New employer reporting requirements for stock options
The implementation of new rules applicable to the granting of stock options has increased the burden on employers on tracking and reporting in respect of qualified and non-qualified securities. This can also have a knock-on impact on the corporate deductibility of stock option benefits.
Under Canadian tax law, beneficial tax treatment whereby only 50% of the option spread is taxable (known as the “50% deduction”) is available in respect of traditional stock options granted to employees, provided that several conditions are met.
New rules enacted by the Canadian government layer an extra limitation on the amount of options that can qualify for the deduction in certain circumstances by separating options into qualified or non-qualified securities, based on an annual vesting limit. Only options granted over qualified securities are able to benefit from the 50% deduction, with option benefits relating to non-qualified securities being taxable in full.
However, option benefits relating to non-qualifying securities will now be deductible for Canadian corporate tax purposes, provided that the required reporting obligations have been complied with.
There are two points at which an employer may need to complete reporting:
- Notifying the employee within 30 days of the grant date if any of their options are granted to acquire non-qualifying securities
- Notifying the Canadian tax authorities of any option grants over non-qualifying securities by the filing due date of the corporation for the fiscal period that includes the option grants.
There is no prescribed form for the employee notification therefore employers should ensure that the notification is either included in the option agreement itself or robust internal procedures are in place to capture all such grants and issue notices if required. As a minimum, the notice should include details of the total options granted and clearly state the number that relate to non-qualified securities.
However, for the second notification requirement the Canadian tax authorities released a specific schedule that is included with the corporation tax return therefore no separate additional reporting is required.
The schedule is titled “Information Return for Non-Qualified Securities” and requires the following details:
- Name of employee
- Date of agreement
- Vesting year
- Number of non-qualified security
- Exercise price per share
Note that the filing due date for corporations is six months after the end of the fiscal year.
The new rules add to an employer’s current administrative burden by imposing detailed tracking and notification requirements in respect of stock options falling within the new rules, with the penalty of being unable to claim a corporate deduction if the reporting requirements are not met.
Implementing a robust tracking process is key to ensuring that all obligations are complied with.