Oct 25, 2023
Overview – Emigrating from Canada with Stock Options
Most forms of remuneration for employment are taxed as income in the year they are received by that employee. For example, income from a salary is included in the year that the salary is paid. Employee stock options are an important exception to this general rule. A stock option is a contractual right to purchase a certain number of shares of a specific corporation at a price specified in the option contract (the “strike price” of the option). Employee stock options plans grant employees the right to purchase shares of their employer or another corporation in their employer’s corporate group.
There is no immediate income inclusion when an employee is granted a stock option. Instead, normally the employee has an income inclusion when the employee exercises the stock option. If at the time the option was granted, it gave the right to purchase shares in a Canadian-controlled private corporation, then there will no be income inclusion when the option is exercised, and instead there is an employment income inclusion for the option when the employee sells the shares of the Canadian-controlled private corporation.
The amount of the employment income inclusion on the exercise of stock options is the fair market value of the shares minus the price paid for the shares and any amounts paid to be granted the options. The amount of the income inclusion is the same for options to purchase Canadian-controlled private corporation shares, only the time at which the income is reported is different as described above. A deduction equal to half of the employment income inclusion is available if the employee was dealing at arm’s length from his or her employer and the strike price of the option was at or above the fair market value of the shares when the option was issued. Alternately, this deduction can also be available if the option was for Canadian-controlled private corporation shares and when the employee exercised the option, the shares were held for at least two years.
Emigration Deemed Disposition Does Not Apply – Emigrating with Stock Options
When a person ceases to be a Canadian tax resident, that person is deemed to have sold their capital property at fair market value then immediately required it for its fair market value. There is however an exclusion from this deemed disposition for the “excluded right or interest” of the taxpayer, which includes employee stock options.
If a taxpayer was granted employee stock options by a Canadian-controlled private corporation in such a manner that the employment income inclusion applies only when the shares acquired on exercising the options are sold, then the shares will be subject to the deemed disposition, but the employment income inclusion that would ordinarily be triggered by a disposition does not occur.
Exercising Canadian Stock Options as a Non-Resident – Emigrating with Stock Options
When an individual employed in Canada is granted a stock option, Canada will ultimately tax the individual even if by the time the corresponding income inclusion is triggered the individual is not a tax resident of Canada and no longer employed in Canada. The timing of the income inclusion is the same as with individuals who remained in Canada. When a non-resident exercises a stock option granted to them as compensation for previous employment in Canada, they will need to file a non-resident income tax return and report their income from the exercise of the option as described above.
Similarly, if a non-resident sells shares obtained from an employee stock option granted by a Canadian-controlled private corporation, the non-resident will have to file a Canadian return in that year and report the associated employment income. The amount of income is calculated in the same manner as for Canadians exercising options or selling shares acquired through Canadian controlled private corporation issued employee stock options.
Pro Tax Tips – Emigrating with Stock Options
The Canadian tax rules for employee stock options are complex. In order to ensure compliance with these rules and minimize tax payable it is essential to consult with an expert Canadian tax lawyer. Individuals with stock options who plan to emigrate should consider whether overall Canadian and foreign tax payable will be higher if they exercise their option either before or after they emigrate from Canada. In some circumstances foreign jurisdictions may all individuals to claim foreign tax credits to offset the Canadian tax on exercising options.
FAQ
What is an Employee Stock Option?
A stock option is a contractual right to purchase a certain number of shares of a specific corporation at a price specified in the option contract (the “strike price” of the option). Employee stock options plans grant employees the right to purchase shares of their employer or another corporation in their employer’s corporate group.
Is a grant of employee stock options taxable?
Employee stock options do not result in an income inclusion at the time they are granted to an employee. Normally, there is an income inclusion for the employee when the employee exercises the option. If the options were issued by a Canadian-controlled private corporation, the income inclusion will be in the year the employee disposes of the shares acquired by exercising their option instead.
Are Employee Stock Options Subject to the Deemed Disposition on Emigrating from Canada?
Employee stock options are excluded from the deemed disposition that applies when a Canadian tax resident emigrates from Canada.
Do I have to pay Canadian tax if I exercise Canadian Employee Stock Options after Emigrating from Canada?
The income inclusions associated with Canadian employee stock options are still considered Canadian source employment income even after you cease to be a Canadian tax resident. If you exercise employee stock options after moving away from Canada, you will need to file a non-resident return to report your income and pay Canadian tax. If you have options from a Canadian-controlled private corporation you will need to report the employment income inclusion to Canada when you dispose of the shares acquired through the options even if you are not a Canadian tax resident at the time.
