Achieving your philanthropic goals with stock options

Portfolio manager and wealth management advisor Cody Gordon, CIM, CFA, shares his advice on a tax-efficient strategy that can help you donate more to the charities and causes you support.

Stock options remain a key compensation tool in many employee and management incentive programs. They provide an opportunity for individuals to benefit from their company’s success and performance. However, most people are unaware that when it comes to supporting a cause that you care about, gifting publicly traded securities from stock options can be a great way to maximize your impact while also minimizing your taxes. With some careful planning, you can avoid paying tax on the employment benefit that normally applies when exercising stock options.

Employee Stock Option Taxation:

• No tax implication arises before the option is exercised.
• Once exercised, the difference in price between the option price and the fair market value of the stock at the time of exercise is included as an employment benefit on the employee’s T4.
• Generally, if the option is deemed qualified by the Canada Revenue Agency, you can deduct half of the benefit, so only 50% of the stock option benefit is taxed at your marginal rate.

Stock Options Donated to Charity Taxation:

• Upon exercising the stock option and donating it to a charity within 30 days, the individual will receive:
  • A charitable tax receipt for your gift’s fair market value.
  • An additional deduction of 50% of the taxable employment benefit.
• If requirements are met, the entire employee stock option benefit is essentially tax free.
• No capital gains tax is applicable if exercised options are donated to charity within the 30-day window or if vested options are donated before being exercised.

Example:

As part of your executive compensation package at ABC Company, you are granted 10,000 options at $100.00 per share. The fair market value of ABC company rises to $120.00 per share and you decide to exercise your options.

No donation:

Donation:

How to Donate:

• Do-It-Yourself (DIY): Exercise vested options and donate them to your cause of choice within 30 days. This must be done in the same calendar year.
• Broker: Direct your broker to exercise, liquidate, and donate.

The donation of stock options is a lesser known but extremely effective way to achieve your philanthropic goals. Please be aware that there are certain requirements that must be met to claim the full tax benefits. We recommend that you seek guidance from a professional tax advisor before making any type of donation.

For more information:

• Department of Finance Canada - Backgrounder: Proposed Changes to the Tax Treatment of Employee Stock Options
• Canada Revenue Agency – Gifts of Publicly Traded Shares and Stock Options

About Cody Gordon, CIM, CFA, Lead Portfolio Manager at Verus Financial at National Bank Financial

Cody is an alumnus of SFU Beedie School of Business with a concentration in finance. With over a decade of industry experience, Cody helps protect, grow, and transition the legacies of affluent multigenerational families. In 2020, Cody won the National Bank Financial Excellence Award for Rising Star of the Year in Canada. In 2021, he was recognized as one of the Top Young Advisors in the Wealth Profession.

Coy is proud of his work in helping his clients make tax-efficient charitable gifts to SFU, and how that has allowed them to have a bigger impact for deserving SFU students.