Equity compensation

How BC law treats it

Corporate approval comes first. Under the Business Corporations Act, SBC 2002, c 57 (BCBCA), shares are issued by the directors, who must set the consideration and confirm it is fully paid before issue. The shares must be within the authorized share structure in the notice of articles, and any special rights or restrictions in the articles must be respected. Options and RSUs are usually granted under a written plan approved by directors' resolution, with individual grant agreements. Securities law comes second. Every grant of shares, options or units is a distribution under the Securities Act, RSBC 1996, c 418. Private companies normally rely on the employee, executive officer, director and consultant exemption in National Instrument 45-106 Prospectus Exemptions, s. 2.24, which requires participation to be voluntary. Tax is federal. Section 7 of the Income Tax Act, RSC 1985, c 1 (5th Supp) governs employee stock options and similar share rights, and BC income tax follows the federal base. Employees of a Canadian-controlled private corporation (CCPC) dealing at arm's length defer the option benefit until they sell the shares and may claim a deduction of one half of it. For other employers, the benefit is generally taxed on exercise. Since July 1, 2021, an annual $200,000 vesting limit on the deduction applies to non-CCPC employers with consolidated revenue above $500 million. Shares issued directly to an employee as compensation are generally also treated as issued under a section 7 agreement: for an arm's length CCPC employee the benefit is usually deferred until sale, while for other employers it is generally taxable when the shares are received.

What it means for your business

Equity compensation lets startups and growing companies attract talent and align teams with investors. The tax result depends heavily on structure: options in a CCPC are far more favourable than shares granted outright. Poor records or missing approvals create problems in financing and exit due diligence, and vague vesting or leaver terms lead to disputes with departing employees. Plan design should match the company's cap table and exit plans. Example: A Vancouver startup that is not a CCPC, because a foreign venture fund controls it, offers a new head of product a choice between 1% of its shares issued now or options over 1% vesting over four years. Its lawyer explains that the immediate share grant creates taxable employment income now, while the options are taxed only when exercised.

Risks and common mistakes

Promising equity in an offer letter without a plan, board approval or grant agreement. Issuing shares outright to employees without checking whether the company is a CCPC and when the employment benefit will be taxed. Granting equity to consultants without confirming they qualify under the NI 45-106 s. 2.24 exemption. Ignoring leaver provisions, so departed employees keep unvested equity. Losing track of grants, which leaves an inaccurate cap table at a financing.