Personal Finance

Capital Gains tax on employee share purchase plans (ESPP)

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  • Mar 16th, 2022 12:01 am
[OP]
Member
Sep 24, 2012
214 posts
129 upvotes
Ontario

Capital Gains tax on employee share purchase plans (ESPP)

Just sold a bunch of stocks that I purchased through my employee share purchase plan (used funds to buy a home).

These stocks were bought at a 10% discount of the market price. I'm pretty sure the 10% discount was taxed as ordinary income in each tax year.

I'm facing a pretty large capital gains tax bill today as the price sold is about 2.5x what I bought them for throughout the past 6-7 years.

Are there any tax strategies that I can take advantage of to reduce the tax bill?

Thanks!!
9 replies
Deal Fanatic
Jan 31, 2007
5230 posts
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Richmond Hill
Crispers wrote: Just sold a bunch of stocks that I purchased through my employee share purchase plan (used funds to buy a home).

These stocks were bought at a 10% discount of the market price. I'm pretty sure the 10% discount was taxed as ordinary income in each tax year.

I'm facing a pretty large capital gains tax bill today as the price sold is about 2.5x what I bought them for throughout the past 6-7 years.

Are there any tax strategies that I can take advantage of to reduce the tax bill?

Thanks!!
I dont think so.
I got company stock at $0 every year. It count as my income for the year i got the share.

Let say market value at the time i got those shares is $50, get 1000 share at $0. It count as my income and i have to pay tax on it. This would be my book cost. When i sell at say $60, capital gain would be $10 / share.
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Deal Fanatic
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Nov 19, 2004
9212 posts
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Cambridge, ON
If you sold your shares for a gain, then you pay tax on the gains. Nothing you can do since that is how it works.

You are correct on the tax for the discounted price. The difference between the price and the discount will be considered taxable income in the year you received. So if the stock was $10 at the time of purchase, but you got a 10% discount and paid only $9, then $1 would be added to your income in that year and you would have paid tax then. When you sell at $25, you now have a capital gain of $15 ($25-$10) that is taxed at time of sale.
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Jun 25, 2008
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I just started at a company with a generous ESPP, and I have a lot of TFSA room.

Shares are bought twice a year. Is it worth selling them immediately and then re-buying them within the TFSA to shelter them from capital gains, at least up to my TFSA room? Any downsides to doing this other than the fees for the transactions?

Edit:

Aha, looks like I can just transfer them directly when I receive them since my employer is US based and uses ETrade:

https://www.reddit.com/r/PersonalFinanc ... ares_in_a/

Edit the Second:

Looks like broker-to-broker in-kind has to be the same kind of account, so apparently I would really need to set up two accounts on Questrade or Wealthsimple or whatever: one regular and one TFSA, then transfer in-kind to the regular, than request an internal transfer as a contribution to the TFSA. Assuming no fees throughout this still works for me, but it's a bit of hoop jumping required.
Sr. Member
Aug 16, 2010
553 posts
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Thornhill
Crispers wrote: Just sold a bunch of stocks that I purchased through my employee share purchase plan (used funds to buy a home).

These stocks were bought at a 10% discount of the market price. I'm pretty sure the 10% discount was taxed as ordinary income in each tax year.

I'm facing a pretty large capital gains tax bill today as the price sold is about 2.5x what I bought them for throughout the past 6-7 years.

Are there any tax strategies that I can take advantage of to reduce the tax bill?

Thanks!!
If the company is a qualified small Canadian business corporation, then you may be eligible to use your lifetime capital gains exemption amount.

https://www.canada.ca/en/revenue-agency ... limit.html

If you can lower your taxable income (e.g. with RRSP contributions, (though it's too late for 2021 tax year)), your capital gains rate could be lower, resulting in a lower tax amount payable.
[OP]
Member
Sep 24, 2012
214 posts
129 upvotes
Ontario
MikeMontrealer wrote: I just started at a company with a generous ESPP, and I have a lot of TFSA room.

Shares are bought twice a year. Is it worth selling them immediately and then re-buying them within the TFSA to shelter them from capital gains, at least up to my TFSA room? Any downsides to doing this other than the fees for the transactions?

Edit:

Aha, looks like I can just transfer them directly when I receive them since my employer is US based and uses ETrade:

https://www.reddit.com/r/PersonalFinanc ... ares_in_a/

Edit the Second:

Looks like broker-to-broker in-kind has to be the same kind of account, so apparently I would really need to set up two accounts on Questrade or Wealthsimple or whatever: one regular and one TFSA, then transfer in-kind to the regular, than request an internal transfer as a contribution to the TFSA. Assuming no fees throughout this still works for me, but it's a bit of hoop jumping required.
i definitely think it's a good idea to transfer the shares to your TFSA account, esp if you have room, and esp if these are growth/tech stocks that you're talking about.
[OP]
Member
Sep 24, 2012
214 posts
129 upvotes
Ontario
stanimal wrote: If the company is a qualified small Canadian business corporation, then you may be eligible to use your lifetime capital gains exemption amount.

https://www.canada.ca/en/revenue-agency ... limit.html

If you can lower your taxable income (e.g. with RRSP contributions, (though it's too late for 2021 tax year)), your capital gains rate could be lower, resulting in a lower tax amount payable.
thanks for pointing out this cap gain exemption- i didn't know about it. however the shares i have are for a publicly traded company.
[OP]
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Sep 24, 2012
214 posts
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Ontario
don242 wrote: If you sold your shares for a gain, then you pay tax on the gains. Nothing you can do since that is how it works.

You are correct on the tax for the discounted price. The difference between the price and the discount will be considered taxable income in the year you received. So if the stock was $10 at the time of purchase, but you got a 10% discount and paid only $9, then $1 would be added to your income in that year and you would have paid tax then. When you sell at $25, you now have a capital gain of $15 ($25-$10) that is taxed at time of sale.
yup fair enough. just thought i'd ask just incase.

cap gains are cap gains haha...
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Sep 1, 2005
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Markham
Crispers wrote: Just sold a bunch of stocks that I purchased through my employee share purchase plan (used funds to buy a home).

These stocks were bought at a 10% discount of the market price. I'm pretty sure the 10% discount was taxed as ordinary income in each tax year.

I'm facing a pretty large capital gains tax bill today as the price sold is about 2.5x what I bought them for throughout the past 6-7 years.

Are there any tax strategies that I can take advantage of to reduce the tax bill?

Thanks!!
If you have RRSP contribution room, you can borrow money and use the deduction to reduce the tax bill this year.

Having said that you still have to repay the loan + interest which requires cash. You might consider doing that if the taxable capital gain pushed you into another tax bracket and you might be in a lower bracket normally. You'd have to run the numbers to see if you're ahead and by how much and whether it's worth it.

Does you home purchase qualify for RSP Home Buyers Plan withdrawal? You might do a qualified HBP withdrawal and do a RSP contribution with those monies. No real money from your pocket required. In effect you're getting a upfront tax deduction with a 15 yr HBP repayment contribution schedule. This might be a good thing if there's a big tax bracket differential
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[OP]
Member
Sep 24, 2012
214 posts
129 upvotes
Ontario
gr8dlr wrote: If you have RRSP contribution room, you can borrow money and use the deduction to reduce the tax bill this year.

Having said that you still have to repay the loan + interest which requires cash. You might consider doing that if the taxable capital gain pushed you into another tax bracket and you might be in a lower bracket normally. You'd have to run the numbers to see if you're ahead and by how much and whether it's worth it.

Does you home purchase qualify for RSP Home Buyers Plan withdrawal? You might do a qualified HBP withdrawal and do a RSP contribution with those monies. No real money from your pocket required. In effect you're getting a upfront tax deduction with a 15 yr HBP repayment contribution schedule. This might be a good thing if there's a big tax bracket differential
Thanks for the idea, however I do not qualify for RSP Home Buyers Plan

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