- Dilution Definition & Example | Investing Answers
- What is weighted average anti-dilution protection?
- Shares vs Stock Options | Mike Volker – Vancouver's Green
Adjusted Cost Base: $68 (FMV of when you exercised your shares)
Proceeds of Disposition: $65 (FMV of when you sold your shares)
Capital Gain: $7
Inclusion Rate: 6/7
Taxable Capital Gain: $6 / share you sell.
You record a gain of $7 for each share you sold and will have to pay $6 in taxable capital gains for each share you sold.
Dilution Definition & Example | Investing Answers
• Deferred tax liability if shares are bought below fair market value.
• May need to defend the fair market value. You may also need an independent valuation, although that is very rare.
• You need to make sure that shareholder agreement provisions are in place.
• Issuing shares at very low prices on a cap table may look bad to new investors.
• More Shareholders to manage.
What is weighted average anti-dilution protection?
The only reasonable justification we have seen for costing executive options below their market value stems from the observation that many options are forfeited when employees leave, or are exercised too early because of employees’ risk aversion. In these cases, existing shareholders’ equity is diluted less than it would otherwise be, or not at all, consequently reducing the company’s compensation cost. While we agree with the basic logic of this argument, the impact of forfeiture and early exercise on theoretical values may be grossly exaggerated. (See “The Real Impact of Forfeiture and Early Exercise” at the end of this article.)
Shares vs Stock Options | Mike Volker – Vancouver's Green
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My wife is currently on maternity leave until March. Therefore, she is on EI. The management of her company decided to allow her to cash in her stock options by December. We are not sure what the tax implications of this will be. The finance department of the company said that the income would be reported in the T9 as employee benefit. Will she have to report this income to the CRA, and will it reduce her EI benefit? She is in the top income bracket.
When you join the company, you may want to come to agreement on your market rate and agree that you will receive a raise to that amount at the time of the financing. You can also ask when you join for the company to grant you a bonus at the time of the financing to make up for your work at below-market rates in the early stages. This is a gamble, of course, because only a small percent of seed-stage startups would ever make it to Series A and be able to pay that bonus.
Furthermore, CRA now wants your company to withhold the tax on this artificial profit. This discourages the holding of shares for future gains. If the company is a junior Venture-Exchange listed company, where will it find the cash to pay the tax – especially if it is thinly traded?
Treasury Stock Method
The treasury stock method is used to calculate diluted EPS for potentially dilutive options or warrants. No change is made to the numerator. In the denominator, the number of new shares that would be issued at warrant or option exercise minus the shares that could have been purchased with cash received from the exercised options or warrants is added to the weighted average number of shares outstanding. The options or warrants are considered dilutive if the exercise price of the warrants or options is below the average market price of the stock for the year.
You can transfer stock options given to you to your corporation. However, there will be a capital gain realized upon the transfer. The amount of the gain will be equal to the market value of the options less the amount you paid for them. If your employer issued the stock options to you, it 8767 s imperative that you read the options agreement to ensure that there are not any restrictions on transferring them.
On CRA 8767 s website, there are instruction on completing the tax return Line 656 Security Option Benefits where it says: 8775 If your employer is a Canadian controlled private corporation (CCPC), which you deal with at arm 8767 s length, you only have to report this taxable benefit on your tax return for the year you sell the securities. If your employer is not a CCPC you may have to report taxable benefits you received in (or carried forward to) the year you exercise your stock option. 8776