Tax laws for stock options need changing, says tech industry

At a minimum, clarification is required
By
|hrreporter.com|Last Updated: 09/04/2003

The Canadian Advanced Technology Alliance (CATA) will consult shortly with the Canada Customs and Revenue Agency (CCRA) and the Department of Finance in an attempt to change the tax laws governing stock options.

The subject is of particular interest to the technology industry because it often uses stock options to attract, motivate and retain key employees. Stock options allow workers to purchase shares in their employer’s company at a set price.

Now when employees exercise stock options, they pay tax on the difference between the set price and the price when the option is exercised. For example, an employee may have an option to purchase a share at $100. When he or she actually buys the share, it’s worth $300. The employee pays tax on the $200 difference.

CATA thinks this treatment is unfair, particularly in cases where technology stocks are decreasing in value, rather than increasing. In those cases, an employee may be forced into bankruptcy if options are exercised.

Assume the employee with the $100 stock option buys a share when it’s worth $300. However, by the time he or she sells the share, its price is back down to $100. The employee would still have to pay tax on that fleeting $200 “gain.” CATA says this amounts to the federal government taxing paper profits.

CATA advocates another approach. It says it would be more equitable for employees to pay tax on the difference between the option price and the actual sale price. In the above example, the employee would pay zero tax, as there was no difference between the option price ($100) and the actual sale price ($100).

Other laws regarding stock options and taxes need clarification, says CATA. Of particular concern are when options qualify for the stock option deduction and for the stock option deferral rules.

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