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TAX CALCULATION
Say a client exercises 25,000 options once they’ve vested. The fair market value (FMV) at the time of exercise is $27 per share; the option price is $20.
The FMV of 25,000 shares is $675,000 (25,000 × $27), and your client’s purchase price is $500,000 (25,000 × $20).
Your client’s taxable employment income for the year she exer- cised the options will include $175,000:
$675,000 – $500,000 = $175,000
The client doesn’t have to sell the shares to trigger tax. Exercising an option by purchasing the shares creates a taxable benefit.
Instead of paying tax on $175,000, Section 110(1)(d) of the Income Tax Act says your client can claim a deduction so she only pays tax on half that amount.
The deduction has a capital-gain-like result, but the benefit is not a capital gain; it’s employment income. So, capital losses on other positions cannot offset tax triggered by exercising stock options.
option price in the offer of employment has to be $20 for her to qualify for the tax deduction. The deduction is meant to incentivize employees to help businesses grow and to raise stock prices.
Death, options and taxes
Multiple tax scenarios can arise on death, depending on whether your client’s exercised some, none or all her options, and how her com- pany’s plan treats unvested options.
Some plans cancel unvested options on death, notes Bernard Pinsky, a partner at Clark Wilson LLP in Vancouver.
Better plans vest all unvested options immedi- ately on death. About 75% of major Canadian companies fall into the latter group.
Scenario #1: Options cancelled on death
Options that don’t vest on death are cancelled and their value is nil, explains Katy Pitch, an associate with Stikeman Elliott LLP’s Tax Group in Toronto. So, from a tax perspective, 30
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