Canada: A "Raptor-Sized" Change To The Stock Option Tax Regime

Last Updated: July 1 2019
Article by Katy M. Pitch

At the end of the day on June 17, 2019, while the rest of Canada was watching the Raptors parade, the Government of Canada released its anticipated changes to the taxation of stock options in the form of a motion to the House of Commons. 

Recall that in the 2019 federal budget (see our article here), the Government announced a cap to the use of the current employee stock option tax regime, suggesting a move towards aligning with the U.S. tax system. In the budget, the Government noted a perceived abuse of the stock option benefits by granting stock options to executives of large, mature companies. In 2017, for example, just over 2,300 individuals, each earning more than $1 million in that year, were able to claim more than $1.3 billion in tax deductions on their employee stock options. The Government's motion seeks to address this imbalance.

Highlights of the motion

The motion proposes the following changes:

  • The proposed changes will apply to stock options granted on or after January 1, 2020. This grandfathers any stock options that were issued prior to that date.
  • A $200,000 annual limit will apply on employee stock option grants (based on the fair market value of the underlying shares at the time the options are granted) that can receive tax-preferred treatment under the current employee stock option tax rules. Options granted over this limit will be subject to new taxation rules.
  • Employee stock options granted by Canadian-controlled private corporations (CCPCs) will not be subject to the new limit.
  • In recognition of the fact that some non-CCPCs could be start-ups, emerging or scale-up companies, those non-CCPCs that meet certain prescribed conditions will also not be subject to the new limit.

The Government is seeking interested parties' input surrounding the characteristics of companies that should be considered start-up, emerging and scale-up companies for purposes of the prescribed conditions, as well as the administrative and compliance implications.

Takeaways

Some of the important takeaways from the motion are:

  • CCPCs will not be subject to these new rules.
  • For the applicable company, once the annual limit is reached, a corporate tax deduction will be available equal to the employment benefit received by the employee. This is a significant change regarding the availability of a corporate tax deduction for companies granting stock options.
  • The rules will apply to stock options granted on or after January 1, 2020. If an employer is seeking to grant a significant number of stock options soon, it should do so before the end of this year.

Most importantly, with a federal election looming in the fall and the House of Commons planning to take its summer recess beginning this Friday, June 21, this motion will likely die on the order paper and will have to be re-introduced by the next federal government.  

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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