Stock options - tax consequences in Canada

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

Moderator: Mark T Serbinski CA CPA

Post Reply
mike.lehmann
Posts: 1
Joined: Sat Dec 29, 2007 3:57 am
Location: Vancouver

Stock options - tax consequences in Canada

Post by mike.lehmann »

I have not seen this question posted via searching using the forum search and google against this forum so apologies if it is too simple or is hidden in here.

I returned to Canada from living in the US in 2005. I am a Canadian citizen living in Canada permanently. I work for the same company - US based - though now am employed by the Canadian subsiduary so am paid in Canadian $ and pay Canadian taxes now.

My issue revolves around the tax consequences of my stock options, granted as part of my employment, that I am planning to sell this year. I have stock options that are still vesting from my time in the US and new stock options granted since.

All these options are held in a Canadian trading account - my company moved them as part of my transfer to Canada.

I will do the basic math example (using made up numbers for simplicity ) here and then follow with my questions:

Company stock options granted 2004 (stock traded on NASDAQ):

1000 options at $10 (fair market value at time of grant). Stock price today $20. Gain after selling $10K

Company stock options granted in 2006 (stock traded on NASDAQ):

1000 options at $15 (fair market value at time of grant). Stock price today $20. Gain after selling $5K

Questions:

1. While reading various tax documents I can track down it seems like I am allowed to treat 50% of the gain as taxable income rather than the full 100% of the gain. Thus for my 2006 profit I would add $2,500 to my income rather than $5,000 and be taxed appropriately. Is that correct?

My concern here is the documents I read seem to indicate this 50% reduction applies only to *Canadian Controlled Private Corporations* (CCPC) whereas my options are for a large US based company trading on the NASDAQ (though I am employed by the Canadian subsiduary).

2. I am struggling - perhaps for no good reason as it comes into effect after the fact - to understand if the tax protocol signed in September - http://www.fin.gc.ca/news07/data/07-070_1e.html - whether or not the 2004 gain has any tax consequences in the US? I have filed $0 tax returns in the US since 2005 on but wonder if this sale in Canada of options granted in the US has any US based tax consequence (e.g. the apportionment language of that protocol). I am assuming not as this was done prior to the protocol but am not sure of rules (if any) prior to the protocol.

3. Not really a US/Canada question but a newbie option tax reporting one - ignore if inappropriate. As I have not dealt with options before, it looks like the tax is reported on at T5008 form here in Canada. With stock trades this looks pretty straightforward. With an option does one put the grant price as the book value and treat it as an ordinary stock sale that happened to be an option? Or is there some way of recognizing it was an option sale (I don't plan on holding the resulting stock)? The form doesn't lend itself to putting option data in there.

Thanks for any pointers on these questions.

Mike.
Norbert Schlenker
Posts: 68
Joined: Sun Nov 21, 2004 1:22 pm
Location: The Dry Side of the Wet Coast
Contact:

Post by Norbert Schlenker »

1. The 50% exclusion from income applies even to options from public corporations now but requires specific paperwork. Getting that paperwork in prescribed form out of a US company isn't going to be easy.

2. It's hard to know if the new protocol changes anything. I know of a case where an exercise of an option (non-qualified, not ISO) granted in the US by a then resident of Canada was treated as fully taxable in the US (and in the state of last employment as well). Are your options NQSO or ISO?

3. It would be surprising if you reported anything on a T5008. If you exercise and then sell immediately, whether it's NQSO or ISO, it's employment income in both the US and Canada.
Post Reply