Employee Stock Option Plans (ESOP)€¦ · Corporate law considerations. Price per share. Number of...

May 2019

Employee Stock Option Plans (ESOP)

What is an ESOP?

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− Security based compensation

− Option of owning shares without having to contribute capital to the company

− Employee’s right to buy certain shares from their employer at a fixed price

What is an ESOP?

Corporate law considerations

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Corporate law considerations

Price per share Number of shares to offer

Validity/expiration of the option

Vesting schedule

Incentive (time based or performance based)

EligibilityESOP

Setup of the ESOP

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− Obtain shareholders’ and directors’ approval

− Amend the articles, if necessary

− Reserve shares for issuance under the ESOP

− Draft ESOP documents

− Agreement

− Form of grant

− Form of notice

Setup of the ESOP

Granting/ exercising the options

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− Confirm there are sufficient shares in the pool

− If not, increase pool size

− Obtain directors’ approval

− Provide a copy of the ESOP to eligible employees

− Employees exercise the option in accordance with the vesting schedule

Granting/ exercising the options

Maintenance of the grants

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− Track grant dates, vesting dates, and expiration dates

− Update ledgers, registers, and certificates

− Record all ESOP documents (agreement, grants, notices, etc.) in the corporate records

Maintenance of the grants

Taxation of ESOP

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Taxation of an ESOP - three main events1. Grant date2. Exercise date3. Disposition date

− Must consider the tax implications to employers and employees at each date

− Different implications for public corporations and Canadian-controlled private corporations (CCPC)

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Grant date

− No tax implications− Determine if options are “in the money” Exercise price < fair market value (FMV)

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Exercise date

− Calculate stock option benefit: FMV – exercise price = benefit

− Income inclusion for public company employees− Deferral of income for CCPC employees Must be dealing at arm’s length with employer

− Adjusted cost basis (ACB) = FMV

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Disposition date− Stock option benefit included in income for CCPC employees− Capital gain or capital loss: FMV – ACB

Other tax considerations

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Stock option deduction

− Stock option deduction = ½ of benefit− Prescribed shares (plain vanilla common shares) − Public company employees: options not “in the money” at grant date

− CCPC employees: options not “in the money” at grant date, or shares held for two years

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Capital gain

− ½ taxable− Able to utilize capital losses from other sources− For CCPC employees review Qualified Small Business Corporation

(QSBC) qualification Multiple tests to be met (generally an active business carried on in

Canada) $866,912 limitation per individual in 2019 Tax savings of approximately $232,000 (in the province of Ontario)

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Employer tax reporting requirements

− T4 Reporting Completed at time stock option benefit is included in income Report qualification for the ½ deduction

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Employer source deduction requirements

− Changes made in 2010− Source deductions required at time stock option benefit is included in

income− Employers to review all cash payments to employees

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Other issues

− Valuation of shares FMV to be determined at all three dates more cumbersome for private corporations

− To receive favourable tax treatment options must be received in capacity as an employee

− Different types of plans captured by different rules with different tax results carefully worded documents is key

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2019 Federal budget impact

− Cap on the preferential personal tax treatment (1/2 deduction) $200,000 annual cap Cap is based on the fair market value of the underlying shares

− Applies to “large, long-established, mature” companies− Details to be announced before summer of 2019− Changes to be on a prospective basis− Actions to be considered: Timing of the granting of options Implement tracking of options (eligible for the deduction/not eligible for

the deduction)

Thank you

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Aaron GillespiePartner Tax, KPMG LLPatgillespie@kpmg.ca(905) 523 2266

Krystle StewartSenior Corporate Law Clerk, KPMG Law LLPkrystlestewart@kpmg.ca(416) 218 7879

To learn more about Employee Stock Option Plans, please contact Aaron Gillespie.

You can also visit our website KPMG private company tax to learn more.

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Information is current to 7 May 2019.

This presentation may contain a discussion or analysis of decided tax cases. Any discussion or description of the facts of the case or the positions argued by the parties is based solely on publicly available information. For greater certainty no confidential client or taxpayer information is disclosed.