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I benefit from Canada's favourable option plan, but it is still bullshit. These tax loopholes are how a VP of Marketing at an obviously going-to-be-successful c
by 3pt14159 11y ago
I benefit from Canada's favourable option plan, but it is still bullshit. These tax loopholes are how a VP of Marketing at an obviously going-to-be-successful company like Shopify makes $1m / year while only paying half the top marginal tax rate.
Even more if they are clever. I'm not sure if they've closed the loophole but you used to be able to max out their TFSA by exercising their options, claiming the share certificates, then putting them into their brokerage account before the Series A is closed. It only costs $500 / year at RBC to do this you / your family just can't ever own 10% of the stock in question and it is completely legal. Then when your $40k of shares grows to $4m after the IPO you have a perpetual tax free investment account.
But these tricks are nothing new. Businesses have all the flexibility in the tax code. The only year I was in the 1% in terms of income I paid an effective tax rate of 12%, and this wasn't because I qualified for the capital gains exemption tax when my business was acquired (the business wasn't was too young, your business needs to be at least 2 years old to qualify).
Investment income should be taxed the same as normal income with one caveat: losses should decrease normal income and should be _after_ inflation. Right now the biggest pushback I hear (that I think is legitimate) to raising the capital gains / dividends rate is about inflation; which makes sense for 4% blue chip bonds, but falls apart on 40% yoy options that are more like deferred income plans than they are investment schemes.
Edit: Downvote me all you want. People disagree with things that challenge situations that are good for them.
- cperciva 11y agoYou can't put shares into your TFSA if you don't operate at arm's length from the company. And if you're operating at arm's length from a company yet are able to predict which shares are going to increase in value, you should be running a VC fund.
- 3pt14159 11y agoYou at the very least can once you're leaving the company, which were the circumstances of someone I know who has done this. Even if you are right (I can't quickly find a good definition for "Arms length" as it relates to non-C level employees) it doesn't materially change my point that people in our position pay substantially less tax than people in the medical or legal profession. Whether it's bulk asset sales and dividends, or Hong Kong holding companies and tax treaties, or capital gains exemption to "retain top talent" if Canadians actually knew how it worked 90% of the time they would never stand for it.
- cperciva 11y agoYou at the very least can once you're leaving the company, which were the circumstances of someone I know who has done this. Sure. But then you have to put in the shares (or options) at their fare market value, which is going to be pretty high if there's an IPO on the horizon.
- 3pt14159 11y agoFair point. Although I still feel the way we value startups (at the last funding event) warps decision making greatly. The person I knew did this with a company about 6 months before they raised their next round. So the company was valued at around $15m for 2.5 years, person invests, then BAM company valued at $45m on year 3 6 months later. And I think if you're in a company that is really going to make it you know. Especially if you've been in startups for a while.
- cperciva 11y agothe way we value startups (at the last funding event) That may be how you value startups, but I guarantee you that if the CRA looks closely it's not how they would value the shares on the eve of a deal which values the shares much higher.
- 3pt14159 11y agoMy experience is that short of being 60 days before a deal the CRA generally accepts the previous funding round as the valuation. I agree that the actual eve of the deal wouldn't fly though.
- lazyant 11y agoI don't understand, TFSA max contribution for the year is 5.5k with current cumulative of 46.5k so how can you end up with a perpetual tax free account for more than that?
- kspaans 11y agoAny gains made to assets inside of the account are tax free. So if you put in $4k worth of stocks one year and they increase in value by 1000%, that's still allowed by the TFSA rules. If you never contributed at all and were starting today, that is when are restricted to the cumulative amount.
- malexw 11y agoHuh. I really should have talked to you before I exercised my options last year. Clearly I didn't understand the tax laws as well as I thought I did.