Canada: Proposed Amendments To The Stock Option Rules

Last Updated: July 16 2019
Article by Paul Carenza

Leading up to the 2015 federal election, the current government's platform contained a pledge to cap or limit the availability of the employee stock option deduction provided for in the Income Tax Act (Canada) (the "ITA"). However, the federal budgets introduced in 2016 through 2018  were silent on the issue.  Budget 2019 revisited the issue and announced the government's intention to impose an annual $200,000 limit on the stock option deduction for employees of large, long-established, mature companies, but few details were provided in the Budget 2019 materials.  On June 17, 2019, the Minister of Finance tabled a Notice of Ways and Means Motion that contains the proposed amendments, which are intended to be effective for options granted after 2019.  This article examines and comments on the proposed changes.

The Current Rules

Under the current rules, a deduction may be available equal to 50 per cent of the benefit derived from exercising or disposing of an employee stock option. This 50 per cent inclusion rate results in taxation to the employee at capital gains-like rates. The current rules do not include limits based on the income level of the employee claiming the stock option deduction, the number or value of the options granted or on the size, maturity or profitability of the company granting the option. The current rules generally deny a deduction to the employer in respect of the grant or the exercise of the option.

The current rules differentiate between options granted by a Canadian-controlled private corporation ("CCPC Options") and options granted by other corporations and mutual fund trusts ("Non-CCPC Options"). 

For Non-CCPC Options, an employee will generally be entitled to the 50 per cent deduction where:

  • The exercise price of the option is no less than the fair market value ("FMV") of the underlying security at the date the option is granted;
  • The employee deals at arm's length with the grantor of the option immediately following the time of grant; and
  • The share underlying the option satisfies the "prescribed share" tests set out in the regulations under the ITA, which seek to ensure that the underlying share is a "plain vanilla" common share.

For CCPC Options, an employee will generally be entitled to the 50 per cent deduction where:

  • The grantor is a CCPC at the time of the option grant;
  • The employee deals at arm's length with the grantor of the option immediately following the time of grant; and
  • The option is exercised and the shares acquired and held for two years prior to a disposition or exchange of the shares.

An employee holding CCPC options can also claim the deduction by meeting the more rigorous test for Non-CCPC Options.

The Proposed Amendments

The proposed amendments do not alter the current rules for CCPC Options.  Further, the proposed amendments will not apply to options granted by "start-ups, emerging or scale-up companies".  These latter terms are not defined in the proposed amendments and the government is engaging in a public consultation with a view to determining the parameters of these terms.  It will be interesting to see whether the government proposes distinctions based on objective criteria such as maturity of the business, number of employees, revenues, profits, etc., or more subjective criteria or perhaps even Ministerial discretion. In any event, options granted by CCPCs or start-ups, emerging or scale-up companies (referred to herein as "Non-Specified Persons") will continue to be governed by the current rules described above.

For all other options, being those granted by "Specified Persons", the proposed amendments introduce significant changes, for employees and employers.

Annual Cap

The concept of a $200,000 annual vesting limit is proposed.  An employee will only be entitled to the 50 per cent deduction in respect of $200,000 worth of options that vest in the same calendar year, with the $200,000 determined by reference to FMVof the shares underlying the options.  Any options that exceed this cap will be treated as "non-qualified" options. If an individual is employed by more than one employer, and those employers deal with each other at arm's length, the employee will have a separate annual cap in respect of each employer.

For example, assume an employee is granted options to acquire 10,000 shares which have a FMVat the date of grant of $80 per share, and all the options vest and are exercisable immediately.  The $800,000 underlying-share value is four times the annual cap, with the result that ¾ of the options will be "non-qualified" options.  Assume further that the employee exercises the options at a time when the share value has increased to $90 per share, such that a stock option benefit of $100,000 arises.  The employee will be entitled to the 50 per cent deduction only in respect of one-fourth of the benefit, or $25,000, with the remaining $75,000 of benefit taxed at full rates.  If, instead, the 10,000 options were to vest over a four-year period, each of those four years would have a separate $200,000 annual cap, with the result that none of the options would be "non-qualified".

The annual cap approach is an interesting policy choice.  In the Backgrounder released with the proposed amendments, the government states that the current rules unfairly benefit the wealthiest Canadians, with six percent of claimants receiving two-thirds of the $1.3 billion in stock option deductions.  However, rather than impose an annual cap based on the income level of the claimant, the proposed amendments impose the annual cap on all claimants who receive options from Specified Persons. This arguably penalizes employees who do not count themselves amongst the "wealthiest Canadians" but for whom the 50 per cent deduction is an important part of their compensation package.

Determining the Vesting Year

If the option grant specifies the calendar year in which the right to exercise arises (otherwise than as a consequence of an event that is not reasonably foreseeable at the time of grant), then the year so specified will be the vesting year for purposes of applying the annual cap.  In any other case, the vesting year will be the first calendar year in which the right can reasonably be expected to be exercised.  It is not clear that an option grant that is silent on the issue of vesting, and thus is technically immediately exercisable, can always reasonably be expected to be exercised in the year of grant. Consider also how vesting criteria other than time-based criteria will be interpreted for the purposes of this rule.

Ordering Rules

Where an employee holds options that include qualified and non-qualified options, the employee will be treated as having exercised the qualified options first.

Employer Deduction

The proposed amendments provide a Specified Person with the ability to claim a corporate deduction in respect of non-qualified options, in an amount equal to the stock option benefit derived by an employee.  The deduction is provided for in the computation of taxable income, rather than by amending
paragraph 7(3)(b) of the ITA which has traditionally been the source of the denial of a corporate deduction in respect of employee stock options. The Specified Person must satisfy the notification requirements (discussed below) in order to claim the deduction.  The deduction will only be available if the optionee is the employee of the Specified Person, such that no deduction will be available to a Canadian subsidiary corporation in respect of non-qualified options granted by a foreign parent corporation.  As well, Non-Specified persons cannot "opt in" to the new regime in order to claim a deduction.

In addition, the option must otherwise have been eligible for the 50 per cent deduction but for having exceeded the annual cap.  Accordingly, the option must have satisfied the tests set out above under "current rules" for Non-CCPC Options.  Thus, no deduction will be available for, inter alia:

  • options with a strike price that is less than the FMVof the underlying shares as at the date of grant;
  • equity-based arrangements that rely on the "stock option" rules but do not qualify for the 50 per cent deduction under the current rules (such as restricted share units); or
  • options for which the underlying shares are not prescribed shares, presumably with the prescribed share test being applied at the time of exercise of the option. 

With respect to the latter bullet, consider whether the proposed amendments might lead to a disqualification for preferential tax treatment for both the Specified Person and the optionee.  For example, if the option has a FMVstrike price but is a non-qualified option due to the annual cap being exceeded, the optionee would not be entitled to the 50 per cent deduction. However, if, prior to exercise, there is an event that causes the underlying shares to cease to be prescribed shares, the employer would be disqualified from claiming the corporate-level deduction.  As a result, both parties would be denied the preferential treatment.  

The proposed amendments also provide that the "limitation on expenditure" rules in section 143.3 of the ITAdo not apply to prohibit the corporate deduction.

The proposed amendments also expand the definition of "non-capital loss" in the ITAto treat a loss created by claiming a corporate deduction in respect of a non-qualified option as a non-capital loss.

Designation as Non-Qualified

The proposed amendments permit the grantor of an option to designate one or more options as non-qualified options for purposes of the new rules, effectively denying the employee the 50 per cent deduction even though the options would otherwise meet the tests for the deduction and would not exceed the annual cap.  This would open the door to the ability to claim a corporate-level deduction in respect of the option.  Interestingly, the designation can only be made where the grantor is the direct employer the employee.  Accordingly, no designation can be claimed where a Canadian subsidiary corporation regularly reimburses its foreign parent for the cost of granting options to employees of the Canadian subsidiary corporation.  This is consistent with the drafting of the employer deduction provisions discussed above.


The proposed amendments include a number of notification requirements.  First, the grantor of the option must notify the employee in writing where the option is a non-qualified option by virtue of exceeding the annual cap.  This notification must be made on the date the option is granted but no particular format appears to be required. 

Further, if the grantor chooses to designate one or more options as non-qualified, the designation must be set out in the grant document, effectively providing notice to the employee.  Finally, the grantor must also notify the Canada Revenue Agency ("CRA") that the option is a non-qualified option for any reason, in a form to be prescribed for this purpose and filed with the grantor's tax return for the year in which the option grant is made. The notification is essential if the grantor intends to claim a corporate-level deduction.  Consider how these notifications will be made by a foreign parent corporation of a Canadian employer corporation, where the foreign parent does not file Canadian income tax returns.


  • No impact to CCPC options;
  • Application to options granted after 2019; Non-CCPCs that rely on the current rules as part of their incentive packages may wish to consider granting additional options prior to 2020;
  • Waiting for results of pubic consultation for details on what constitutes a "start-up, emerging or scale-up" company;
  • Internal procedures for tracking each employee's annual cap will be required;
  • What will the next Parliament do with these proposed amendments?

Read the original article on

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
26 Sep 2019, Seminar, London, UK

Providing GCs, Heads of Legal and senior in-house lawyers with timely, topical and practical legal advice on a variety of topics.

8 Oct 2019, Seminar, Birmingham, UK

Supporting the development of paralegals, trainees and lawyers of up to five years' PQE by providing valuable knowledge and guidance together with practical tips.

10 Oct 2019, Seminar, London, UK

Supporting the development of paralegals, trainees and lawyers of up to five years' PQE by providing valuable knowledge and guidance together with practical tips.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions