The Bottom Line June 2006 23
F I NA N C I A L P L A N N I N G
Stock options and the independent consultant
By PETER MERRICK about the movement of stock CRA will view them as indepen- consultant should be excluded
uring the late 1990s there prices can be summed up in eight dent, not as employees. The CRA from stock option plans and docu-
D was a lot written on the
value of employees
receiving stock options as an
words: “The downs are tempo-
rary; the ups are permanent!”
Stock options might be out of
tests individuals on four criteria to
determine their status as indepen-
ments for the company’s full-time
Over the last few years the leg-
employee benef it and the favor as today’s preferred form of Test 1. To what extent does the islation regulating stock options
favourable tax treatment this form compensation, but those with independent consultant control as compensation for employment
of compensation received from vision and faith in our economy how the work is done? in Canada have been in constant
the Canada Revenue Agency. know that experience has proven Test 2. Does the independent flux.
However there has been very that what most people describe as consultant own the tools? It would be highly recom-
little discussion on the benefits of a bear market is actually a really Test 3. Does the independent mended before considering
using stock options as a way that big sale. consultant pass the integration receiving this type of compensa-
skilled independent consultants Further, those professionals test? tion to seek the advice of a labour
can be paid in lieu of money. Inde- who embrace stock options as a Test 4. What are the chances of and employment lawyer to make
pendent consultants may want to portion of their employment dian economy are soft. profit and loss for the independent sure all bases are covered.
explore this alternative during financial compensation have deep Companies that trade their consultant?
lean economic times. down within them an intrinsic potential future stock value in
It was not long ago that we belief that their stock options will options are able to barter for the To help create safeguards from Peter Merrick, BA, FMA, CFP,
heard daily news about Gen Xers be very valuable in the future skills of highly paid consultants having an employer/employee FCSI is the President of Merrick
who had just graduated university because the companies they are today. Including stock options as relationship deemed by CRA, Wealth Management Inc., a boutique
and had begun working for start- working with will be successful. compensation will, from the stock options issued to indepen- fee-for-service executive benefit and
up companies that suddenly went They want to share in that employers’ point of view, solidify dent consultants should be in the financial consulting firm in Toronto.
public on some stock exchange. financial success. In the end true their relationship with their con- name of their incorporated com- He can be contacted at: peter@mer-
Overnight these 20-something- optimism is realism. Fear of the tractors. Also, if structured prop- panies, not to them personally. rickwealth.com or www.merrick-
year-olds would find themselves future is counterintuitive to the erly, stock options have no finan- All stock option documenta- wealth.com or (416) 854-1776.
with more than enough money in nature of human progress. The cial risk. There are no tax tion specific to the independent
the bank to retire comfortably for Internet, to date, is humanity’s consequences to either the
life. greatest invention and it is only 37 employer or the independent con-
This was, and still is, the lure years old; just imagine what inno- sultant as long as the options are
of company stock option pro- vation the next 37 years will not exercised. And when the stock
grams. It seems like a lifetime ago bring. options are exercised, the consul-
since Jan. 14, 2000, when the tant will receive favorable tax
Dow Jones peaked at 11,722.98 Top talent treatment on the proceeds of the
points and March 10, 2000, when When the job market was tight sale.
the Nasdaq reached its all-time in the late ’90s for hi-tech profes- If independent consultants are
high of 5048. sionals, paying in stock options considering receiving stock
allowed companies to get access options as part of the payment,
Staying positive to top talent at below-market they should be particularly cau-
The lessons that history has prices. This same logic applies tious that their relationship is
taught us over the last century when some sectors of the Cana- structured contractually so that
Free up your time for tax planning
suggest you go out and buy The business you need many clients.
World Is Flat by Thomas L. Many clients equal many tax
Friedman. You may find some of returns. Preparing many tax
the answers to your time dilemma returns requires vast amounts of
in that excellent book. time spent on a task, though
In life, when you do not have important, not accountants’ core
time to do everything you want to, benefit.
you have to prioritize. When it So what is the solution? All
comes to business, your priority practical problems have multiple
should be the core benef it that solutions, but the solution that I
your firm provides. want to focus on is outsourcing.
Take this one step further and There is a good reason why
ask yourself, what is the core ben- Nike outsourced the making of
efit you provide to clients? Is your their shoes, but kept their mar-
core benef it a completed tax keting department in North
y the time you read this, return? America.
B tax season will have come
and gone. In my f irst
article of the year I mentioned
They have outsourced activi-
ties that are not central to their
business to minimize costs and
that tax planning should be proac- maximize eff iciency. They can
tive and done throughout the year. All practical problems easily train others to make their
Sound advice in theory you have multiple solutions. shoes, but not to perform their
may say, but not always practical. core benefit of customer contact.
Reason being, you do not always They are now able to focus more
have the time to be proactive. of their time on what they are
Running your own practice is really selling, image.
hard work, and above all, Ask your clients and I think Their success speaks for itself,
extremely time consuming; espe- you will find them saying that the but what of the world of
cially when you are playing roles core benef it you provide is the accounting? Accounting is not
in the production department proactive searching for and imple- made of shoes and image you may
(actually doing the work) the mar- mentation of tax minimization say!
keting/sales department (client and deferral strategies. Here is why it makes strategic
contact) and often the R & D The problem that arises here is sense to outsource the completion
department (determining what a little like the chicken and the of tax returns.
valuable services your clients may egg. You need to have tax returns Allowing someone else to
be willing to purchase through completed to have an idea of pos- complete the forms will mean you
your firm). sible tax planning strategies that may be able to lower your
Before you attack the backlog you can implement for your
that built during the tax season, I clients. And to run a successful See Canadian on page 25