The newly elected Liberal government has indicated in its
electoral platform that it intends to make certain tax-related
changes, including changes to the tax treatment of stock
What You Need To Know
Current tax treatment of
stock options. Paragraph 110(1)(d) of the Income Tax
Act (Canada) provides employees with the ability to claim a
deduction equal to one half of the employment benefit that would
otherwise be required to be included in computing income on the
exercise of certain qualifying stock options. These are options the
exercise price of which is not less than the fair market value of
the underlying shares at the date of grant of the options and that
meet certain other conditions. The result of this particular rule
is that qualifying stock options are effectively taxed at capital
gains rates on exercise. In addition to the rule in paragraph
110(1)(d), which is the rule relied on in the case of stock options
granted by public companies, other rules in the Income Tax
Act (Canada) provide for similar favourable tax treatment on
the exercise of options granted by a company that is a
"Canadian-controlled private company" (a CCPC). The
current rules relating to options granted by a CCPC provide for the
taxation of the stock option benefit not on the exercise of the
options, but rather at the time the shares acquired on the exercise
of the options are disposed of and, if the shares are held for a
period of not less than two years, only one half of the employment
benefit would be included in income.
Proposed changes. In
its electoral platform, the newly elected Liberal majority
government pledged to cap the amount that can be claimed under
stock option deductions. The Liberal election platform also
acknowledged that stock options are a useful compensation tool for
start-up companies and that a new Liberal government would ensure
that employees with up to $100,000 in annual stock option gains
would be unaffected by the cap. The Liberal election platform did
not distinguish between the rule in paragraph 110(1)(d) and the
rules relating to CCPC stock options which suggests that both types
of rules may be amended in an adverse manner.
Timing and scope of changes
uncertain. Although we continue to monitor developments on
the tax treatment of stock options and other tax-related proposals,
at the present time we do not have further information on how any
proposed amendment to paragraph 110(1)(d), or to the CCPC stock
option rules, would be implemented, or the effective date of any
such amendments. Based on past practice with respect to certain
recent amendments to the stock option rules, it is possible that
the effective date of the amendments could be the
"announcement date" (the date the amendments are
announced), without any grandfathering period or other transitional
rules for previously granted stock options.
Given the statements in the Liberal election platform relating
to stock options and the uncertainty associated with the nature and
timing of any possible amendments to the stock option rules, we
would encourage companies to advise their stock option holders of
these matters relating to stock options at the earliest
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.
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