Canadian ESPP

Cultivate performance and retention company-wide with an employee share purchase plan.

Launching or retooling your ESPP?

With an ESPP, employees make contributions to an account held for their benefit. From this account, shares of the company are purchased at regular intervals, either on the open market or from shares issued from treasury. Employees can make fractional share purchases, which are not permitted in individual brokerage accounts. These programs are also beneficial for employers. ESPPs can serve as both recruitment and retention tools, and function to align employee and shareholder values.

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Deferred profit- sharing plan

Employee benefit plan

Employee profit- sharing plan

Employee savings plan

Registered retirement savings plan

Tax-free savings account

Deferred profit-sharing plan

Plans at a glance

Canadian savings plan types

Deferred profit- sharing plan

At a glance

Vesting Employer contributions Trustee required Tax deferred

Employee contributions

Employee benefit plan

Employee profit- sharing plan

Employee savings plan

Registered retirement savings plan

Deferred profit- sharing plan

Tax-free savings account

Employee benefit plan

At a glance

In an employee benefit plan (EBP), contributions are made by the employer for the employee and are subject to a vesting rule. We rarely see an EBP with a vesting of over three years. Once the shares are vested, they are no longer considered to be part of the EBP and must be moved to anemployee savings plan (ESP). For this reason, an EBP can’t function as a stand-alone plan. Contributions are taxed on the vesting date using the market value on that date. If your stock value sees a major increase, participants will be taxed at the increased value. Employees can expect taxes to be withheld on the pay period where the vest date falls. An EBP can be a great fit for any company, but it’s often suited to bigger firms due to its administrative requirements. EBPs can present a lot of work for the payroll team at vesting time, as payroll must deduct taxes from employees’ pay. These plans also require the services of a trustee.

Vesting Employer contributions Trustee required Tax deferred

Employee contributions

Employee benefit plan

Employee profit-sharing plan

At a glance

In an employee profit-sharing plan (EPSP), a company is able to share its profits with some or all of its employees. Employer contributions are computed by reference to company profits, and the employer must decide on a formula that will be used to calculate the contributions. Employer contributions are considered a taxable benefit and are added to an employee’s income in the year the benefit is received. EPSPs also allow employee contributions. EPSPs allow for vesting, so they can be a great option for employers whose goals include retention. In fact, there is no vesting maximum, which offers employers a lot of flexibility. Yet it’s worth noting that a particularly long vest may not be popular with employees! Naturally, EPSPs are a better fit for companies that are profitable. Solium commentary – Forfeitures are reversed from employee income in the year of the forfeiture.

Vesting Employer contributions Employee contributions Trustee required

Tax deferred

Deferred profit- sharing plan

Employee profit- sharing plan

Employee savings plan

At a glance

In an employee savings plan (ESP), contributions are deducted from employees’ pay and employers match the contributions according to defined parameters. Employer contributions are considered a taxable benefit and are added to an employee’s income in the year the benefit is received. ESPs generally do not require the services of a trustee, and therefore are less costly to administer. For that reason, they can be great for small companies. A possible drawback of this plan type is that vesting is not permitted. Because employees receive the employer match right away, some argue that the ESP is a tool better suited to recruitment than retention. However, ESPs do permit restrictions. For instance, you might decide that the plan will not allow voluntary withdrawals for a given period.

Employer contributions Employee contributions

Vesting Trustee required Tax deferred

Employee savings plan

Registered retirement savings plan

At a glance

As most of us know, a registered retirement savings plan (RRSP) is a legal trust registered with the CRA used to save for retirement. RRSP contributions are tax deductible – employees participating through their employer contribute on a pre-tax basis and taxes are deferred until the money is withdrawn. The individual RRSP deduction limit is prescribed by CRA and is 18% of the prior year’s income to a maximum per year which is indexed for inflation. The maximum for 2019 is $26,500 and individuals are responsible for monitoring their contribution limits. Most Canadians are readily familiar with RRSPs and therefore may have less anxiety about participating. And RRSPs offer flexibility to employers because they enable restrictions. For instance, you might decide that the plan will not allow voluntary withdrawals for a given period. These plans require the services of a trustee, which will add administrative costs.

Employer contributions Employee contributions Trustee required Tax deferred

Vesting

Registered retirement savings plan

Tax-free savings account

At a glance

Tax-free savings accounts (TFSAs) are a popular choice for ESPPs. They allow individuals to contribute up to $6,000 per year (updated in 2019), and the contribution limit is indexed to inflation. Employer contributions count toward the yearly limit. Unused contribution room may be carried forward indefinitely. Any amounts withdrawn, including attributed gains or losses, will be also be factored into the individual’s contribution room. Most companies with a TFSA offer it as an add-on to another plan type, simply because the contribution limit is tough for employees to monitor. In TFSAs, income and capital gains are not subject to income taxes, nor are losses deductible from capital gains outside the TFSA. Withdrawals, which are not subject to income tax, may be made at any time and for any reason, so TFSAs can offer more flexibility to employees than, for example, RRSPs.

Contribution limits CRA defined Plan registration Register with CRA Tax implications for employees Employer contributions are taxable to the employee. Employee contributions are included in taxable income. Other employee tax events None. Dividends and realized gains are not taxed at time of occurrence, nor are they taxed at withdrawal. Realized losses within the TFSA are not deductible from other capital gains.

Employer contributions Employee contributions Trustee required

Vesting Tax deferred

Tax-free savings account

How Does Your Garden Grow?

Tax-free savings account

Registered retirement savings plan

Employee profit- sharing plan

Employee benefit plan

Deferred profit- sharing plan

Employee savings plan

Vesting

Employee contributions permitted

Employer contributions permitted

Trustee required

Tax deferred

No, but investment gains are not subsquently taxed.

CRA Defined

Unlimited

No requirement

Notify CRA

No requirement

Employee contributions are not permitted. Employer contributions are not included in taxable income.

Employee and employer contributions not included in taxable income.

Employer contributions are taxable to the employee. Employee contributions are included in taxable income.

Employer contributions taxable to the employee at vest.

Employees pay tax upon withdrawal, based on value at time of withdrawal. Funds are taxed as regular income.

None. Dividends and realized gains are not taxed at time of occurrence, nor are they taxed at withdrawal. Realized losses within the TFSA are not deductible from other capital gains.

Dividends and interest earned are taxed as employment income.

Dividends and interest earned are taxed in the year earned. Realized gains and losses are taxed in the year of share sales per the CRA rules.

Contribution limits

Plan registration

Tax implications

Other employee tax events

Contribution limits CRA defined Plan registration Register with CRA Tax implications for employees Employee and employer contributions not included in taxable income. Other employee tax events Employees pay tax upon withdrawal, based on value at time of withdrawal. Funds are taxed as regular income.

Contribution limits Unlimited Plan registration Notify CRA Tax implications for employees Employer contributions are taxable to the employee. Employee contributions are included in taxable income. Other employee tax events Dividends and interest earned are taxed in the year earned. Realized gains and losses are taxed in the year of share sales per the CRA rules.

Contribution limits No Plan registration No requirement Tax implications for employees Employer contributions taxable to the employee at vest. Other employee tax events Dividends and interest earned are taxed as employment income.

Contribution limits CRA defined Plan registration Register with CRA Tax implications for employees Employee contributions are not permitted. Employer contributions are not included in taxable income. Other employee tax events Employees pay tax upon withdrawal, based on value at time of withdrawal. Funds are taxed as regular income.

Contribution limits Unlimited Plan registration No requirement Tax implications for employees Employer contributions are taxable to the employee. Employee contributions are included in taxable income. Other employee tax events Dividends and interest earned are taxed in the year earned. Realized gains and losses are taxed in the year of share sales per the CRA rules.

In a deferred profit-sharing plan (DPSP), the employer allocates a share of the profits to a trustee for the benefit of participating employees. Benefits remain in the trust until employment is terminated. Employees receiving a share of the profits paid out by the employer do not have to pay federal taxes on the money received from the DPSP until it is withdrawn. Deferred profit-sharing plans are quite similar to registered retirement savings plans (RRSPs) in that funds are taxed-deferred, but the major difference is that DPSPs do not allow for employee contributions. As such, DPSPs are normally coupled with an EPSP or another plan that allows for Employee contributions. Restrictions and vesting rules can be added to the plan structure, but the maximum vesting length is legislated and cannot exceed two years past the plan participation date. Solium commentary – Note that DPSP contributions count towards the Employee’s annual Pension Adjustment amount reported on their T4. This uses up the same contribution room as pension plan contributions so typically we see clients offer their employees a DPSP or a pension plan but not both.

Yes - until vest.