Taxes on income (share value - option strike price) become owing on option exercise.
If the company is not a CCPC (Canadian-controlled private corporation) and the option strike price was less than the share value at grant-time, you may qualify for a 50% deduction (bringing it in line with capital gains), subject to some conditions (arms-length dealing, etc).
If the company is a CCPC, you can defer the taxes until the shares are sold. If sold within 2 years, you pay full income tax. If sold after 2 years of holding, a 50% deduction applies bringing it in line with capital gains. CCPC status of options are grandfathered in so if the company loses CCPC status (e.g. bringing in US investors), your options continue to qualify.
Keep in mind that going bankrupt/company sale are forced sales of your shares, which could hit you with a big tax bill and since that tax bill is income (not cap gains), the capital losses of the sale cannot be used to offset it! If you find yourself in this position, you should contact the CRA. They have forgiven these kinds of errors in the past (Nortel employees, JDS Uniphase) with a special treatment of the gains/losses. No guarantees though.
CCPC employees should also look at the lifetime capital gains exemption (LCGE) of $750000 to reduce taxes on the capital gains following exercise, and the allowable business investment loss (ABIL) which can be used to halve the tax owing in the downside case. In theory, the 50% deductions mentioned above and the ABIL stack to reduce the tax owed to 0. The ABIL can only be claimed if the company is a CCPC when it is wound up; so it's possible to lose the ability to claim the ABIL if e.g. US investors come on board later and get a majority of the company.
All these rules make perfect sense assuming there is easy liquidity, but it's a mess for illiquid shares.
Taxes on income (share value - option strike price) become owing on option exercise.
If the company is not a CCPC and the value of the options at grant-time were less than the share value, you may qualify for a 50% deduction (bringing it in line with capital gains), subject to some conditions (arms-length dealing, etc).
If the company is a CCPC, you can defer the taxes until the shares are sold. If sold within 2 years, you pay full income tax. If sold after 2 years of holding, a 50% deduction applies bringing it in line with capital gains. CCPC status of options are grandfathered in so if the company loses CCPC status, your options continue to qualify.
Keep in mind that going bankrupt/company sale are forced sales of your shares, which could hit you with a big tax bill and since that tax bill is income (not cap gains), the capital losses of the sale cannot be used to offset it!
CCPC employees should also look at the lifetime capital gains exemption (LCGE) of $750000 to reduce taxes on the capital gains following exercise, and the allowable business investment loss (ABIL) which can be used to halve the tax owing in the downside case. In theory, the 50% deductions mentioned above and the ABIL stack to reduce the tax owed to 0.
The problem with all of this stuff is that when you exercise, there is no way to know what deductions you will qualify for under various hypothetical scenarios.
It feels like tax laws just aren't set up to deal with the notion of illiquid shares and fairy tale valuations.
If the company is not a CCPC (Canadian-controlled private corporation) and the option strike price was less than the share value at grant-time, you may qualify for a 50% deduction (bringing it in line with capital gains), subject to some conditions (arms-length dealing, etc).
If the company is a CCPC, you can defer the taxes until the shares are sold. If sold within 2 years, you pay full income tax. If sold after 2 years of holding, a 50% deduction applies bringing it in line with capital gains. CCPC status of options are grandfathered in so if the company loses CCPC status (e.g. bringing in US investors), your options continue to qualify.
Keep in mind that going bankrupt/company sale are forced sales of your shares, which could hit you with a big tax bill and since that tax bill is income (not cap gains), the capital losses of the sale cannot be used to offset it! If you find yourself in this position, you should contact the CRA. They have forgiven these kinds of errors in the past (Nortel employees, JDS Uniphase) with a special treatment of the gains/losses. No guarantees though.
CCPC employees should also look at the lifetime capital gains exemption (LCGE) of $750000 to reduce taxes on the capital gains following exercise, and the allowable business investment loss (ABIL) which can be used to halve the tax owing in the downside case. In theory, the 50% deductions mentioned above and the ABIL stack to reduce the tax owed to 0. The ABIL can only be claimed if the company is a CCPC when it is wound up; so it's possible to lose the ability to claim the ABIL if e.g. US investors come on board later and get a majority of the company.
All these rules make perfect sense assuming there is easy liquidity, but it's a mess for illiquid shares.