When a corporation agrees to sell or issue its shares to an employee, or when a mutual fund trust grants options to an employee to acquire trust units, the employee may receive a taxable benefit. The taxable benefit is the difference between the fair market value of the shares or units when the employee acquired them and the amount paid, or to be paid, for them, including any amount paid for the rights to acquire the shares or units. Also, a benefit can accrue to the employee if his or her rights under the agreement become vested in another person, or if they transfer or sell the rights.
The shares or trust units are considered to be acquired when legal ownership of the shares has been transferred and the vendor has entitlement to receive payment. In general, this would occur where the shares have been transferred to the employee/broker and paid for.
The exercise or disposal of an option will result in a taxable benefit when:
- The employee decides to exercise an option and acquire securities at less than fair market value.
The exercise or disposal of an option will not result in a taxable benefit when:
- The benefit conferred by the option agreement was not received by reason of the employee's employment.
- If the employee is also a shareholder or unit-holder, it is a question of fact whether he or she received the shares or units as a shareholder, a unit-holder or an employee.
- There was no intention to issue securities under the terms of the agreement, but there was an intention to issue a cash payment to the employee as a means of compensation (that is, under a phantom stock plan)
- Natasha Smyth, B.SC.(Agr.), CPM
For more information contact Info@onpayroll.ca