Moving Back to Canada and Stock Options

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paula
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Moving Back to Canada and Stock Options

Post by paula » Fri Nov 19, 2004 4:33 am

1. Living in US since 91 first as student then working.
2. H1B status presently, no green card.

I'm moving back to Canada and have a question regarding stock options (both ISO and NQO). I have 90 days after termination to exercise my vested options. I will be stopping work around Dec. 23. Now for the questions:

Should I exercise the options before moving back to Canada or after?
Should I attempt to split my exercise over 2004 and 2005 to get more deductions and AMT relief or do it all in one shot?

Mark T Serbinski CA CPA
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Post by Mark T Serbinski CA CPA » Sat Nov 20, 2004 11:11 pm

Hi Paula:

Well, your qualifying ISO's held over one year are taxed in the U.S. as long term capital gains. This is good, since the LT capital gains tax rate is 5% for income under $144,000 and 15% over that.

Non qualifying options are taxed when the option is granted, so you would have already paid tax on them.

In Canada, options are taxed as employment income at your top marginal rate (46.5 over $60K CDN), but may be subject to a Para. 110(1)(d) deduction which has the effect of taxing the option as a capital gain.... which is taxed at half the marginal rate or about 23%.

It seems that you are better off exercising and paying the tax on the options prior to becoming a resident of Canada again.



Regards,

Mark T. Serbinski, CA, CPA

nelsona
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Post by nelsona » Sun Nov 21, 2004 12:23 am

Would the ISO capital gains be excludable from US taxation based on Art. XIII.4 of the treaty, if paula were to wait until after re-establishing Cdn residency?

I realize that the Cdn taxrate would be higher if she waited. Just wanted to know if options are excludable.

<i>nelsona non grata</i>

Norbert Schlenker
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Post by Norbert Schlenker » Sun Nov 21, 2004 1:36 pm

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote"><i>Originally posted by Mark T. Serbinski, CA CPA</i>

Hi Paula:

Well, your qualifying ISO's held over one year are taxed in the U.S. as long term capital gains. This is good, since the LT capital gains tax rate is 5% for income under $144,000 and 15% over that.

Non qualifying options are taxed when the option is granted, so you would have already paid tax on them.

In Canada, options are taxed as employment income at your top marginal rate (46.5 over $60K CDN), but may be subject to a Para. 110(1)(d) deduction which has the effect of taxing the option as a capital gain.... which is taxed at half the marginal rate or about 23%.

It seems that you are better off exercising and paying the tax on the options prior to becoming a resident of Canada again.
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

It's not generally a great idea to have one's debut post be the debunking of info from a CA, CPA, and forum sponsor, but damn the torpedoes.

The advice above re ISOs is useless given the circumstances. Paula is leaving her job in a month, has only 90 days to exercise the options, and will be back in Canada before the one year waiting period is up. If she exercises the ISOs for cash, they are fully taxable no matter where she lives. If she exercises in the US, holds the stock, and then repatriates, she isn't taxable in the US at all and is only taxable at cap gains rates in Canada on any increase after reestablishing residence.

The advice re NQSOs is flat wrong. They are taxed in the US when <b>exercised</b> at full marginal rates. Both state tax and FICA are also chargeable. The proper advice on NQSO exercise depends on which state Paula is leaving, which province she is going to, what her income is already this year, whether she's maxed out on FICA, whether she has an interest in establishing full SS/Medicare eligibility and how close she is to 40 covered quarters, what her income is likely to be after she gets to Canada, et cetera.


paula
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Joined: Fri Nov 19, 2004 4:21 am

Post by paula » Mon Nov 22, 2004 2:45 am

Here's some more information on my situation that may help things.

I live in California which is great for the weather but not so great for other things like state tax rates. I'll be making around $130k this year and an unknown amount next year since I have no employment lined up at this time. I'm moving to Ontario.

For the ISO's, if I exercise but do not sell the purchased shares, I thought that AMT comes into play for the difference between the fair market value at exercise and the total amount paid to exercise. That's why I was asking about splitting my exercise over two years. Perhaps, this would let me use the AMT exemption in 2005 but I don't know how it phases out with partial year residence in the US.

For the NQSO's, splitting over two years hopefully lets me make use of the lower marginal tax brackets in 2005 that are taken up by employment income this year.

Thanks for any further information.

paula
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Joined: Fri Nov 19, 2004 4:21 am

Post by paula » Mon Nov 22, 2004 2:47 am

Is the 5% tax rate really up to $144,000 in income? I thought that 5% only applied to the lowest two tax brackets and everyone else paid 15%.

Norbert Schlenker
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Post by Norbert Schlenker » Mon Nov 22, 2004 4:24 pm

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote"><i>Originally posted by paula</i>

Here's some more information on my situation that may help things.

I live in California which is great for the weather but not so great for other things like state tax rates. I'll be making around $130k this year and an unknown amount next year since I have no employment lined up at this time. I'm moving to Ontario.<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

So your 2004 marginal rate is probably >35% (fed + CA + Medicare). The worst marginal rate in Ontario is about 46% and, if you're likely to have a much smaller income in 2005, it could be much less (<C$70k -> 33% marginal in Ontario).

I see no good reason to exercise anything, ISO or NQSO, in 2004.

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