Stock-based remuneration is a common form of compensation in Canada, especially for executives, employees, and directors of publicly traded companies. It typically includes stock options, restricted stock units (RSUs), and performance shares.
Scope:
Here's an overview of how stock-based remuneration works and how it's taxed in Canada. The key factor to note in Canada is that the security options become taxable when the employee acquires the shares whether the employee sells the shares or not.
Security options can be broken down into three types of plans:
Stock Option
Description: This plan allows employees to purchase shares of their employer’s company or of a non-arm’s length company at a predetermined price.
Taxation: The benefits are subject to C/QPP and income tax.
Year End Reporting: These amounts are reported in Box 14 and Code 38 of the T4 and Boxes A and L of the RL-1. This is the only type of stock option plan where a 50% deduction is reported in Code 39 of the T4 and a 25% deduction is reported in Code L-6 of the RL-1.
Employee Stock Purchase Plan (ESPP)
Description: This plan allows employees to acquire shares at a discounted price, (i.e., for an amount that is less than the value of the stock at the time of the acquisition of the shares). Many ESPPs provide for a delay in the acquisition of the shares as follows: an employee contributes a certain amount over a period of time and at pre-specified periods, the employee can purchase shares at a discount using the accumulated contributions. The benefit is equal to the value of the shares, minus the amount paid.
Taxation: The benefits are subject to C/QPP and income tax.
Year End Reporting: These amounts are reported in Box 14 and Code 38 of the T4 and Boxes A and L of the RL-1.
Stock Bonus
Description: Under this plan, an employer agrees to give the shares to an employee free of charge. In effect, the employer agrees to sell or issue shares to the employee for no cost. Restricted stock units (RSU) normally fall into this category.
Taxation: The benefits are subject to C/QPP and income tax.
Year End Reporting: These amounts are reported in Box 14 and Code 38 of the T4 and Boxes of the RL-1.
Capital gains deduction only applicable to Stock Option Plans:
The 50% deduction is not reported in Code 39 of the T4 nor is the 25% deduction reported on the RL-1 in Code L-6 for ESPP’s or stock bonus plans, as the benefit is not based on an agreement between the employer and the employee allowing the employee to purchase shares at a fixed per share price, in the same way as with stock option plans.
Tax Planning Considerations:
Employees may have the option to defer the taxation of stock-based remuneration through certain strategies, such as exercising stock options or selling shares in a tax-efficient manner.
Timing the exercise or sale of stock options or RSUs can have significant tax implications, depending on the individual's overall tax situation and market conditions.
Regulatory Compliance:
Stock-based remuneration plans are subject to various regulatory requirements, including those set forth by the Canadian Securities Administrators (CSA) and the Canada Revenue Agency (CRA).
Publicly traded companies are required to disclose details of their stock-based compensation plans in their financial statements, including the number of options granted, exercise prices, vesting schedules, and the fair value of the options or shares at the grant date.
Accounting Treatment:
Companies must account for stock-based compensation expenses in their financial statements based on the fair value of the options or shares at the grant date.
Fair value is typically estimated using option pricing models (for stock options) or market prices (for RSUs and performance shares).
Conclusion:
Stock-based remuneration is an important component of compensation packages in Canada, particularly for employees and executives of publicly traded companies. Understanding the tax implications and regulatory requirements associated with stock-based compensation is essential for both employers and employees to effectively implement and manage these compensation plans.
Resources:
Canada Revenue Agency:
What is a security (stock) options taxable benefit
Withholding payroll deductions on options