Need help reviewing ESPP

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bhramar
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Need help reviewing ESPP

Post by bhramar »

I live in BC and work for Canadian entity of a company that has corporate headquarters in US (market cap > US$30 bn). The company is now offering Employee Stock Purchase Plan (ESPP) to Canadian employees and would like to seek the forum's help in evaluating the plan.

ESPP details -
Max. Contribution: 15% of Base Salary deducted from pay cheque (twice a month)
Company contribution: 10% discount on the purchase
Contributions for the previous month will be converted from C$ to US$ using exchange rate published by Corporate Finance typically during first week of the month. These funds will be used to purchase company stock on 10th of every month and will be available in Morgan Stanley StockPlan Connect account in 3 days. I can sell immediately (transaction cost US$25) and can get a US$ cheque sent to me for free or get a direct deposit for a fee.

If I had started contributing to this plan in December, here is how I think it would have worked out -

Contribution:
Max Contribution per month: C$1,755
Company Contribution: C$195 (10% of total)
Total ESPP Contribution: C$1950
C$ to US$ Conversion Rate: 0.7976 (as published by Corporate Finance)
Total ESPP Contribution: US$1555.32

ESPP Transaction:
Company Stock Price: US$100
No. of Stocks purchased: 15.55 (on 10th of every month)
No. of Stocks sold: 15.55 (say 13th of every month)
Transaction Fee: US$25
Net Proceeds from Sale: US$1530.32 (assuming no change in stock price)
US$ to C$ Conversion Rate: 1.2130 (TD Non-Cash Exchange Rate as of today, it might be third or fourth week of the month when I get the cheque)
Net Proceeds from Sale: C$1856.28
Capital Gains: -C$93.72 (1856.28 - 1950)

Taxes:
Combined Marginal Tax Rate: 40.70%
Tax Deducted at Source: C$79.37
Capital Gains Tax: -

Net Gain:
Monthly Net Gain from ESPP: C$21.91 (1856.28 - 1755 - 79.37 - Capital Gains Tax if any)
Annualized Net Gain from ESPP: C$262.96
Monthly Rate of Return: 1.2%
Annualized Rate of Return: 15.0%

When I worked in US for the same company, I contributed to max and sold immediately every month during 2013-2016 period. The stock price remained fairly stable - average change over all transactions was -0.1%. The annual return was higher in US because of low marginal tax rate and as there was no loss in currency conversion. I can reduce transaction frequency and sell every quarter or so that will help increase the return, but then I am exposed to market risk on currency and stock price. Considering the low returns and the effort it might take to track exchange rate / cost basis, I am wondering if this is a good plan.

Am I missing anything in the analysis above? Is there anything else I can do to improve the returns or simplify from tax filing perspective?

Thank you for your time and feedback.
Last edited by bhramar on 21 Jan 2018 12:41, edited 1 time in total.
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adrian2
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Re: Need help reviewing ESPP

Post by adrian2 »

It makes little sense to use it the way you describe it, you would be giving away most of the 10% discount to:
- taxes (unavoidable),
- sell commission,
- forex ("published by Corporate Finance" does not mean they're not marking it up some percentage point from mid-market),
- vagaries of the market,
- vagaries of the exchange rate.

You are also calculating the capital gains the wrong way: your ACB would be the CAD deductions from your pay cheque, plus the company match (which you can also see as a taxable benefit in your pay slip / T4). The proceeds of disposition needs to be calculated in CAD. There may be a gain in USD and a loss in CAD or viceversa. Forget about using the capital gain report from the US broker, you have to do the calculation yourself (a lot of numbers to input yearly).

I also work for a Canadian subsidiary of a US multinational and they offer 2 ESPP's:
1. The quarterly plan, which buys stock quarterly, with up to 15% of your paycheque, with a 5% discount on the stock price.
2. The monthly plan, which buys stock at the end of each month, with up to 6% of your paycheque, company matches 2/3 for a max total of 10%.
The effective exchange rate on the buy side is (unofficially) about 50 bps from mid-market. Both plans charge heavy commissions to sell (similar options to yours in getting the money, just have to be careful to request USD currency, otherwise they'll send you CAD and rip you off another 2 or 3%).

I took a pass on the first plan and enrolled in the second.
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bhramar
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Re: Need help reviewing ESPP

Post by bhramar »

Thanks adrian2 for your response. I will update the capital gains to 1856.28 (Net Proceeds in C$) - 1950 (ACB) = -93.72
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Hyperborea
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Re: Need help reviewing ESPP

Post by Hyperborea »

Are you sure that you will get the fractional share? At every company that I worked for that had an ESPP they rounded down and refunded the extra dollars at the end of the purchase period (usually 6 months in the companies I worked for).
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kcowan
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Re: Need help reviewing ESPP

Post by kcowan »

In my case, they offered the option to roll the money into the next period too.
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BRIAN5000
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Re: Need help reviewing ESPP

Post by BRIAN5000 »

IMO a lot depends on what company this is?

Your intended use of the plan is probably not the companies intended use of the plan not that that matters I guess. These plans are like any pay yourself first strategy with the bonus on a 10% discount what's not to like? In my past company people used a similar plan for several different strategies, for long term investing to selling once a year to pay for car insurance, selling monthly or even quarterly seems a little excessive to me. If this was a stable long term company try to estimate your downside risk set a level of contribution you would be comfortable with and review once a year. "The most millionaires were made with investments of less than $1000 per month." (sorry no source for that quote)
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Re: Need help reviewing ESPP

Post by kumquat »

If you think the company is a likely long term gainer (ie you might consider buying it without the 10% match), go for it. If you wouldn't buy it with your money, why would you buy it with 90% your money?
I don't intend to offend anyone, that part is just a bonus.

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bhramar
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Re: Need help reviewing ESPP

Post by bhramar »

Hyperborea wrote: 24 Jan 2018 13:26 Are you sure that you will get the fractional share? At every company that I worked for that had an ESPP they rounded down and refunded the extra dollars at the end of the purchase period (usually 6 months in the companies I worked for).
Yes. I contributed to ESPP in US and each month the purchase resulted in fractional shares.
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Re: Need help reviewing ESPP

Post by bhramar »

Thank you all for your responses.

Even if the company has been around for long time (will be 100 yrs. in 2019) and is relatively stable long term company among its peers, I would not buy the stock if there was no (10%) discount from company. I do not invest in individual stocks and my portfolio consists of only low cost broad-market index ETFs. The only reason that I participated in ESPP in US and would consider doing it in Canada is to benefit from company discount. Although its the same plan, the net benefit in Canada is decreased due to taxes, transaction fee and currency conversion.

My wife also works for the same company and if we both were to contribute to the max (15%), the total monthly contribution will be around C$2750. This amount is around 40% of our total monthly savings that gets invested in our taxable accounts. If I sell on a quarterly or semi-annual basis it will help reduce transaction and currency conversion cost, but a significant portion of our savings will be accumulated in ESPP in just one company stock. I am not comfortable with this risk as even a small drop of 3% over 3 or 6 months can wipe out the net benefit from ESPP.
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AltaRed
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Re: Need help reviewing ESPP

Post by AltaRed »

If you are that risk averse that you fear a stock price drop of 3% (break even), then I don't see any 'sleep at night' value in pursuing this plan. I visualize you crunching through the calculations monthly, and likely watching the stock price daily, and worrying about winning or losing on each transaction, whether done monthly or quarterly.

No investment is worth fretting about when you both have busy careers and a lot of living life to be done. It is only worth it if you can put it out of mind and only look at it every 6 months or so.
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bhramar
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Re: Need help reviewing ESPP

Post by bhramar »

Thanks AltaRed.

Yes, I will worry about the possibility of quarterly loss. I agree, its not worth it in my case.
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Mordko
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Re: Need help reviewing ESPP

Post by Mordko »

This is for tax experts... Does CRA consider ESPP to be equivalent to having share options for the purposes of tax-loss harvesting?

My ESPP summary:
- a percentage of salary withheld from every payslip
- buying shares every 2 months with accumulated $, at a discount.

I let the shares accumulate for a while but make sure that the total never exceeds 1% of my stock portfolio to avoid "double jeopardy".

Last year the shares accumulated a decent gain, so I waited until early January to sell the stock. This year the shares are down a bit.

Question: if I sell the shares purchased this year in December of 2018 - will CRA recognize the loss or will they consider this as a "superficial loss" because I am still contributing to ESPP?

Thanks.
twa2w
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Re: Need help reviewing ESPP

Post by twa2w »

They should recognize the loss.
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Mordko
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Re: Need help reviewing ESPP

Post by Mordko »

twa2w wrote: 16 Jun 2018 12:17 They should recognize the loss.
Thank you.
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