The first step in untangling the causes of backdating is to acknowledge that the backdating phenomenon must be driven by both supply and demand factors. Lipman, Incentive Stock Options and the Alternative Minimum Tax: The Worst of Time, 39 Harv. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub.
From the supply side, the question is what motivates a firm to grant a backdated option, and from the demand side, what motivates an executive to demand (or, at the very least, accept) a backdated option?
We therefore focus on the value at exercise (and eventual sale of the shares) and demonstrate the role the income tax regime plays in determining the after-tax value to the executive. The long-term capital gains rate remains applicable for AMT purposes; in other words, the reduced rate is not treated as a tax preference for AMT purposes.
This article considers in detail the potential role of personal income taxation in influencing demand for backdated options in Canada relative to the United States.
As executives could lawfully be paid equivalent amounts in cash (or properly dated options), it does not seem likely that greed is, at least by itself, a primary motivator for backdating.
A better motivator may be the fact that backdated options are a form of what Bebchuk and Fried have called “stealth compensation.” Other considerations may affect backdating behavior, such as penalties and concomitant costs if the backdating is caught, including penalties arising from income tax reassessments and actions by securities regulators, as well as attorneys’ fees, loss of employment, and potential loss of reputation. In order to assess the role of personal income taxation in backdating stock options, this study provides a comparative analysis of the personal income tax regime for executive stock options in Canada and the U. In the United States, the entire benefit realized by the employee at the time of exercise of most executive stock options is included in income, while in Canada, assuming certain conditions are met, the benefit is taxed at the same effective rate as capital gains (and thus is subject to a lower tax rate than if taxed as regular employment income).
The CRA and the Tax Court of Canada recognize that a transaction may be “papered” after the fact, but that backdating is improper where it alters the characterization of a transaction or reality.
There is a range of conduct from effective dating (which is acceptable) to inappropriate backdating (which is not).
All employee stock options share the same general tax treatment in two areas. annual salary or bonus income), which is taxable in the year it is received, there are no tax consequences when stock options are granted or when they vest; rather, under subsection 7(1), a tax liability does not arise until the time the option is exercised, at the earliest. The amount that must be included in income from employment upon exercise (or later, if certain conditions are met) is equal to the difference between the fair market value of the stock on the date the option is exercised and the strike price. A., the taxable portion is calculated as one-half of the capital gain or capital loss. There are, however, several exceptions to the general rules described above that affect both the amount and timing of the inclusion.
Dividends must be declared before they are paid and once they are declared they cannot be rescinded. At year end, some taxpayers may wish to characterize cash withdrawals or other amounts as dividends for accounting or tax purposes.
Taxpayers will ask lawyers to draft corporate resolutions on the basis that a dividend was declared in the prior year.
The taxation of stock options varies significantly between Canada and the United States. In this part we summarize the differences, focusing on backdated options and incorporating a discussion of recent U. changes regarding the taxation of discounted stock options enacted in 2004 on the heels of the Enron, World Com, and Tyco scandals.
Personal income taxation of stock options in Canada is notably less complex and more generous from the employee’s perspective than in the United States. The AMT rate for individuals is 26% of such amount up to 5,000 and 28% of any excess.
The comparison suggests that the personal tax regime may have been one of the factors which impacted the desire to receive backdated options in lieu of other forms of compensation in Canada but not so in the United States. Prior to 2003, the long-term capital gains rate was generally 20%.