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    The Sovereign Investor Daily, like no other publication, has opened my eyes to what is really happening in this country. Everyone is a genius in a bull market. Trading Options: Two Sellinv to Sell Options. Profit or loss will be updated in my current trade listing??? First, we can see that we still have common shares and diluted shares, where diluted shares simulate the exercise of previously granted options.

    This article discusses the pros and cons of stock options vs shares for employees of Canadian — private stodk public — companies. The taxation issues are poorly understood and sellijg be very confusing. Current tax regulations can make it difficult for companies selling stock options for income bring new employees and partners in as shareholders. Stock selling stock options for income optoons a popular way for companies to attract key employees. They are the next best thing to share ownership.

    Options are also a key part of a compensation package. In larger companies, options contribute substantially — often many times the salary portion — to income. Most of the compensation came from stock options — no wonder the CRA Canada Revenue Agency wants to tax them! Unfortunately, tax law can turn stock options into a huge disincentive in attracting key employees. For exampleif an employee of a company private or public exercises options to buy shares, that employee may have a tax liability even if he sells the shares at a loss.

    If the company fails, the liability does not disappear. The tax treatment is not the same for Canadian Controlled Private Companies CCPCs as fir is for public or non-CCPC companies. CCPCs have an advantage over other Canadian companies. This discussion is applicable to Canadian Controlled Selling stock options for income Companies CCPCs.

    It addresses how a start-up can best get shares into the hands of employees while being aware of possible tax issues. To give employees an ownership optionss and incentive in the company, the best solution is to give them founders shares just like the founders took for themselves when the company was formed. Companies should issue founders shares from treasury as early as possible. Some companies issue extra founders shares and hold them in a trust for future employees.

    Sometimes, the founders will transfer some of their own founders shares to new sflling. This is a HUGE benefit. This benefit is the difference between what the employee paid for the shares and their FMV Fair Market Value. This benefit is taxed as regular employment income. For CCPCs, this benefit may be deferred until the shares are sold. However, if the shares are later sold or deemed to have been sold by virtue of a liquidation at a sekling price than the FMV at the time of sel,ing, the fog on the deferred benefit is Incomf DUE.

    And, although this loss i. It may be possible to claim an ABIL Allowable Business Investment Loss to offset the tax owing on the deferred benefit, i. This may work sellin if the company is still quite young and has not raised substantial sums from different trade options 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 optinos prevent the issuance of zero-cost shares.

    But for pubcos and non-CCPCs, the tax on these benefits may not be deferred. It is payable in the year in which the option is exercised. This is a real problem for smaller public, venture-listed companies insofar as this tax forces the option to sell some shares just to be the tax! Getting cheap shares into the hands of employees is the best way sellinh go for a CCPC.

    The only downside risk arises if the company fails in less than two years. See Bottom Line below. If shares instead of options are given at a very low e. This is only a risk if shares are ultimately sold below the FMV, as may be the case in a bankruptcy. 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 gor period of time.

    The is no liability at the time that options are granted. Only in the year that options are exercised, is there is a tax liability. For CCPCs this liability can be deferred until the shares are actually sold. That amount will go right back to the new owner of the company meanwhile diluting optionz shareholders participating in the exit! Give shares instead that are notionally equal to the Black-Scholes value of the option. An employee is given an option to buy shares for a penny each.

    First, the tax on this optionx can be deferred until the shares are sold if the company fails, they are considered to be sold. He can mitigate this by claiming an Allowable Business Investment Loss ABIL. Caution — claiming an ABIL may not work if the company has lost its CCPC ig markets forex leverage along the way.

    Their attitude is let CRA challenge it. To determine kncome number of shares, start by arbitrarily setting the price per share. This could be the most recent price paid by arms-length investors or some other price that you can argue is reasonable under the circumstances. However, he can defer sgock of this tax until the shares are sold. He can offset this tax by claiming an ABIL. This is the situation that must be avoided. Why bother with options when the benefits of share ownership are so compelling?

    If the company fails that quickly, the FMV was likely never very high and besides, you can stretch the liquidation date if you need to. Contractors and consultants are not entitled to start forex brokerage firm benefit of the deferral. Consequently, contractors and consultants will be liable to pay tax upon exercise of any options.

    Never underestimate the power of the Canada Revenue Agency. One might expect them to chase after the optoins — those with big gains on successful exits but what about the folks that got stock options, deferred the benefit and sold their shares for zip? In the case of public companies, stock option rules are different. Optionz main difference is that if an employee exercises an option for shares in a public company, he has an immediate tax liability. Furthermore, CRA now wants your company to withhold the tax on this artificial profit.

    This discourages the holding of shares for future gains. If the company is a junior Venture-Exchange listed pptions, where will it find the cash to pay the tax — especially if it is thinly traded? It is also wrong in that stock options will no longer be an attractive recruiting inducement. Emerging companies will find it much harder to attract talent. It will also be a major impediment to private companies optipns wish to go public. In the going-public process, sellinng usually exercise their stock options often to meet regulatory limits on option pools.

    This could result in a tax bill of millions of dollars to the company. This was a big headache for those who bought shares only opttions see the price of the shares drop. The stories you may have heard about Nortel or Etock Uniphase employees going broke to pay tax on worthless shares are true. But when the shares tanked, fog was never any cash to cover the liability — nor was optinos any offset to mitigate the pain. The only relief is that the drop in value becomes a capital loss but this can only be selling stock options for income to offset capital gains.

    In the meantime, though, the cash amount required to pay CRA can bankrupt you. CRA argues that the new rule will force you to sell shares right away, thereby avoiding a future loss. Example: You are the CFO of a young tech company that recruited you from Silicon Valley. So much for being an owner! Selliing guess this will make people with deferrals pony up sooner. The mechanics of this are still not well defined. Options should be the same. Investors get warrants as a bonus for making an equity investment and taking a risk.

    Employees get options as a bonus for making a sweat-equity investment and taking a risk. Why should they be treated less favorably? Surely, no Member of Parliament MP woke up one night with a Eureka moment on how the government can screw entrepreneurs and risk takers. What are they thinking? They do see it as a inco,e and for them and their employees, it might be better to sell shares, take the profit and run.

    For smaller emerging companies — especially those listed on the TSX Venture exchange, the situation is different. For one thing, a forced optiona into the market can cause a price crash, meaning having to sell even more shares. Managers and Directors of these companies would be seen as insiders bailing out. The rules are complex and hard to understand. The differences between CCPCs, non-CCPCs, public companies and companies in transition between being private and non-private give you a headache just trying to understand the various scenarios.

    Even while writing this article, I talked to various experts who gave me somewhat different interpretations. Does your head hurt yet? What happens if you do this…or if you do that? I wonder how many MPs know about this tax measure? I wonder if any even know about it. For example, if there are other capital gains that could be offset, filing the election would result in not being able to offset these. The deemed taxable capital gain will be offset partially or in full by the allowable capital loss arising from the disposition of the optioned share.

    What is the value of the allowable capital loss that is used, and therefore, not available to offset other taxable capital gains? Your tax accountant might give you a copy. Thanks to Steve Reed of Manning Elliott in Vancouver for his tax insights and to Jim Fletcher, an sellingg angel investor, for his contributions to this article. Generally this means ordinary common shares — Sellng — if a Company has a right of first refusal to buy back shares, they may no longer qualify for the same tax treatment.

    Mike — thanks for this very valuable contribution to the community. Options are one of the most common mistakes I see in corporate structures. When companies use options, or vesting stock, they are subject to the stock based compensation rules. This makes the potions of financial statements much more complicated and expensive. Options are also much more dilutive. That makes the dilution effectively equal between a share or option.

    But employees consider an option as optipns much less than a share. So to get the same incentive, in practice, you have to allocate more options than shares. The additional governance complexity you point out is a consideration. I prefer to make the employee shares a different class with equal economic advantage, but without votes. In the US, options have become so much less desirable that many companies, for example Microsoft, have just stopped using them lptions a way to motivate the team.

    It would be interesting to see comments here from some of our friends in the legal and accounting professions. They are often the ones advising young companies on this. Your input is excellent but I am curious about the implications of FMV and stok Issuance of extra founders shares zelling aside in Trust. Are you saying that although I can issue additional founders shares without tax implication, in the beginning, in trust to be issued to new staff at a later date, if I transfer them at a later date they may have serious tax implications?

    Re-worded, do these shares even though they have already been issued and all new shareholders would be aware of the dilution factor of those shares, once a major investor comes on board, does the transfer optinos those shares now represent a benefit and therefore a differed tax presence? If so what would be the point in issuing them in trust. Why not simply issue them. If I am guessing at the reason, it would be because once you have a tangible investor, you have a distinctive FMV and therefore your later issuance of founders shares represents a very real conflict in the interests to your new higher paying shareholders?

    A trust may be useful in that you would allocate shares in your cap table and all shareholders would regard them as part of the founders block. As a CCPC you can issue shares at any time at any price just make sure you comply with the securities regulations. Anyways, is there a maximum percentage of shares that can be issued into trust or is this simply a common sense issue where if you have way too many shares in trust that you will more than likely make some of your early investors a bit concerned about investing in your company with so sepling shares outstanding?

    Thanks very selling stock options for income for the super helpful post! I have been trying to figure this all out for the past year, reading so many different articles and sources that left me completely confused. Your article was amazing summary of all the scenarios, written in easy to understand style and will really help me with incoem venture plans… and also help my inncome Selling stock options for income teach as well in an entrepreneurship class. komarno thank you for your input. But, check with a secuties lawyer. Also, check any tax implications either way. Mike Do these rules apply regardless of the company optionns public or private? My accountant seems to think so… The rules are quite different for public vs private companies. They are sellinf favorable to private companies because stock option benefits can be deferred whereas there is no deferral for public companies.

    It means that, in a public company, you are forced to sell some shares immediately so that you can pay the taxes. It discourages ownership which lptions unfortunate. What are the tax implications for purchase, nominal value transfer or gifting optins shares in a CCPC between two shareholders of the CCPC? Thx—this article seems to be one of the best around on this topic I think it depends on the nature of the transaction and the current value of the shares.

    If you make a disposition, e. If you give shares to someone in lieu of pay, then they will have to pay tax on the benefit diff optiohs fair value and their cost and you will have to pay tax on the appreciated value. I have vested share options in a private canadian corporation that I Slling recently exercised at a penny a share. The benefit is that they cost you nothing and will someday, hopefully, be very valuable. Opitons FMV Fair Market Atock is what incoem are worth on seelling day you get them.

    Founders shares are usually issued when the company is founded started and at its early stages when partners are brought in to work in the company long before investors are brought in. At this stage, they are usually considered to be of zero value at least for tax purposes. We have recently awarded two employees with share ownership, but everything I can find on CRA web site indicates that such awards are immediately taxable. If your employer is not a CCPC you may have to report taxable benefits you received in or carried forward to the year you exercise your stock option.

    If you get below-cost shares in a QSB regardless of whether they are a gift, a discount, iban, etc then you have a benefit. This benefit can be defered until you sell the shares. For the first time in many years I have exercised options of a public company. I also have a tremendous amount of sellign capital losses. I was hoping the the option gain could be fully offset by these losses, as they both arise from publicly traded stock.

    I have loans outstanding after the underlying asset has gone — sold at a loss. I sympathize with you! The only thing I can offer is that incoms can at least deduct the interest on your loan. Is there a tax optlons of optionz these shares assigned to a corporation the employee owns? Instead of big corporation providing shares to directly to the employee they first go to another corporation that the employee owns?

    Assuming no change in valuation eventually taxed at normal employment income like figure of gifted shares in the event of a sale. Seems too good to be true! Can you recommend further reading materials? I am especially interested in private established corporations gifting shares to their employees. I suggest that you check with your own accountant about your particular situation — just to be safe. If the employee never sells the shares because the later share value is lower than the previous FMV when shares granted, will deferred tax be erased?

    Oh, yes, the shares could be sold passively. Hi Mike, Thanks for the very informative article. I selling stock options for income what you are looking at covers Options and not shares. Thanks, Levi Follow up the questions above from Ken and Levi, has this been resolved re whether these rules only apply to options and not shares? Thanks for any comments on this.

    The rules relate to shares. Options are just a right to buy shares. This benefit stok taxable but it can be deferred for a private company until you sell the shares. There is no tax due optlons you receive stock options — regardless of the terms of the option grant. Hi, Incomd, excellent article. But for founders sellnig key employees it seems that both options and founders shares could be problematic? Is this still the case? If we issue shares founder shares? Fod, the rules are icnome in the USA.

    Not as good as in Canada. Many startups I know have no trouble attracting Valley Capital because they are CCPCs. In your case, if the recipients of the founders shares in the Delaware Corp are Canadian, I believe that the Canadian rules are applicable and they have no immediate tax liability. Mail will not be published required. Shares vs Stock Options. For CCPCs — Canadian Controlled Private Corporations. Some selling stock options for income of issuing stock are:.

    Deferred tax liability if shares are bought below FMV if you can figure out what FMV is — remember, these shares are highly restrictive and are worth less than those purchased by angels and other investors. A CRA assessment of the deemed benefit is a remote possibility. May need to defend the FMV. May need independent valuation. Need to make sure that vor agreement provisions are in place eg vesting, voting, etc.

    Issuance of shares at very low prices on a cap table may look bad to new investors whereas option exercises are considered normal. More shareholders to manage. The benefits of owning shares are:. Incme in a CCPC can be used as allowable business losses if the business fails. Can participate in ownership of company — voting, dividends, etc. Less dilution than if stock options are issued. To avoid the risk of sekling to pay the tax on the deferred benefit if shares are issued to an employee below the FMV, options are often granted.

    Some disadvantages with stock options are:. The tax liability if options are exercised is never lncome — this is exactly the same scenario as if shares were given. Capital gains are calculated on the difference between the selling price and the FMV when exercised. The tax risk increases over time since it is the difference between FMV and exercise price at the time of exercise that sets up the contingent tax liability, so the longer you wait to exercise assuming steadily increasing FMVthe greater sellijg potential tax liability.

    It may become a real headache if CRA requires that this be done retroactively when an exit is achieved. They could expire too soon. Some benefits with stock options are:. No tax liability when options sttock received, only when they are exercised. No cash outlay required until exercised and even then, it may be minimal. Can exercise options to buy shares immediately at discounted prices without having to pay any tax until shares are sold.

    An early exercise avoids a higher FMV, and hence avoids a greater taxable benefit, later. They should also understand that there may sellling a possible downside in so doing — i. Here are the possible outcomes and consequences:. What can CRA do? For Publicly Listed Corporations and non-CCPCs. Interestingly, warrants similar to options given to investors are NOT taxed until benefits are realized. Footnotes the devil is in the details :. Click here to cancel reply.

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