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
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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