Upload
others
View
8
Download
0
Embed Size (px)
Citation preview
May 2019
Employee Stock Option Plans (ESOP)
What is an ESOP?
3© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
− 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
5© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
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
7© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
− 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
9© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
− 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
11© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
− 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
13© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
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)
14© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Grant date
− No tax implications− Determine if options are “in the money” Exercise price < fair market value (FMV)
15© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
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
16© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Disposition date− Stock option benefit included in income for CCPC employees− Capital gain or capital loss: FMV – ACB
Other tax considerations
18© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
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
19© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
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)
20© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Employer tax reporting requirements
− T4 Reporting Completed at time stock option benefit is included in income Report qualification for the ½ deduction
21© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
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
22© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
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
23© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
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
© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. 25
Aaron GillespiePartner Tax, KPMG [email protected](905) 523 2266
Krystle StewartSenior Corporate Law Clerk, KPMG Law [email protected](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.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 21410
KPMG Enterprise is a registered trademark of KPMG International Cooperative (“KPMG International”), a Swiss entity and is used under license by KPMG LLP, a Canadian Limited Liability partnership and a member firm of the KPMG network of independent member firms.
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
kpmg.ca/enterprise
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.