Chahar Bonus

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Tidal Pool

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Chahar Bonus

posted on Feb 15, 2015 05:02PM

Lets look at the potential ways available to compensation a manager.

1) Salary

2) Cash Bonus

3) Share Bonus or Restricted Shares

4) Options

Will Dr. Chahar be put on salary and the share bonus is the first disclosure of this event? This could be very bullish for ZEN.

Why not just grant Dr. Chahar more options? Well options are usually a long term incentive to keep someone and he already has been granted 200,000 in 2013 when he joined the company. Also it could be that options must be held longer than stock to get the full advantage under the IRS, ie treated as a capital gain instead of income. So is something going to happen to raise the SP in the short term?

Why not just give Dr. Chahar a cash bonus? This would be immediately taxable.

As an American consulting for a Canadian company but residing in the US Dr. Chahar would be subject to US not Canadian tax treatment of the restricted shares (since he cannot sell for 4 months they are restricted). See below from Gowlings the IRS treatment of such awards. Basically this is a way to not pay any tax until the restriction is fulfilled. So in 4 months it is due.

This type of award is a way of paying Dr. Chahar without any immediate tax liablity and it will enable him to sell these shares after 4 months and likely not pay any taxes due until he files his US taxes in 2016.

To me Restricted shares are more tangible, don't attract tax immediately and can be converted to cash when the restriction is fulfilled and any appreciation in share price will be treated as a capital gain and taxed lower.

2.2 U.S. Taxation of Restricted Stock: Specific U.S. tax rules govern the tax treatment of restricted stock. A U.S. employee receiving a restricted stock award is not taxed at the time of grant unless an election is made under IRC section 83(b). Instead, the employee is taxed at vesting, when the restrictions lapse. The amount of income subject to tax is the difference between the fair market value of the shares at the time of vesting less the amount paid for the shares, if any. The company receives a tax deduction equal to the same amount included in the employee’s income. The effect of the election under section 83(b) of the IRC is to include in income the fair market value of the stock at the time it is transferred to the employee (less any amount paid for the shares) as compensation. The company also takes a corresponding tax deduction at the time of the inclusion of compensation. If the election is made, no tax is imposed at vesting. The employee receives capital gains treatment on any subsequent stock appreciation from grant when the shares are sold.