The newly elected Liberal government released its Update of Economic and Fiscal Projections on Friday, November 20, bringing with it some much-needed clarity on a particularly sensitive subject.

In a press conference discussing the update, the Honourable Bill Morneau, Minister of Finance, discussed one of the key platforms of the Liberal election campaign. The Trudeau government indicated that, if elected, they intended to limit the deductions related to the taxation of employee stock options. Currently, an exercise of stock options results in a taxable employment benefit to the employee equal to the excess of the market price (at the time of exercise) over the strike price of the options. However, there is a 50% deduction available against the benefit, provided certain conditions are met, effectively taxing only half the amount of the income. This affords stock option income tax treatment akin to the treatment given to capital gains. 

The Liberals appeared intent on limiting the amount of the stock option deduction to the first $100,000 in stock option gains annually. As a result, there was a widespread view in the tax community that consideration be given to accelerating any planned future stock option exercise (despite other inherent risks), in order to take advantage of the existing tax rules.

The Finance Minister indicated on Friday that the government is giving careful consideration to this issue and a detailed plan to tax stock options would be laid out in the coming months. The Minister also clarified that any changes to the taxation of employee stock options benefits would not be retroactive, and would apply from the date they are announced. Further and perhaps even more importantly, he indicated that any changes would be applied only to stock options issued after the announcement is made. Therefore, stock options currently outstanding should not be affected by any new rules, and any tax planning done to combat these anticipated changes (such as an early exercise) would appear to not be required. That said, the decision to exercise in 2015 (rather than defer), should take into account other factors, particularly the anticipated increase in top personal tax rates – another Liberal campaign promise.

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