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

Stock Options – Rules for Canadian-Controlled
Private Corporations and Ordinary Stock
Option Rules (cont’d)
• Prescribed shares under Regulation 6204
– where dividends or liquidation entitlements are limited
to a maximum or fixed at a minimum, shares will not
be prescribed shares
– where shares can be reacquired by issuer or person
with whom the issuer does not deal at arm’s length,
this may preclude shares being prescribed shares
– conversion rights can also be problematic
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Stock Options – Rules for Canadian-Controlled
Private Corporations and Ordinary Stock
Option Rules (cont’d)
– some exceptions to repurchase restrictions if price
does not exceed fair market value and/or to provide a
market or protect employee from loss
– relevant dividend, liquidity and repurchase provisions
can be in share terms or under an agreement in
respect of a share or its issue, which could include
shareholders agreement, credit agreement, etc.
– prescribed share test is at time shares are issued (or
would have been issued in the case of a cash-out)
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Stock Options – Rules for Canadian-Controlled
Private Corporations and Ordinary Stock
Option Rules (cont’d)
– paragraph 110(1)(d) deduction will not be available on
an option cash-out unless company that granted
option files election under subsection 110(1.1) to
forego any deduction of cash-out amount
• subsection 110(1.1) election is made on employee’s T4
for the year in which the option is cashed out
• where options cashed out on exit event, purchaser will
control company at time T4s are prepared
• commitment from purchaser to cause election to be
made can be included in purchase agreement but
employees may not be parties
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