Strategies for Executive Compensation: Design and Tax Issues for a ...

Key Design Considerations and Commonly Used
Incentive Compensation Arrangements (cont’d)
• Private equity fund often wants to limit ability of
portfolio company executives to liquidate their
equity holdings prior to an IPO or other defined
liquidity event. Sometimes, there will be an
exception for shares already acquired by the
executive as opposed to outstanding stock
options or in some cases for certain narrowly
defined events (e.g., death or disability).
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Stock Options – Rules for Canadian-Controlled
Private Corporations and Ordinary Stock
Option Rules
• Employee stock options and other equity
awards granted by a Canadian-controlled
corporation (CCPC) have preferential
Canadian income tax treatment:
- taxable employment benefit arises when shares
are disposed of (subsection 7(1.1) of Income Tax
Act (Canada) (ITA)) – the exercise of the stock
option or the issuance of shares under a stock
bonus or share-settled restricted share unit is not a
taxable event
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Stock Options – Rules for Canadian-Controlled
Private Corporations and Ordinary Stock
Option Rules (cont’d)
– the employee may claim a 50% deduction
(paragraph 110(1)(d.1)) against the taxable
employment benefit (e.g., in-the-money
amount when the option was exercised or in
the case of a stock bonus, the fair market
value of the share at the time it was issued)
provided:
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