Canada: New Rules For Tax Treatment Of Employee Stock Options

The new Liberal government's tax policy focusses on relieving the tax burden on the middle-class and increasing taxation generally for those earning more than $200,000.¹ As part of that plan, the Liberal government plans to eliminate the tax deduction on employee stock option benefits over $100,000 and increase federal marginal tax rates on individuals with an annual income above $200,000 to 33%.

The present tax regime governing employee stock option benefits generally allows employees to defer inclusion of, and deduct one half of, the otherwise taxable benefit relating to stock options. The timing of the deferral and criteria to access the deduction depends on whether the corporation issuing the options and underlying shares is a Canadian-controlled private corporation.

The Liberal government plans to set a $100,000 dollar cap on the deductibility of one half of the taxable benefit applicable to employee stock options. In essence, this is expected to mean that employees will be limited to a $50,000 deduction relating to stock option benefits.

On November 20, 2015, Finance Minister Bill Morneau stated that the Liberal government will not apply retroactive legislation to the current employee stock option tax regime, and that existing stock options should be effectively grandfathered.² This means that taxpayers do not need to immediately exercise or sell their options.

To retain or attract valuable employees in 2016 and later years, employers should consider alternative employee incentive plans which can be used as a tax-efficient substitute to employee stock options.

Footnotes

1. Liberal Party of Canada, "The Liberal Fiscal Plan and Costing" (current as of 7 December 2015), online: (https://www.liberal.ca/files/2015/09/The-Liberal-fiscal-plan-and-costing.pdf).

2. Bloomberg News, "Tax changes won't apply to existing stock options, Morneau says", The Globe and Mail (20 November 2015), online: (http://www.theglobeandmail.com/report-on-business/economy/tax-changes-wont-apply-to-existing-stock-options-morneau-says/article27409116/).

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