Autumn usually sees an increase in employee stock option activity. The reason is deadlines. Public companies have fixed “windows” when options can be exercised by executives. Moreover, options have terms; they expire if they are not exercised. While stock options can generate a significant spike in compensation, they may also trigger a large tax event. If the executive has charitable intent, these circumstances are often an opportunity for charitable giving and significant tax savings.
A bit of context. When a stock option is exercised there is an employment benefit, which is the value between the exercise price and the fair market value. The benefit is included in income in the year of the transaction and taxed at 50% of the normal rate (same level as capital gains).
If the employee decides to donate the proceeds of the exercise – either the shares themselves or net cash proceeds – there is no taxation on the amount donated as long as the gift is made to a registered charity within 30 days. In addition, the taxpayer will receive a tax credit for the fair market value of the donation. These two tax benefits are similar to those for gifts of public securities.
Aqueduct Foundation has been able to assist a number of public company executives with time-sensitive donations from stock options. Aqueduct provides a number of advantages.
- The donation can be arranged and implemented with 24 hours. This means an immediate tax receipt and market timing.
- Aqueduct has strong experience with logistics of these donations.
- Aqueduct provides the donor complete flexibility about choice of charities after the gift has been made. The donor can give now, but choose the timing, charity/ies and grant amount later.
The best way to make an option gift is to donate a portion of the net cash proceeds within the 30-day window. Transferring the cash enables employees to set the value of the gift by making the exercise and the sale of the security simultaneous. In addition, the donor is less likely to be out of pocket when financing the options.
Malcolm D. Burrows and the Aqueduct team:
Rosaline Chan Vancouver 1-888-723-1122