Canada: Significant Tax Changes On The Horizon

On November 4, 2015, the leader of the Liberal Party of Canada, Justin Trudeau, was officially sworn in as Canada's 23rd Prime Minister. Mr. Trudeau replaces the Conservative Party's Stephen Harper, who had served as the Prime Minister of Canada since February of 2006.

Over the course of the lengthy campaign that culminated in the election of the new Government, the Liberal Party made a host of campaign promises that could fundamentally alter the Canadian tax system.

While the new Government's campaign pledges have yet to be enacted into law, much speculation has focused on when certain of the proposed tax changes might take effect. If past governmental practice is any indication, the anticipated tax changes may apply from the day that a formal announcement is made by the Minister of Finance, even if the required enabling legislation is not enacted until a later date. Many have also speculated that a Notice of Ways and Means Motion, containing a host of tax-related amendments, could be introduced once Parliament is recalled on December 3, 2015. In short, it is possible that many of the campaign promises made by the new Government may come into force in the very near future.

Business Tax Changes

The Liberal Party proposed a number of business-related tax changes as part of its election platform.

(i) Changes to the Taxation of Employee Stock Options

Of significant concern to many in the business community, the new Government has proposed to limit the deductions that a person may claim in connection with the exercise of employee stock options.

The Income Tax Act currently provides that when an employee is granted certain stock options, the employee is not immediately required to recognize a taxable benefit from employment. However, when the options are subsequently exercised (or, in the case of options relating to shares of certain "Canadian-controlled private corporations" ("CCPCs"), when the shares acquired on the exercise of the options are subsequently sold), a taxable benefit from employment is required to be recognized by the employee. The amount of the taxable benefit is generally equal to the value of the shares acquired on the exercise of the option, less the amount paid to acquire the shares.

As a means of encouraging employees to hold equity interests in their employers, the Income Tax Act currently provides that, under certain circumstances, an employee may claim a deduction equal to 50% of the taxable benefit that arises in connection with the exercise of a qualifying employee stock option (the "Stock Option Deduction").1 (In effect, the Stock Option Deduction results in the taxable benefit being subject to tax at rates comparable to those that would have applied if the benefit was instead treated as a capital gain.)

While the new Government has indicated that it recognizes the importance of maintaining the Stock Option Deduction, it has claimed that the benefit of the Stock Option Deduction has been disproportionately enjoyed by a small number of taxpayers. On that basis, the Government proposed in its election platform that taxpayers only be permitted to claim the Stock Option Deduction in respect of the first $100,000 (US$75,000) of annual gains arising from the exercise of employee stock options. The amount of any such annual gains in excess of $100,000 would be required to be fully recognized as taxable income, without any offsetting deduction.

Planning Considerations

The new Government initially offered few details on how the proposals affecting the Stock Option Deduction will be implemented. However, on November 20, 2015, the new Minister of Finance indicated that it was not the Government's intention to amend the rules governing the taxation of employee stock options on a retroactive basis. According to the Minister, "any decision we take on stock options will affect stock options issued from that date forward" and "any stock options that have been issued prior to that date will be under [the] taxation regime that was in effect prior to that date".

The Minister's comments appear to indicate that employee stock options issued prior to the release of more detailed legislative proposals will be "grandfathered" and will not be subject to the contemplated limitations on the ability to claim the Stock Option Deduction.

Prior to the Minister's announcement, option holders had been left to consider whether it might be prudent to exercise their options before the expected tax changes took effect. The early exercise of options carried certain risks that extended beyond the simple risk of potentially accelerating a taxable benefit unnecessarily if existing options were ultimately "grandfathered" from the proposed tax changes. For instance, where an option holder does not intend (or is not permitted) to immediately sell the shares acquired on the exercise of an option, any subsequent loss on the later sale of the shares cannot be carried back to offset the initial taxable benefit. As a result, the early exercise of a stock option couldcan give rise to immediate taxable income that cannot be reduced in the future by losses arising on the ultimate sale of the shares.

The Minister's recent announcement should provide comfort to most option holders that it is not necessary to exercise existing options early to ensure that the Stock Option Deduction may be fully claimed in respect of such options. Nevertheless, certain option holders may still wish to consider the prudence of exercising options in advance of the impending 4% increase in the highest marginal personal income tax rate (as discussed in more detail below).

The Minister's recent comments appear to suggest that the new Government may take some time to assess how it wishes to adjust the rules governing the taxation of employee stock options. For instance, will limitations on the ability to claim the Stock Option Deduction ultimately apply in respect of all options or will there be an exemption for options in respect of shares of CCPCs or companies that operate in sectors that have traditionally relied heavily on stock option compensation (e.g., technology start-ups)?

The announcement of "grandfathering" relief may also offer special planning opportunities for businesses, albeit for a short period of time. Businesses that have been considering granting stock options to employees may wish to consider expediting such grants to ensure that employees will be able to fully claim the Stock Option Deduction in respect of such new options in the future.

Businesses that grant significant employee stock options may wish to begin considering alternative compensation plans as a means of providing ongoing incentives to those employees that might cease to be able to fully avail themselves of the Stock Option Deduction in the future.

Corporate taxpayers are not entitled to claim a deduction in respect of the value of shares issued on the exercise of stock options when computing their income. If the ability to claim the Stock Option Deduction is limited, businesses may begin to reassess the advantages and disadvantages of granting stock options relative to other forms of employee remuneration. Alternative equity-based compensation programs, which track the equity value of an enterprise, yet entitle the company to claim a deduction in respect of payments made to participating employees, may soon represent a more tax-efficient mode of compensation. Employers with significant stock option programs would be well advised to begin reviewing their stock option plans at the earliest opportunity to mitigate the impact of the impending changes to the Stock Option Deduction.

(ii) Changes to the Employment Insurance ("EI") Program

The Liberal Party also proposed a number of significant changes to the EI system during the election campaign.

First, the Liberals indicated that they would scale back previously proposed reductions to EI premiums. In its 2015 Budget, the former Conservative Government had projected that EI premiums would fall to $1.49 per $100 of remuneration by 2017. The new Government has proposed to limit the reduction in EI premiums to a revised level of $1.65 per $100 of remuneration earned.

Second, the Liberals have proposed to grant employers an exemption from employer-side EI premiums in respect of certain new hires. Specifically, under the proposal, employers that hire a person between the ages of 18 and 24 into a permanent position in 2016, 2017 or 2018 will enjoy a 12 month exemption from having to pay employer-side EI premiums in respect of the employee.

Third, the Liberals have proposed to extend the period during which an individual may obtain EI benefits during a parental/maternity leave from 12 to 18 months (albeit on a reduced basis). (The new Government has acknowledged that the implementation of this latter proposal will require the cooperation of the provinces and amendments to the provincial labour codes.)

Planning Considerations

Employers that intend to hire younger workers into permanent positions may wish to consider delaying the initial retention of such new employees until 2016 in order to take advantage of the promised EI premium holiday. However, employers will need to exercise caution in trying to take advantage of the new incentive. In particular, human rights legislation precludes employers from discriminating between prospective employees on the basis of age. While it may be possible to assess the eligibility of an applicant for the new EI incentive without violating human rights legislation, questions will need to be carefully considered prior to being posed to applicants.

(iii) Other Commercial Tax Changes

The new Government has proposed other tax changes with a view to stimulating economic activity. For one, the new Government proposes to provide a full federal GST rebate in respect of expenditures on new capital investments on affordable rental housing. While further details on the expenditures that will qualify for the rebate have yet to be released, a footnote to the Liberal Party's election platform seems to suggest that the rebate will be modeled on the existing partial rebate under the current law.

The Liberal Party has also proposed to reverse the legislated phase-out of the tax credit offered in respect of the acquisition of shares of "prescribed labour-sponsored venture capital corporations" and immediately reinstate the full 15% federal tax credit. (In 2013, the federal Government proposed to phase-out the tax credit over a four-year period.) It will be interesting to observe whether parallel provincial tax credits, which were previously phased-out, might be re-introduced in light of the new federal proposal.

Personal Tax Changes

A central theme of the Liberal Party's election platform was increasing taxes, and reducing tax benefits, for those individual taxpayers with incomes in excess of $200,000 (US$150,000) per year.

In this regard, the Liberal Party pledged to introduce a new top federal marginal tax rate of 33%, which will apply to personal income that exceeds $200,000 each year. When combined with applicable provincial income tax rates, the combined top marginal tax rate that will apply to taxpayers in many provinces will exceed 50%, with the rate in one province approaching 59%.

The Liberal Party also proposed to repeal the rules in the Income Tax Act that permit certain "income splitting" between spouses. The "family income splitting" provisions, which were first introduced in 2014, effectively permit an individual with a child under the age of 18 to transfer up to $50,000 of his/her income to a lower-earning spouse for federal income tax purposes (for a maximum federal tax savings of $2,000 per year).

Finally, the new Government has proposed to reduce the annual limit on the contributions that individuals may make to a Tax-Free Savings Account from the current limit of $10,000 to $5,500.

Planning Considerations

Taxpayers may wish to consider the prudence of (i) accelerating the receipt of income in 2015, or (ii) delaying the recognition of expenses or deductions to a later taxation year. For instance, taxpayers may wish to consider accelerating the receipt of bonuses or the disposition of property with accrued gains prior to the increase in personal income tax rates. In a similar vein, taxpayers may wish to consider means of maximizing the benefit of the "family income splitting" provisions by managing their income relative to that of their spouse before the provisions are repealed.

Although taxpayers might be eager to take steps to mitigate the impact of the impending personal income tax changes, taxpayers should exercise caution before taking steps to increase their 2015 income. To date, few details have been provided on how, or when, the proposed tax changes will become effective. Particular attention should be paid to all upcoming governmental announcements to determine the effective date of the expected tax changes. Ultimately, each taxpayer will need to carefully weigh the relative risks and advantages that might accrue from accelerating income, particularly in cases where future income or salary levels might be uncertain.

General Tax Policy Statements – Foreshadowing Things to Come?

The new Government's election platform also contained a series of general statements that provide some indication of where future tax changes may emerge.

For instance, the Government has signalled a desire to introduce enhanced tax measures to generate more clean technology investments in Canada. The new Government's stated objective is "to make Canada the world's most competitive tax jurisdiction for investments in the research, development, and manufacturing of clean technology".

The new Government has also repeatedly expressed a desire to review all existing tax expenditures to "target tax loopholes that particularly benefit Canada's top one percent". The Government has suggested that the "core objective" of the review will be to "look for opportunities to reduce tax benefits that unfairly help those with individual incomes in excess of $200,000 per year". The proposed limitations to be imposed on the Stock Option Deduction have been cited as one example of the changes that will be made as part of the tax expenditure review.

The new Government has further suggested that it may introduce more restrictive rules governing the taxation of CCPCs.

The new Government has projected that it will be able to generate $6.5 billion in savings and increased tax revenue over the next four years as a consequence of its review of existing tax expenditures and spending policies. The new Government has also pledged to allocate an additional $80 million over the next four years "to help the Canada Revenue Agency crack down on tax evaders".

Planning Considerations

The new Government's stated focus on tax planning and closely-held business corporations suggests that taxpayers should expect increased audit activity in the coming years. Taxpayers should take steps to ensure that their previous tax plans have been executed and administered in the manner intended, and future tax planning should be undertaken with an eye to the Government's pending legislative proposals.


1  In the Province of Québec, for provincial tax purposes, the available deduction is equal to 25% of the taxable benefit.

2  The revenue projections contained in the Liberal Party's election platform seem to suggest that broad-based "grandfathering" relief was not originally contemplated, although the data presented in this regard is not entirely clear.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2015

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.

Michel M. Ranger
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

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