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

42 Pages Posted: 11 Apr 2010 Last revised: 3 Jul 2012

See all articles by Ryan A. Compton

Ryan A. Compton

University of Manitoba

Daniel Sandler

University of Western Ontario - Faculty of Law

Lindsay M. Tedds

University of Calgary - The School of Public Policy; University of Calgary - Department of Economics

Christopher C. Nicholls

University of Western Ontario

Date Written: May 28, 2010

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.

Keywords: Executive compensation, stock options, personal income tax

JEL Classification: H24, H26, J33, J38, K34

Suggested Citation

Compton, Ryan A. and Sandler, Daniel and Tedds, Lindsay M. and Nicholls, Christopher C., Quantifying the Personal Income Tax Benefits of Backdating: A Canada - US Comparison (May 28, 2010). Columbia Journal of Tax Law, Vol. 3, No. 2, 2012, Available at SSRN: https://ssrn.com/abstract=1586994 or http://dx.doi.org/10.2139/ssrn.1586994

Ryan A. Compton

University of Manitoba ( email )

501 Fletcher Argue Bldg
Winnipeg, Manitoba R3R3B1
Canada

HOME PAGE: http://home.cc.umanitoba.ca/~compton

Daniel Sandler

University of Western Ontario - Faculty of Law ( email )

London, Ontario N6A 3K7 N6A 3K7
Canada

Lindsay M. Tedds (Contact Author)

University of Calgary - The School of Public Policy ( email )

Calgary, Alberta
Canada

University of Calgary - Department of Economics ( email )

University Drive
Calgary, Alberta T2N 1N4
Canada

Christopher C. Nicholls

University of Western Ontario ( email )

1151 Richmond Street
Suite 2
London, Ontario N6A 5B8
Canada

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