On November 4, 2015, Liberal leader Justin Trudeau was sworn in
as Canada's 23rd prime minister. Canadians can expect a number
of significant tax changes under the new Liberal government. One
change that relates to the tax treatment of stock options likely
will adversely affect a significant number of executives.
Current Tax Treatment
Under existing tax laws, a benefit realized by an employee on
the exercise or cashing out of stock options is treated as
employment income but in many cases is eligible for a 50% stock
option deduction, resulting in taxation at rates similar to those
applicable to capital gains. The original rationale for treating
stock options like capital gains was to encourage more widespread
use of employee stock option plans, which were thought to promote
greater employee participation and increase productivity.
In its 2015 election platform, the Liberal Party announced an
intention to cap how much can be claimed under the 50% stock option
deduction described above. Acknowledging that employee stock option
plans are useful compensation tools for start-up companies, the
Liberal government's proposal is to ensure that employees with
up to $100,000 of annual stock option income will be unaffected by
Uncertainties Under the Proposed Changes
There are a number of uncertainties under the proposed changes,
which will not be clarified until draft legislation is
The $100,000 Cap. It is
unclear whether executives who realize annual stock option income
in excess of $100,000 will be entitled to claim the 50% stock
option deduction in respect of the first $100,000 of income, or
whether such executives will be completely barred from claiming the
Timing of Changes. While we
continue to watch for developments relating to the proposed
changes, there is presently no information on when the proposed
changes will be announced by the new government or when they will
take effect. It is possible that the proposed changes will be
effective retroactively as of the announcement date, and that
existing stock option holders will not benefit from grandfathering
or transitional rules.
Scope of Changes (CCPCs).
Under the current rules, additional tax advantages may be enjoyed
by executives who exercise options to acquire shares of
Canadian-controlled private corporations. It is unclear whether
these advantages will be affected by the proposed changes.
What Can You Do Now?
If enacted as currently proposed, the proposed changes to the
tax treatment of stock options likely will create a significant
incremental tax burden for executives that participate in employee
stock option plans. This cost may be exacerbated by the proposed
increase to the top federal marginal tax rate to 33% for
individuals earning over $200,000 a year. For example, based on
2015 rates, an Ontario stock option holder may be subject to tax on
stock option income at tax rates in excess of 53%. In light of the
foregoing, we recommend that employers with employee stock option
plans discuss the proposed changes with affected employees at their
The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
sought about your specific circumstances.
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