EMPLOYEE STOCK OPTIONS – Generally, when a stock option is exercised, the difference between the strike price and the fair market value of the option at the time it is exercised is included in the employee’s income as a taxable benefit. Employees are generally able to access preferential personal income tax treatment on qualifying stock options by claiming an offsetting deduction equal to 50% of the benefit. – For stock options granted after June 30, 2021, the 50% deduction may be limited to the extent that the fair market value of the securities under the options that would vest in a particular year exceeds $200,000 at the time the options are granted. – Provided that an employer complies with certain notification requirements, the portion of the deduction that is denied to the employee is deductible by the employer in that year. – The stock option rules do not apply to Canadian-controlled private corporations (CCPCs) or non-CCPC employers with consolidated group revenue of $500 million or less. SAFE INCOME PLANNING – Intercorporate dividends between Canadian companies are tax-free in many cases. – Dividends paid by the target to a corporate shareholder in advance of a sale may reduce the shareholder’s capital gain on the sale. However, the dividend can be recharacterized as a capital gain when it exceeds the shareholder’s “safe income.” – Safe income often approximates the shareholder’s share of the target’s taxed retained earnings on hand, determined on a consolidated basis, that accrued during the shareholder’s holding period. – A dividend to all shareholders to take advantage of safe income is usually not possible or desirable (for example, because of withholding tax for non-resident shareholders or tax payable on the dividend by non-corporate shareholders). – Very significant taxable Canadian shareholders of the target may engage in special transactions to access safe income to step up the cost of their shares as part of the sale transaction. Typically this involves the acquirer purchasing the shares of a holding company that has been established by the corporate shareholder that holds only target shares. The shareholder will have used the safe income in the target to step up the tax cost of the holding company shares without involving the target’s other shareholders. MERGERS (AMALGAMATIONS) – On a merger, target shareholders can have a complete deferral of tax, provided that target shareholders receive only shares of the amalgamated corporation or its Canadian parent in exchange for their target shares.
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Canadian Mergers & Acquisitions
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