ESOPs

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Toronto, Ontario, Canada
Making Shared Ownership a Profitable Reality
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Global Equity Compensation

• Canadian Perspective
• October 29, 2001
• Presented by Perry Phillips, CA, CBV, ASA
• President, ESOP Builders Inc.

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ESOP Legislation in Canada and its provinces
Government Legislation Incentive
Federal Income Tax Act RRSP eligibility for employees Employees receive 20 matching tax credit Available only in Saskatchewan and BC
Nova Scotia Share Ownership Plan Act Employees receive provincial tax credit 20
Quebec Quebec Stock Savings Plan Societes de Placements dans LEntreprise Quebecois 125 to 175 deduction on funds invested to a maximum of 30 of employees net income RRSP eligible
Ontario Community Small Business Investment Funds Act Employees receive provincial tax credit 20 on first 3,500, 30 up to 15,000, 150,000 lifetime limit
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ESOP Legislation in Canada and its provinces
Government Legislation Incentive
Saskatchewan Labour Sponsored Venture Capital Corporations Act Employees receive provincial tax credit 20 Matching Federal Tax Credit 20 Maximum 1,000
British Columbia Employee Investment Act Employees receive tax credit 20 Matching Federal Tax Credit Maximum 1,000
Manitoba Manitoba Employee Ownership Fund Corporation Provincial tax credit 700 matching Federal tax credit of 20
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Canadian Global Equity Survey Findings
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Canadian Global Equity Survey Findings
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Canadian Global Equity Survey Findings
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Canadian Global Equity Survey Findings (contd)

• PROBLEMS
• Trouble finding reliable outsourcing companies
• Employee information not user friendly
• Fulfillment of buy / sells
• Internal accounting complexity
• Outsource administrator not knowledgeable
• Start up issues
• No real problems
• 8 out of 17 companies reported no real problems

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Deferral of Stock Option Benefit for Public
Company Employees

• Canadian Federal Income Tax Consequences
• An employee will generally have to pay Canadian
  personal income tax on a taxable benefit at the
  time stock options are exercised. The taxation
  of this taxable benefit generally applies whether
  or not the employee sells the shares received
  from the exercise of the stock options. However,
  due to recent Canadian tax changes, the
  employment benefit arising to public company
  employees on the exercise of stock options may be
  deferred in certain circumstances. In order for
  the deferral to be available the following
  criteria must be met
• The shares must be acquired after February 27,
  2000.
• The employee must be a Canadian resident at the
  time the shares are acquired.

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Deferral of Stock Option Benefit for Public
Company Employees (contd)

• The employee must be arms length with the
  company at the time the option is granted.
• The employee cannot be a specified shareholder
  (i.e. they, together with non-arms length
  persons cannot own 10 or more of any class of
  shares in the company).
• The shares acquired must be of a class that is
  listed on a Canadian or prescribed foreign stock
  exchange.
• The employee must be carried to the 50
  employment benefit deduction (i.e. the option
  price must be at least the fair market value
  (FMV) at the time the options were granted).
• The employee must elect to have the deferral
  provisions apply before January 16 of the year
  following the year in which the options are
  exercised. The election is filed with the
  employer.

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Deferral of Stock Option Benefit for Public
Company Employees (Example)
Value of Shares at Time of Granting Amount of Stock Options where Benefit Can be Deferred

Year 1 50,000 50,000
Year 2 100,000 100,000
Year 3 150,000 100,000
Total 300,000 250,000
(Authored by Michael J. Fremes, CA, ESOP
Builders Inc. October 2001)