A stock option plan provides an employee of a corporation with
the right to purchase shares of the corporation at a pre-determined
exercise price. To the extent the stock option is exercised and the
exercise price is less than the fair market value of the share at
the time of exercise, the employee realizes an employment benefit.
If certain conditions are met, the employee can claim a deduction
equal to 50% of the employment benefit (the "Option
Deduction"), therefore, effectively taxing the employment
benefit at the same tax rate as a capital gain. Presently, there is
no annual maximum amount allowable to be claimed in respect of the
In fulfillment of a Liberal election platform to reduce the
amount of such tax reductions being claimed by high income
Canadians, it is anticipated that the federal Budget, due to be
tabled on March 22, 2016, will introduce an annual cap of $100,000
in respect of the Option Deduction. However, in recent comments,
the Minister of Finance has indicated that any change will likely
not apply to stock options granted before the effective date of the
amendment, which is expected to be March 22, 2016.
Assuming the changes are made as expected and that the effective
date is not retroactive*, there is a narrow window still available
for employers to grant stock options which will not be subject to
the annual $100,000 Option Deduction cap. In particular, high tech
and start-up businesses, as well as public companies, that grant
stock options and view them to be a substantial part of the
long-term incentive compensation of employees should consider
whether planned stock option grants can be made before the
effective date of this amendment. This will be a particularly
important consideration for employees receiving large stock option
grants where potential employment benefits could exceed the $100K
proposed cap. In many instances, all stock option gains are
realized in a single year, usually as a result of an exercise of
the stock option just before a sale of the company's shares or
business, such that gains that have built up over many years are
all triggered in one year and potentially exceed the $100K
We therefore recommend that stock option granting employers seek
advice and consider making planned new stock option grants prior to
March 22, 2016.
Article co-authored with Kevin Wong CPA, CA, MNP LLP
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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