Form - Exercise of an Incentive Stock Option
An employee stock option ESO gives an employee the right to purchase shares of the employer corporation at a fixed price during a set period. Should the value of the shares later exceed the option price, the employee may exercise the option and thereby purchase those shares at the bargain option price.
The employee can then sell the shares and immediately realize a profit. Certain employers find employee stock options to be an attractive method of compensating their employees. Moreover, an ESO affords a method of compensation with little risk to the employer should the company perform poorly. Also, through the use of vesting periods, the employee stock option provides an incentive for the employee to stay with the corporation.
No tax consequences arise when the employee receives the option; they arise when the employee exercises the option—i. The employee must account for the benefit garnered from exercising the option when computing his or her income for the year. The benefit inclusion equals the fair market value of the shares at the time the employee exercised the ESO minus the option price and any amount that the employee paid to purchase the option.
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The tax year in which the employee must include the benefit depends on whether the shares under the ESO are those of a Canadian-controlled private corporation CCPC. If the ESO shares are those of a Canadian-controlled private corporation, the employee need not account for the benefit until he or she sells the shares.
But if the employee-stock-option shares are those of a non-CCPC—i. The market for shares in a Canadian-controlled private corporation is often restricted and typically smaller than that for shares in a public corporation. So, these employees need not report the employee benefit until the year that they sell their shares and thus presumably have the cash to pay the tax.
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So, they must report the employee benefit and pay the resulting tax in the year that they acquired the shares under the employee stock option. Subsection 1 of the Income Tax Act allows the employee to report only half of the benefit derived from exercising the employee stock option. Subsection 1 gives two sets of criteria for the one-half benefit deduction.
The first applies generally; the second places less stringent demands on employees acquiring shares of a CCPC.
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For employees receiving CCPC shares, paragraph 1 d. If, under the employee stock option, the employee receives shares in a CCPC, the employee receives the one-half deduction as long as the employee held the shares for at least 2 years.
The acquired shares, however, are a capital property that may give rise to a capital gain when the employee sells them. The employee would suffer double taxation if the tax cost of the acquired shares were not adjusted to account for the already taxed employee benefit. This result comes from paragraph 53 1 j of the Income Tax Act. In other words, although the subsection 1 may allow the employee to deduct half the ESO benefit from taxable income, the tax cost of the ESO shares includes the full amount of the ESO benefit. If the option is quoted, the taxable benefit is calculated on the basis of its closing price on the day immediately preceding the offer date.
Reduced rate The above percentages can be reduced by half, if certain conditions are met:. If an option is in the money, the taxable benefit, calculated using the formula indicated above, will be increased by the amount of the discount. In principle, Belgium does not tax capital gains, realised by private persons, on the sale of shares, if the sale comes. In case stock options were granted by a foreign based group company, the Belgian employing entity whose employees received and accepted the stock option offer must report the benefit on the annual tax form as well.
Payroll taxes are only to be withheld in such case insofar the Belgian employing entity intervened in the stock option grant. Under the Royal Decree of October 5, , taxable benefits derived from stock options granted to employees, are generally exempt from Belgian social security charges.
16682: Form 3921 - Exercise of an Incentive Stock Option
Social security will nevertheless be due if:. Stock options granted to self-employed Directors will trigger self-employed scale social security contributions, unless their other income equals or exceeds the ceiling up till which self-employed social security contributions are due. Gunther Valkenborg is counsel to our Brussels office. His main focus is on employment and benefits and international mobility of employees. Tax aspects Definition of stock options A stock option is defined as " the right to purchase, during a fixed period, a fixed amount of shares, at a fixed price ".
Taxable moment The benefit resulting from stock options, granted in the context of a professional relationship, is taxable at the moment of grant , irrespective of whether the options are conditional or not.
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