Three Employees Faced Losing Their Stock Option Deduction at Closing

The situation

By the time Jae-won came to us, he had already spent three weeks emailing back and forth with the acquiring company's legal team, trying to get the deal structure changed. His employer, a mid-sized engineering firm in Wallaceburg where he worked as an actuary supporting the firm's risk consulting arm, was being bought by a much larger national engineering group. The purchase agreement, as drafted, called for every outstanding stock option to be cashed out at closing: option holders would simply receive a cheque for the difference between the strike price and the deal price, rather than exercising their options for shares first.

Jae-won's emails asked, reasonably, whether option holders could instead exercise into shares and roll those into the transaction, a structure that would have preserved the tax treatment he understood his options were meant to carry. The buyer's team declined every version of the request. Their standard practice, on deals of this size, was a cash buyout of options across the board, and they were not interested in carving out a different mechanism for one seller's employees when it complicated their own closing paperwork and their own timeline.

What Jae-won had not fully appreciated, and what none of the three employees who came to us together had been told clearly, was what a straight cash buyout would do to their taxes. Along with Jae-won, Sanja, a professional engineer who had been with the firm for over a decade, and Jelena, who had joined more recently on a contract basis rather than as a direct employee, all held options that had appreciated significantly. Cashed out as ordinary payments, the gains would be fully taxable, with none of the reduction available to option holders who meet the conditions the rules set for a genuine option exercise. Across the three of them, the value of the deduction at stake ran to several hundred thousand dollars combined.

With the closing date already fixed and only a few weeks away, Jae-won's own efforts had gotten the group nowhere. He needed someone who could speak to the buyer's tax and legal team on different terms than an anxious employee could manage on his own.

What the other side was relying on

Once we looked at the deal structure closely, the buyer's position made more sense, and it was not simple indifference. A straight cash buyout of options is administratively easier for an acquirer, but it also has a real financial upside for the company doing the buying: the corporation making the cash-out payment can generally deduct that payment as a business expense. The rules allow employees to keep their own stock option deduction on a cash-out, but only if the employer formally gives up its own corresponding deduction through a specific election filed with the tax authority. Absent that election, the default outcome favours the corporation, not the employee.

The buyer's team was relying on exactly that default. Nothing in their draft agreement made the election, and nothing obligated them to. From their perspective, the deal already worked financially without it, and making the election meant giving up a deduction that would otherwise land on their own books after closing. Jae-won's earlier emails had asked for a different transaction structure entirely, exercise and rollover, which the buyer had no template for and no interest in building on short notice. He had never actually asked for the narrower thing that was achievable: the election itself, which requires no change to how the cash flows, only a filing that shifts who gets to claim the deduction.

The second thing the buyer's team was relying on was time pressure. With a fixed closing date, they expected that raising this late in the process would either be waved through without real negotiation or abandoned entirely once the sellers' side realized how close the deal was to signing. That calculation was not unreasonable. Closings do not wait comfortably for tax elections, and the buyer knew that pushing back firmly, and simply, was more likely to work than any employee complaint about fairness.

The third factor, and the one that ultimately could not be negotiated around, was Jelena's status. Because she had been engaged on a contract basis rather than as a direct employee of the firm, the stock option deduction was never going to be available to her regardless of what election the company made, since that treatment depends on the option holder actually being an employee at the relevant time. No negotiation with the buyer could change that fact, because it was not the buyer's decision to begin with.

What we did

1. Reframed the ask from a structural change to a single election. Rather than continuing to press for a different transaction mechanism the buyer had already rejected, we asked only for the corporate election that would let employees keep their deduction, a request that changed nothing about how or when the cash-out payments were made. This was a far smaller concession for the buyer to say yes to, and it moved the conversation out of the stalemate Jae-won's earlier emails had reached.
2. Quantified the cost difference for the sellers' side. We prepared a short comparison showing what the election would cost the acquiring company in lost deduction against what its absence would cost the option holders in additional personal tax, so the negotiation was grounded in real numbers rather than a general appeal to fairness that had gone nowhere for three weeks already.
3. Escalated past the deal team to the buyer's tax counsel directly. The transaction lawyers handling the purchase agreement were not the right audience for a request that turned on a tax election; they had already said no once and had little incentive to reopen it. We asked to speak with the buyer's own tax advisors instead, who understood immediately what was being asked and why it was a modest concession rather than the structural objection the deal team had assumed it was.
4. Confirmed Jelena's contractor status could not be changed retroactively. We reviewed her engagement history carefully to see whether any argument existed that she had, in substance, been an employee despite her contract label. The record did not support that position honestly, and pursuing it would have risked the credibility of the broader request on behalf of Jae-won and Sanja, so we did not raise it with the buyer.
5. Negotiated the election into the closing documents. Once the buyer's tax counsel agreed in principle, we worked the election language into the closing deliverables directly, rather than treating it as a side letter that could slip once the deal team's attention moved on to other closing items in the final rush before signing. Locking the commitment into the closing set, instead of a separate promise made in a phone call, meant it was still binding even if the individual advisors who agreed to it were not the ones actually running the signing table weeks later.
6. Managed the filing timeline against the fixed closing date. Before the buyer's tax counsel would commit to the election, they wanted the tax authority's own written confirmation of how it would be treated, and that request was taking noticeably longer to turn around than usual that quarter, which the buyer's own advisors confirmed independently. We tracked that confirmation request separately from the deal's own closing mechanics, building in a buffer, so a slow response from the tax authority would not leave the whole transaction waiting on a single outstanding letter.
7. Advised Jelena on limiting the damage rather than avoiding it. For Jelena, we focused on timing her cash-out payment and reviewing her overall tax position for the year to reduce the total bill where possible, including confirming what other deductions and credits were available to her, since the option deduction itself was simply not on the table. We were direct with her early, rather than letting her assume the buyer's negotiation might eventually reach her too, so she could plan around the real number instead of a hoped-for one that was never coming.

The outcome

The buyer agreed to make the election, and it was filed correctly once the deal closed. Before it would commit, though, the buyer's tax counsel had asked the tax authority for its own written confirmation of how the election would be treated, and that request took noticeably longer than usual to come back that quarter, a delay its own advisors confirmed independently. That slower turnaround forced the whole group to accept a closing date that shifted by nearly three weeks from the original schedule, entirely outside anyone's control, since the buyer would not finalize the numbers until its own confirmation request was answered. Jae-won and Sanja kept their stock option deduction on the cash-out payments, which meaningfully reduced the personal tax each of them owed on a transaction they had no real control over the structure of in the first place.

Jelena's outcome was different, and we were honest with her about that from the first conversation, well before the negotiation with the buyer had even concluded. Her contractor status meant the deduction was never available to her, whatever the company agreed to on the election, because that outcome depended on a classification question the deal itself could not change. What we could do, and did, was time her payment relative to her other income for the year and review her broader tax position for additional deductions and credits to reduce the total bill somewhat, but the core loss, several tens of thousands of dollars in tax that Jae-won and Sanja avoided and she did not, was real and could not be undone by anything negotiated at closing.

The three of them understood, by the end, that the result reflected an accident of employment classification set months before the sale was ever discussed, rather than anything unfair about how the file itself was handled. Jae-won's early instinct, to push for a different deal structure entirely, had been the wrong ask; the narrower request that actually worked cost the buyer far less and gave the company no real reason to refuse once it reached the people on their side who understood what it meant technically. The lesson the group took from it, more than the dollar figure either way, was how much the final outcome had turned on a contract detail agreed long before anyone was thinking about a sale at all, and how little room there was to revisit that detail once the deal was already moving.

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