This is interesting and seems to remove some of the ambiguity, particularly around the tax treatment of CCPC options, that existed prior to the clarifications in these rules, in particular the tax treatment mechanism when exercising of the options. However I don’t think this really changed anything for startups and CCPCs.
I wish Olser would have described the tax mechanisms at play in that article. It doesn’t really do much to explain how this works in practice. My understanding is as follows but IANAL.
Essentially if a startup compensates an employee with 100,000 share options at a strike price of $1 and during some exit event that employee exercises and sells the shares at $10 (yay!) then they will be deemed to have received employment income in that year of $900k but have a deduction of 1/2 making it only $450k that they need to pay tax on. Basically it receives a treatment similar to a capital gain which isn’t too bad.
It is my understanding that a startup can run a cash buy back program for vested shares and the employee still gets the 1/2 deduction, so this could be a tangible way to have a flexible mixed retention/bonus benefit with reduced tax treatment for the employee/employer. Worth considering as a solution to the common problem with startup ESOPs which is that many savvy employees don’t assign much value to them as they figure the likelihood of being paid out of them is extremely low.
Now to complicate things, for a CCPC, the employee may want to exercise the stock options as soon as possible in order to hold the shares for two years and benefit from the CCPC capital gains exemption. This means that the capital gains of the share from the time they exercise and the time they sell could be entirely tax free (up to $800k).
Of course this does mean the employee has to put up capital and is taking some risk that the share value could decline.