Repricing Underwater Stock Options

  • October 08, 2020
  • Kathryn Walker, tax planning associate, Fasken

When a company’s value decreases any issued stock options may become “underwater,” which occurs where the value of the underlying shares drops below the exercise price of the stock option. If stock options are underwater, it may be necessary to reprice the options to ensure that key employees remain incentivized. 

How can repricing be implemented?

The repricing of stock options can raise significate issues from a corporate law or securities law perspective, which are beyond the scope of this article. The following focuses exclusively on tax law considerations, namely, the need to ensure that (a) the repricing is not considered a taxable disposition; and (b) the 50% deduction under paragraph 110(1)(d) of the Income Tax Act,  remains available.

The following two methods salvage underwater options without triggering adverse tax consequences.