Capital Gains or Income Tax?

[Fas1975]

The company I work for is about to be acquired. As part of my pacakge, I have a decent amount of stock options, I'm starting to receive paperwork to begin the exercise process, however, will be another 6-8 weeks for the sale to go through. Will the exercised options be subject to capital gains tax, or be treated as income tax? I'm currently in the higher tax bracket, so this is the difference between paying 40% vs 28%.

The company I work for is Canadian, and all of the options are priced in CAD. I've been told that once executed, to "expect a cheque", but don't know if that's just a turn of phrase, or to sit by the letterbox.

Thx

[sidicks]

Fas1975 said:

The company I work for is about to be acquired. As part of my pacakge, I have a decent amount of stock options, I'm starting to receive paperwork to begin the exercise process, however, will be another 6-8 weeks for the sale to go through. Will the exercised options be subject to capital gains tax, or be treated as income tax? I'm currently in the higher tax bracket, so this is the difference between paying 40% vs 28%.

The company I work for is Canadian, and all of the options are priced in CAD. I've been told that once executed, to "expect a cheque", but don't know if that's just a turn of phrase, or to sit by the letterbox.

Thx

The short answer is that 'it depends' - the documentation you were given at the time the options were issued should explain how these would be treated for tax reasons.

Unless there is specific approval from HMRC, my understanding is that most schemes of this type treat the money received from the sale of stock / stock options as income and hence subject to income tax rather than capital gains.

Obviously, as you allude to, the capital gains exemption amount and the lower tax rate on subsequent gain mean that it would be hugely advantageous for you to be able to go down the CGT route.

Sidicks

[db10]

Likely to be income I'm afraid

[Fas1975]

Just looked at the paperwork I have in hand.

I have a cover letter stating the number of stock and strike price. I have the stock option agreement which refers to the stock option plan. None of them say anything about tax or tax jurisdiction. It does say that the governing law will be "in accordance with the laws of the Province of Ontario and the law of Canada applicable in Ontario"

Will prepare for the worst and hope for the best I guess

[J4C]

I interpret your OP as saying these were straight options grants to you in the line of work, as compensation. I assume you did not give the company any money when the options were issued to you ? If I am correct with both of these points then you are 99% likely to be paying income tax on the strike price and capital gains on any premium paid over the strike by the acquiring company.

Note there is a quite complex withholding tax in Canada so your cheque may be smaller than you expect.

[Fas1975]

J4C, thanks for your input. Your interpretation is spot on. I've been given an idea of the amount, and you're right, it's a little smaller than expected, but I'm treating it as free money, so any amount is great.

[cashmax]

All the options I have sold previously have been CGT, but thats been UK and US companies.

The issue I has was structuring things so that exercising the option itself wasn't subject to tax.

[Eric Mc]

Length of time of ownership of the options is sometimes a factor in deciding whether some or all of the proceeds on disposal are subject to UK Income Tax or CGT.