company is beyond its start up phase, there is a worry that if these shares are simply given (for free or for pennies) to an employee, CRA (Canada Revenue Agency) considers this an “employment benefit” on which income tax is payable.

However, make sure that the shares reverse-vest over time (or based on performance), so that quitters and non-performers don’t get a free ride. This benefit is the difference between what the employee paid for the shares and their FMV (Fair Market Value). For CCPCs, this benefit may be deferred until the shares are sold.

Most of the compensation came from stock options – no wonder the CRA (Canada Revenue Agency) wants to tax them!

For example, giving shares at a penny instead of granting options exercisable at 50 cents means that more options must be granted which means .

This may work well if the company is still quite young and has not raised substantial sums from independent investors.

(In the case of publicly-listed companies, options grants are the norm since FMV can be readily determined – and a benefit assessed – and because regulations often prevent the issuance of zero-cost shares.

The tax treatment is not the same for Canadian Controlled Private Companies (CCPCs) as it is for public or non-CCPC companies.

CCPCs have an advantage over other Canadian companies.