Page 30 - Newcom

29
there’s no benefit—or loss—to report on the client’s terminal return.
Scenario #2: All options vested
and exercised before death
Say all your client’s options vested three years before death. She exercised all of them, but didn’t dispose of the stock. In this case there are no special rules, notes Lisa Goodfellow, a partner at Miller Thomson LLP in Toronto. The situation’s the same as for any client who owns stock.
Scenario #3: Options automatically
vest on death, all unexercised
Say all your client’s 100,000 options were unexer- cised prior to death. Her plan says the options automatically vest when she dies.
Her terminal return must include this deemed employment benefit, notes Friedman. Calculate the benefit by subtracting the option price from the FMV of the company’s stock immediately after death. So, if the stock’s trading at $23 immediately after death, and the option price is $20, the deemed benefit is $300,000:
$2.3 million (100,000 x $23) — $2 million (100,000 x $20)
Prior to 2010, CRA allowed your client’s executor to apply the 110(1)(d) deduction to that
$300,000, notes Pitch. That would have meant income tax owing on $150,000. But post-2010, the deduction can’t be used this way, so the estate must pay tax on the full $300,000.
The reason: to take advantage of the 110(1)(d) deduction, your client must possess the shares, and that means exercising options prior to death.
Pitch notes there are no spousal rollovers with stock options. “If you leave everything to your surviving spouse, the income inclusion [on the ter- minal return] would [still] occur.”
Advice for executors
If your client’s an executor, and the estate he’s responsible for is for the person in Scenario #3, it’s his job to exercise the vested options—and
to claim a different tax break if the FMV of the shares has declined between the time he calcu- lates and pays the taxable benefit for the terminal return, and the time the options are exercised.
The client in Scenario #3 has a $300,000 tax- able benefit, based on an option price of $20 and a FMV of $23. But, say, six months pass before the executor is able to exercise the options and sell the shares, and the FMV at that point is $21 instead
of $23.
CRA offers relief under section 164(6.1) of the Income Tax Act. Since the benefit that actually goes to the deceased’s estate (based on the $21 stock price) is less than the deemed benefit taxed
GETTING TECHNICAL
When a client exercises options and has to report the benefit on her tax return, she has to subtract the amount she pays for the shares from the amount she would have paid if she bought the stock at FMV the day the options were exercised.
But CRA rules also say the client needs to subtract any amount she paid to acquire the options in the first place.
“Paying to acquire options is less com- mon,” notes Michael Friedman, a partner at McMillan LLP in Toronto. An example would be where employees of a private corporation are eager to obtain equity ownership. “The employer says, ‘I’ll grant it to you, but in exchange for that right, which could prove very valuable, I want you to give me something.’ ”
30 AE 05 2015
www.advisor.ca
WHITE PACKERT/GETTY IMAGES