Canada: Summary of Considerations for Equity Compensation Plans
[Updated February 2021]
This Summary Guide to Canada provides information on the exchange control, securities law, labor law and taxation considerations for offering stock compensation to employees in the Ontario and Quebec regions of this country.
Taxation of Employee
This summary can be downloaded at the bottom of this section
|Editor’s Note: Text highlighted with BOLD FACE indicates features that qualify for special tax relief or that present other plan-design opportunities.
TAXATION OF EMPLOYEE FOR STOCK COMPENSATION IN CANADA
Nonqualified stock options: No tax upon grant. Ordinary income rates apply to spread at time of exercise; then capital gain upon sale by the employee.
Qualified stock options: Options that qualify result, in effect, in capital gains treatment upon exercise, i.e., only 50% of the spread is taxable. An additional deduction is available for gifts of option shares to charities that meet specified conditions. Effective for grants made on or after July 1, 2021, the qualified option rules will be subject to an additional limitation if the employer has annual revenue that exceeds CAD500 million and is not a Canadian-controlled private corporation.
Restricted stock: Taxable upon receipt, subject to a discount to reflect restrictions.
Restricted stock units: Taxable upon issuance of shares.
Performance stock: Taxable upon issuance of shares.
Bonus stock: Taxable upon issuance of shares.
Stock purchase plans: Any discount from fair market value is taxable upon acquisition of the shares, which may be affected by the terms of the plan.
Retirement savings plans: Registered pension plans, deferred profit-sharing plans, and registered retirement savings plans are generally permitted to invest in Parent Stock. An arrangement with similarities to a US 401(k) plan would permit employees to elect to forgo a portion of salary for investment in Parent Stock to be distributed after death, retirement, or loss of employment.
Withholding is generally required on all income from employment, including stock-based benefits. A tax information slip (a T4, known in Quebec as a Relevé 1) is issuable to the employee by the Parent or Subsidiary, as appropriate, with a copy to the government.
Tax reporting is required on all income from employment, including stock-based benefits. There is currently no reporting requirement that is specific to stock-based benefits, but a recently announced proposal, if enacted, will require certain employers to notify their employees and the Canadian tax authority in respect of stock-based benefits.
SOCIAL SECURITY TAXES
Unless settled in cash, the value of stock-based benefits is not included in an employee’s compensation base for purposes of computing the employer’s contribution under the Employment Insurance Act (Canada) but is included for purposes of the Canada and Quebec pension plans, as well as the Employer Health Tax in Ontario, the Quebec Health Fund, and certain other funds.
The registration requirements of Ontario and Quebec securities laws apply to trades of securities, and any trade constituting a distribution must comply with prospectus requirements in each case, unless a statutory exemption applies, or an exemption order is obtained from the provincial securities regulatory authority. Many offerings to employees are exempt under the Employee Stock Incentive Rule (ESIR), which provides that distributions by an issuer of securities to its employees, executive officers, directors or consultants are exempt from the prospectus requirement, provided that participation in the distribution by such individual is voluntary. Resales may be restricted, but exemptions apply in many situations, especially where Canadian residents hold only a small proportion of the issuer’s stock and the resales are made on a market outside Canada. The US/Canada Multijurisdictional Disclosure System may provide an alternative for certain issuers, but is infrequently relied upon for employee plans in Canada due to the ESIR’s low barriers to use.
Employees terminated other than for “just cause” are entitled to reasonable notice or payment in lieu thereof, and stock-based benefits may be taken into account unless otherwise clearly stipulated.
The value of stock-based benefits is not taken into account for calculating the mandatory severance pay that is required upon certain significant group terminations under the Ontario Employment Standards Act.
Payroll deductions permitted with the employee’s written consent.
The privacy interests of employees and other persons are protected under several statutes, most notably federal legislation, Personal Information Protection and Electronic Documents Act (Canada) (“PIPEDA”), applicable in Ontario; and provincial legislation, An act respecting the protection of personal information in the private sector (Quebec), applicable in Quebec.
Electronic signatures are enforceable generally in Ontario and Quebec. In Ontario, electronic signatures are recognized as valid and enforceable so long as the technological process adopted reliably identifies the person signing and the signature can be reliably associated with the corresponding electronic document. In Quebec, electronic signatures are enforceable so long as the integrity of the technology-based document is ensured.
STAMP DUTIES AND OTHER FACTORS
No applicable stamp duties under Canadian federal or Ontario and Quebec provincial laws.
Materials delivered to employees in Quebec must be translated into French, unless the documents provide that the employee has requested the documents be drawn up in English.