59 What are the tax implications of some compensation alternatives (stock options, bonuses, fringe benefits)?

Here is a summary of some other common compensation alternatives.

Stock Options – ITA 7(1), 110(1)(d)

• Public company – Income inclusion when options are exercised
• CCPC (Canadian controlled private corporations) – Income inclusion when acquired shares are sold

Employee can claim a one-half deduction of the taxable benefit if the conditions are met:

• When the option is issued, the option price >= market price; or
• If CCPC – Available if shares held for two years without regard to option price.

Bonuses – 78(4), IT-109R2

For most bonuses, the recipient doesn’t have to include it in  income until it is actually received.  Here are some specific rules

• Standard bonus – Bonus is paid within 180 days of the business year end NOT from when the bonus was declared.
  • Deductible to the business when declared
  • included in the taxpayer’s income when received.
• Other bonus – Bonus is paid more than 180 days after employer’s year end but prior to 3 years after December 31st of the year in which the bonus was earned
  • Deductible to the business when paid.
  • included in the taxpayer’s income when received.
• Salary deferral arrangement – It is determined that the salary was earned in the year but just ‘pushed back’ to a subsequent period to defer taxes.  Also applies to unpaid bonuses within 3 years after the year-end the service was provided.
  • Deductible to the business in the year declared.
  • included in the taxpayer’s income in the year declared.

Example: On July 25, 2019, Jones Ltd (“Jones”) declares a bonus of $50,000 in favour of one of its employees. Jones has a December 31st fiscal year end and the bonus is paid on January 15th, 2020. As this is paid within 180 days of Jones fiscal year-end, the bonus is deductible to the corporation in 2019 (when it was declared) and taxable in the hands of the employee in 2020 (when it was received).

Fringe benefits

Fringe benefits are non-salary benefits given to employees for various purposes such as employee motivation and incentive to stay with the company.  The general rule is that any benefit received during the year by virtue of your employment is a taxable benefit, unless the primary beneficiary is the employer rather than the employee (See ITA 5(1) and 6(1)(a)).  There are numerous exceptions however, see Income Tax Folio S2-F3-C2 for a detailed discussion on this topic.

Interactive content (Author: Aneesh Dhaumya, January 2020)

Interactive content (Author: Gurkaran Sidhu, January 2020)

References and Resources:

• ITA – 6(1)(a), 7(1)
• Article – “What is a security (stock) options taxable benefit” (Author: Government of Canada)

January 2020