-person in question is a Canadian resident/citizen
-he/she acquires shares of a private US startup through an RSPA (Restricted Stock Purchase Agreement) vesting over a number of years while working, living, paying taxes in Canada
-although no money changes hands the receiver of the shares is considered a "purchaser" with a purchase price (in such situations US residents typically file 83(b) elections to pay taxes up front - https://www.investopedia.com/terms/1/83b-election.asp )
-at the start 100,000 shares are offered, valued at $0.01 each, book value $1,000
-vesting occurs over 4 years, so 2083 shares/month for 4 years
-a hypothetical US resident filing an 83(b) pays taxes on $1,000 in year 1 for all 100,000 shares to avoid possible increased taxes during vesting (ie. if the value of the company increases). Cross-border US/Can tax accountants have suggested the same applies to the CRA for the Canadian resident/citizen (ie. pay tax on initial book value of all shares as if it were income in year 1 - all shares are considered "acquired" and taxable).
Scenario 1 - company goes bankrupt, capital loss $1,000
Scenario 2 - company is bought for cash, capital gain = cash received - $1,000
Scenario 3 - company is sold for shares on an ex-NA exchange but shares are received over 3-4 years
1. Is there any strategy to reduce potential capital gains? or do you simply take it as a gain on an individual return? Scenario 3 at minimum allows some staggering and choice of when to sell shares. Scenario 2 does not.
2. For Scenario 3 ACB would just be the $1,000 split over the years shares are received, correct?
3. Is the cross-border accountant correct (ie. income tax is owed on the initial book value of the shares offered)? Or is vesting a taxable event? Or is none of it taxable in Canada except for future possible gain with a book value of $0? If those shares are essentially worthless (non-redeemable for anything) I see an argument for the BV of $0.
4. Are the any US tax implications for the Canadian resident/citizen?
Thank you for any insights
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Moderator: Mark T Serbinski CA CPA
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