Sox and backdating

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We therefore focus on the value at exercise (and eventual sale of the shares) and demonstrate the role the income tax regime plays in determining the after-tax value to the executive. The long-term capital gains rate remains applicable for AMT purposes; in other words, the reduced rate is not treated as a tax preference for AMT purposes. This article considers in detail the potential role of personal income taxation in influencing demand for backdated options in Canada relative to the United States.

The practice of backdating executive stock options has received significant attention in the U. financial[1] and legal[2] literature, and has recently begun to be discussed in the Canadian legal literature.[3] Backdating, in its most basic form, is the use of hindsight to selectively pick a local low point in a stock’s trading price and issue executive stock options stipulating the selected date as the grant date when, in fact, the options are granted at a later date. In 2003, the rate was reduced to 5% for individuals in the lowest two income brackets and 15% for all others.

In Canada, not only is there no super-inclusion or penalty tax regardless of the option’s exercise price relative to the value of the shares on the option grant date, but also provided that the options are at-the-money (or backdated to appear as such), only one-half of the option benefit is included in income for tax purposes regardless of the length of time that the shares are held after exercise.[61] This demonstrates a clear tax advantage for stock option compensation, provided that the options are granted not-in-the-money (or reported as such). § 409A should have reduced the incidence of backdating in the United States. An executive at a publicly traded company is the recipient of an option grant for 30,000 shares which expires ten years after the date of the grant. § 409A.[67] For the purposes of demonstrating the impact, if any, of minimum tax in Canada and AMT in the United States, it is assumed that the executive has gross taxable income not derived from any issuance, exercise or sale of stock options or the underlying stock, of 0,000 and does not benefit from any tax preference other than the preference (if any) associated with employee stock options. For a Canadian executive, if the option is “successfully” reported as an at-the-money grant awarded on October 16 with a strike price of .25, then the income benefit subject to tax is calculated as the difference between the fair market value of the shares on the date of exercise and the strike price multiplied by the number of options awarded, which is 5,600.

In Canada, employees who receive backdated stock options, the equivalent of in-the-money options (assuming that the fair market value of the shares on the real grant date exceeds the strike price under the option), may be reassessed by the Canada Revenue Agency not only to deny any deduction claimed under paragraph 110(1)(d), but also to include the employee benefit from the option in income in an earlier year than that in which the employee reported the benefit (and offsetting deduction) for tax purposes. In addition, ISOs that are backdated do not meet the necessary requirements for preferential tax treatment (assuming that the shares are held for at least a year after exercise) and instead must be treated as backdated NSOs for tax purposes. § 409A) in addition to the year the shares are ultimately sold. § 409A, such executives could be subject to gross negligence penalties and perhaps charged with tax evasion.[64] Based on the standard model of tax evasion by Allingham and Sandmo,[65] where compliance is positively associated with the size of penalty assessed if caught, one might expect that the punitive consequences of I. However, there continues to be some evidence of backdating in the United States,[66] suggesting that executives may perceive there to be a low risk that the IRS will apply I. This award is dated as having been granted on October 16 when the share price was .25, but in reality was granted on November 30 when the share price was .40. executive, that such options expire or are all exercised prior to the introduction and application of I. Based on this assumption, minimum tax will not apply in any of the examples and AMT will apply only in the fourth example. The individual claims a deduction under paragraph 110(1)(d), which reduces the income inclusion to 7,800.

Both sets of motivations arise from the quantitative and qualitative benefits, costs, and risks of issuing and receiving backdated options. Certain AMT may be carried forward and applied to reduce the general tax payable in subsequent years (to the extent that the general tax exceeds the tentative alternative minimum tax liability for the subsequent year).

Most of the research to date has focused on supply side factors (e.g., accounting treatment, securities regulations, and corporate taxation),[9] while there has been little discussion of demand side factors.

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