NSO

You can grant non-qualified stock options (NSO) to local residents in Canada. It works and is an excellent option to incentivize team members.

Taxation will generally be:

• At grant: There’s no taxation at grant.
  
  
• At exercise of the stock options: The stock options are taxed at the time of exercise, as salary income. The company will be responsible for reporting/withholding the taxes. There will be a possibility to reduce the taxable amount by half, subject to certain conditions.
  
  
• At sale: The sale price minus the FMV of the shares at exercise will be taxed either as capital gain.

There are tax advantages available when granting stock options to Canadian employees. The effect is that only half of the amount due at the time of the exercise of the stock options will be effectively taxed!

NSO

You can grant non-qualified stock options (NSOs) to local residents employed via EoR in Canada.

Taxation will generally be:

• At grant: There’s no taxation at grant.
  
  
• At exercise of the stock options: The stock options are taxed at the time of exercise, as salary income. The EoR will be responsible for reporting/withholding the taxes so inform them asap when the grantee informs the company, he/she wants to exercise.
  
  
• At sale: The sale price minus the FMV of the shares at exercise will be taxed either as capital gain (most likely) or regular income (less likely).  

There are no specific tax advantages available when stock options are granted to employees employed via an Employer of Record (EoR).

NSO

You can grant non-qualified stock options (NSOs) to local residents employed as contractors in Canada.

There are no legal obstacles but the tax treatment of stock options offered to contractors is not clear: it’s difficult to tell how and when stock options are going to be taxed by the Canadian tax authorities (because the gains realized could be considered as either business income or as a capital gain).

For this reason, it’s recommended that the grantee consults with a personal tax advisor, in particular at the time of exercise of the stock options and upon sale of the shares.

The most likely taxation is:

• At grant: It’s unlikely that there would be a taxation at the time of grant.
  
  
• At exercise: The difference between the FMV of the shares at exercise and the exercise price would normally be taxed at the time of exercise, either as (i) a business income or (ii) a capital gain (which is less heavily taxed compared to business income, because only 50% of the gain is taxed).
  
  
• At sale: The difference between the sale price and the FMV of the shares at the time of exercise will be taxed, most likely as capital gain.

The company won’t legally have to do anything vis-à-vis the local authorities as it will be the grantee’s responsibility to report the taxable gains and pay the taxes.

There are no specific tax benefits that apply for contractors.