Donating Optioned Stock
Tax Planning For Each Donor Can Be As Individual As They Are
As part of a holistic wealth management approach, it is important to understand all of the tax planning opportunities available, especially those that enable the donor to successfully achieve their charitable giving objectives.
Important Update: Be aware that, for employee stock options granted after June 30, 2021, a $200,000 annual vesting limit is imposed on options that can qualify for the 50% employee stock option deduction. The limit does not apply to options granted by CCPCs or non-CCPC employers with consolidated group revenue of $500 million or less.
Many donors will hold employee stock options which, when exercised, will result in cash proceeds that will be considered a taxable benefit or income. As part of a giving strategy, a client can choose to donate part or all of their employee stock option cash proceeds, once exercised and then sold, to a registered charity or foundation, like Benefaction. They must make the donation of the desired amount within 30 days of the sale. Donating optioned stock cash proceeds is treated the same as if it were a donation of publicly traded securities by the Income Tax Act. The donor will receive an income tax receipt for the donation and they will also have been able to maximize the value of their donation to the charity, while minimizing their tax burden.
Example: Gift of Cash Proceeds
Robert has been with the same rapidly-growing company for over 10 years. He has achieved many promotions and received performance-based bonuses annually. These bonuses as well as part of his annual base compensation have often been in the form of employee stock options in the company. Robert would like to make some renovations to his vacation property and he is considering giving a gift to his favourite charity. He has approached his advisor to understand the tax implications of exercising a portion of his options.
Robert owns 10,000 vested stock options at $50 per share. His marginalized tax rate (MTR) is 45%. He would like to donate at least $50,000 to charity from the proceeds. After his advisor sent him the following illustration, Robert proceeded with a $100,000 donation to his favorite charity.
Total proceeds for Robert, from exercising his stock options and making a $100,000 gift, were $191,000. This is calculated as: $300,000 net cash from the sale (had he not made a gift) less $100,000 cash donation less $54,000 taxes on retained portion plus $45,000 tax credit from the donation. This compares to proceeds of $232,500, had he not made a gift. So, for a net difference of $41,500 to Robert, he was able to make a $100,000 gift to his favourite charity.
| No Gift | |
| Cash from Sale | $500,000 |
| Less: Exercise Price (ACB/FMV) = 40% | $200,000 |
| Equals: Employee Benefit | $300,000 |
| Less: Employee Deduction of 50% | $150,000 |
| Equals: Gain on Sale | $150,000 |
| Tax on income (Gain x MTR) | $67,500 |
| Tax credit (Gift x 45%) | n/a |
| Total proceeds (Benefit less tax) | $232,500 |
| Make $100,000 Gift | Make $100,000 Gift |
|---|---|
| Keep | Donate |
| $400,000 | $100,000 |
| $160,000 | |
| $240,000 | |
| $120,000 | |
| $120,000 | |
| $54,000 | |
| n/a | $45,000 |
| n/a | $191,000 |
Benefits to the donor
Donors can make a significantly larger gift to their chosen charity or foundation.
Tax is minimized in two ways: (1) a reduction in capital gains tax and (2) a tax credit is received from the donation which can be used to reduce income tax that year.
Gifts of Securities Acquired Under an Employee Stock Option Plan
Donors can also choose to donate the vested options directly to a registered charity or foundation. In this case, they would receive a tax receipt for the fair market value. None of the capital gain, if any, will be reported as income, and the capital gain is reduced to zero for the charity or foundation.
This article is not intended to convey tax and or legal advice and is for illustration purposes only. Anyone interested in the strategy should seek guidance from their financial and/or legal advisor before making a gift.