Quantifying the Personal Income Tax Benefits of Backdating: A Canada - US Comparison

Compton, Ryan and Nicholls, Christopher C. and Sandler, Daniel and Tedds, Lindsay (2011): Quantifying the Personal Income Tax Benefits of Backdating: A Canada - US Comparison. Published in: Columbia Journal of Tax Law , Vol. 3, No. 2 (2010): p. 145.

Abstract

This paper examines the pre- and post-tax returns to Canadian and US executives who receive backdated stock options (that appear to be at-the-money options) compared to currently-dated in-the-money options. We begin by comparing the Black-Scholes value of backdated at-the-money options to currently-dated in-the-money options (with the same strike price as the back-dated options). We then contrast the pre- and post-tax returns of such options on the assumption that the options are eventually exercised at a time when the options are in-the-money and the shares sold (either immediately or later) at a profit. We demonstrate that a Canadian executive can earn a significantly larger after-tax return from backdated options compared to a US executive due to the favourable Canadian tax treatment of executive options relative to their treatment in the United States. The comparison suggests that the personal tax regime may have had an impact on the desire to receive backdated options in lieu of other forms of compensation in Canada but not so in the United States.

• Item Type: MPRA Paper
• Language: English
• Keywords: Executive compensation, stock options, personal income tax
• Subjects: J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J38 - Public Policy; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H24 - Personal Income and Other Nonbusiness Taxes and Subsidies; K - Law and Economics > K3 - Other Substantive Areas of Law > K34 - Tax Law; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J33 - Compensation Packages ; Payment Methods; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion and Avoidance

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