Stock option taxes and divident taxes

[Gorilla]

Anyone have any experience with taxes on stock options?
I was told that you only get taxed on 50% of your options? and 25% on your dividents?

[ExtraSlow]

A quick search on google would have answered this for you, but:

Stock options are taxed as income when you exercise them (sale price-strike price = income. So Tax rate depends on your marginal tax rate.

Dividends (from eligible Canadian corporations) are taxed at a lower rate than normal income because of the dividend tax credit.


You don't mention the other types of share grants (DSU, RSU etc) but those are taxed as income on the day they are GRANTED, which is very different than options. If they go down in value after they are granted, you can end up owing more int ax then they are worth when you sell. The way to avoid this is to sell enough to cover the tax immediately, and set that money aside for tax time.

[tenth]

The taxation of options have changed recently. Generally, so long as the options are issued out of the money (exercise price greater than or equal to share price on grant date), then you'll qualify for the 1/2 reduction in tax payable on exercise. The tax you'll pay is:

(Market price on exercise - exercise price) x 1/2 x marginal tax rate

Your marginal tax rate is likely between 32% and 39% (Alberta).

Things are now a little more complicated for 2011, as the company is now required to remit income tax and CPP (if not maxed out) on exercise to the CRA. So if you're doing a regular exercise, not only will you have to cut a cheque for the exercise price, but also for the taxes to be remitted to the CRA. You can immediately sell the shares on the open market to cover that off though.

If you have a cash settlement feature, then the 1/2 reduction of the taxable benefit may not apply. By default, instead the corporation gets a corporate tax deduction for the cash they're paying you, and you do not get the 1/2 reduction in taxable benefit. However, they are able to elect to forgo their corporate tax deduction in order to give you the 1/2 benefit. I'm not sure what industry standard is there, but currently we're electing to give that benefit to the employee.

You used to also be able to defer a portion of the taxation of the benefit until the stock was actually sold, but that was eliminated in March of 2010.

Regarding dividends, the tax rate depends on your marginal tax rate and whether they are eligible or other than eligible (should be eligible if it's a public company). Rates can be found here: http://www.taxtips.ca/taxrates/ab.htm

[tenth]

Originally posted by ExtraSlow
A quick search on google would have answered this for you, but:

Stock options are taxed as income when you exercise them (sale price-strike price = income. So Tax rate depends on your marginal tax rate.

It's actually muddied and more complicated than that simple formula.

You don't mention the other types of share grants (DSU, RSU etc) but those are taxed as income on the day they are GRANTED, which is very different than options. If they go down in value after they are granted, you can end up owing more int ax then they are worth when you sell. The way to avoid this is to sell enough to cover the tax immediately, and set that money aside for tax time.

Taxable on the date paid, not granted. More often than not the CRA runs on a cash basis. DSUs specifically are often used as part of tax-deferral arrangements for the executives who don't immediately need the cash.

[Crymson]

I did a cashless exersize on my options from my work a few months ago, and paid 22% tax.

[Chandler_Racing]

Originally posted by ExtraSlow

Stock options are taxed as income when you exercise them (sale price-strike price = income. So Tax rate depends on your marginal tax rate.
[/B]

The rules are more complicated than that. What about "in the money options" from a pubco?

[ExtraSlow]

awww fuck, I thought I was so smart.

[tenth]

Originally posted by Chandler_Racing


The rules are more complicated than that. What about "in the money options" from a pubco?

Are there really any companies granting options immediately in the money?

Basically, you'll lose the 1/2 tax reduction.