ConductLaw on Stock Option Plans

| Published on
April 8, 2015
| Updated on
September 17, 2021
By Jeffrey (JP) McAvoy
| Published on
April 8, 2015
| Updated on
September 17, 2021

Occasionally, we get asked questions by clients who are considering implementing a stock option plan.  These clients often want to provide incentives and promote loyalty to key employees or contractors.  After explaining how a stock option plan works, we can help a client determine whether or not it is appropriate under their specific circumstances.

In our discussions with our clients, we explain that a stock option plans refer to certain rights that a corporation may grant to its employees, contractors, or to the employees of a non-arm’s length corporation that allows them to acquire shares of those corporations. The rules in the Income Tax Act relating to stock options are intended to encourage greater involvement in the granting corporation and to allow corporations to offer financial incentives in lieu of higher salaries and also foster loyalty.  However, they are taxed differently depending upon whether they are being issued to employees or contractors with 100% of the benefit taxed to the contractor.  In addition, if contractors are considering receiving stock options as part of the payment, they should be particularly cautious that their relationship is structured contractually so the CRA will view them as independent, not as employees.

To help create safeguards from having an employer/ employee relationship deemed by the CRA, stock options issued to independent contractors should be in the name of incorporated companies, not to them personally. In addition, all stock option documentation specific to the independent consultant should be excluded from stock option plans and documents for the company’s full-time employees.

Over the last few years the legislation regulating stock options as compensation for employment in Canada have been changing. Consequently, there are numerous types of plans.  Normally the stock option plan allows the employee to purchase shares of the employer’s company or of a non-arm’s length company at a predetermined price.

An employee stock option plan gives the employee the right to buy a certain number of shares of your employer’s stock at a stated price (called the grant price, strike price, or exercise price) over a certain period of time (for example, four years).

In many cases, the shares “vest” over a period of several years, meaning that some fraction of the shares can be exercised in the first year, another fraction in the second year, and so on. Whenever the option’s exercise price is above what the stock currently trades for, the option is “in the money”. Otherwise, it is “underwater”.

To make a final determination on behalf of our clients, we need to complete an analysis as to what we are dealing with in terms of employees and independent contractors.  Depending on that assessment, we may need to prepare contracts formalizing the arrangement.  Finally, we will need to prepare the stock option plan, subscriptions, shares etc.

If you wish to discuss the implementation of a stock option plan for your employees or independent contractors, feel free to contact Jeffrey (J.P.) McAvoy at jpmcavoy@conductlaw or by calling to speak to him or any of our other professionals at 613.440.4888.

About the Author

JP McAvoy
JP is the Managing Partner of Conduct Law, a Business Law Firm with Offices in Ottawa, Ontario and Orlando, Florida. His legal practice is focused on business and business owners.  Called to the bar in 2001, he received his LL.B and JD from Queen’s University in 1999. He represents a diverse range of clients throughout Canada, the United States, and Eastern Asia. In addition to practicing law, JP is a College Professor, Best-Selling Author and Host of the top rated podcast The Millionaire's Lawyer.  JP's accomplishments earned him an Ottawa Business Journal Forty Under Forty Award. Read JP's full profile.