Phantom Stock Plans – Employee Incentive or Tax Nightmare?
Granting options to employees is a fairly standard form of employee incentive utilized in Canada. What seems to be equally popular in the United States is the issuance of “phantom stock units” to incentivize employees. Phantom stock units can also be referred to as “deferred stock units”or “restricted stock units”.
Phantom stock units are generally issued as part of a phantom stock plan, and while the terms of each plan can vary greatly, at its core, a phantom stock plan basically grants employees certain economic rights that are tied to the equity or performance of the company but may not result in the issuance of any equity in the company. For example, a phantom stock unit may track the increase in value of a company’s common shares, such that employees will be paid an amount equal to the increase of a company’s stock price between the issue date and the maturity date of the unit.
Phantom stock plans can provide a company with significant flexibility in granting incentives to its employees, but in Canada, the taxation of phantom stock plans for the recipient employee may not be as advantageous as the issuance of a stock option. If not structured properly, a phantom stock unit grant can be immediately taxable to the employee, even if no amounts are payable to the employee until months or years later.
It is important to review the terms of any phantom stock plan before issuing units to Canadian employees to ensure the Canadian income tax implications are understood, so that you can truly provide your employees an incentive, instead of an unwelcome Canadian tax surprise.
If you have questions about phantom stock plans, please contact a member of our tax team.