Short post here.

The finance nerd in me wanted to figure out how to optimize tax implications for my stock options. After researching, I found something I think would be valuable to most Canadian employees in any pre-IPO company where they hold stock options.

Basically, for private stock (i.e. pre-IPO stock) from a Canadian Controlled Private Corporation (CCPC, which your company probably is), this is the pro-tip and the reason you might want to exercise your vested options now:

Exercise your shares at least two years before exit, and you will pay no tax on any gain you make up to $813,600.

Here’s the reference from the CRA

A example to bring home the point:

It’s 2015, and you have 100,000 vested stock options with an exercise price of $0.10 at Awesome Co. In 2018, Awesome Co. IPOs at $5.00 (woohoo!). Here’s two scenarios:

Scenario #1: You didn’t read this article and didn’t buy your shares in 2015 and now you exercise and sell your options. Here’s the tax implications:

  • $500,000 proceeds (100,000 * $5)— $10,000 cost (10000 x $0.10) = $490,000 capital gain
  • You pay tax at your marginal rate for 50% of the capital gain
  • Since you’re a baller, that’s almost 50% tax on $245,000 = $122,500 in tax
  • You net a $367,500 profit ($500,000 proceeds— $10,000 cost — $122,500 tax)

Scenario #2: You exercised your shares like a boss

  • $500,000 proceeds (10,000 * $5) — $10,000 cost (10000 x $0.10) = $490,000 capital gain
  • The lifetime capital gains exemption (LCGE) hooks you up because you had the shares for 3 years, no tax baby!
  • You buy a new tesla model S (which by 2018 can probably fly) with your extra $122,500

Some risks (yes there are some)

  • Your company IPOs/sells earlier than in 2 years, in which case you didn’t really lose out but you end up spending $100,000 a year too early (lost interest from carry, for the finance nerds)
  • If your company never succeeds and doesn’t sell, you will have wasted $10,000 (considering many early startup employees are in situations where their options were issued at pennies, this usually is worth the gamble for the potential tax savings IMO)
  • Your stock eventually sells for LESS than your exercise price (in this scenario, less than $0.10).
  • Note in both of the above, you can claim 50% of the loss as a tax deduction

You got some other tax tips for pre-IPO employees? Share them with me on Twitter

Disclaimer here: This is not financial advice. I googled this, came to the conclusions above, and am sharing with the hope of helping some people. But ultimately, if I am wrong, it’s your fault — use at your own risk.