Canada: What Are The Impacts Of Canada Revenue Agency's Cap On Stock Option Tax Deductions? A Canadian Tax Lawyer's Analysis

Last Updated: July 25 2019
Article by David Rotfleisch

Introduction: CRA Introduces Cap on Stock Deductions for Employees

The government budget in 2019 revealed that Canada intends to cap stock option deductions for individuals because the stock option tax deduction was regressive. The government's purpose for the stock option deduction was to allow corporations that were starting out to provide competitive salaries to desirable candidates. Start-up corporations are able to offer more competitive salaries based primarily in stock rather than cash. When the value of a stock option rises significantly and is exercised, the employees can take advantage of the stock option deduction reducing their tax payable.

After the Canada Revenue Agency(CRA) analyzed the data on the stock option tax deductions, it concluded that most of the tax benefits went to high income individuals receiving over 1 million dollars in yearly salaries. This proposed legislation seeks to cap the deductions to limit the tax benefits to the first $200,000 of income from stock options. The amounts that are above the $200,000 limit will be taxed at normal rates and not be allowed to take advantage of the preferred rate available for stock options.

What are the Current Stock Option Deduction Rules Under the Income Tax Act:

Under the existing stock option deduction rules, when an employee exercises a stock option, the difference between the strike price (a predetermined fixed price for which the owner of the option can buy the stock) and the fair market value of the option at the time it is exercised is included in the employee's income as a taxable benefit.

However, employees can use preferential personal income tax treatment of qualifying stock options by claiming an offsetting deduction equal to one half of the benefit under paragraph 110(1)(d) of the Income Tax Act.

The rationale for the stock option deduction is to support young and growing Canadian businesses. There is currently no limit or cap on the stock option benefit under paragraph 110(1)(d) of the Income Tax Act, so employees that receive more than $200,000 in stock option benefits will be affected by the proposed legislation.

According to a CRA analysis, in 2017, $1.3 billion in deductions went to 6% of individuals by way of the paragraph 110(1)(d) deduction on employee-stock-option benefits—that is, 6% of taxpayers received almost two-thirds of the all deductions claimed under paragraph(1)(d) of the Income Tax Act in that year. In other words, under the current system, the Canadian government ceded significant potential revenue to a small group of high-income employees who received stock options of significant value. The Canada Revenue Agency therefore determined that the current stock option deduction rules were regressive. The downside to this new policy is that will discourage valuable employees from staying in Canada and encourage them to leave for more lucrative opportunities elsewhere.

The rationale of the proposed legislation is to prevent well-paid employees at mature businesses from taking advantage of the stock option deductions but to allow Canadian start-ups and other qualifying businesses to continue to offer competitive compensation packages to employees.

Which Companies Will Be Affected by the Stock Option Cap Draft Legislation:

The limitations being imposed will not affect all corporations. For example, Canadian controlled private corporations (CCPCs) and other corporations that meet a list of "prescribed conditions," which are yet to be determined, will not be affected by the limitation of the proposed stock option deduction rules.

If a corporation meets the conditions, the corporation will be exempt from the legislation and the employees of the exempt corporation will not be limited by the proposed legislation on stock option deductions. So, those employees may claim the one-half deduction on the full amount of the benefit from exercising an employee stock option.

Yet a non-exempt company may still qualify for a corresponding corporate tax deduction equal to the employee's stock option benefit. That is, if the employee's one-half deduction is limited only to the first $200,000 of the stock-option inclusion, the corporate employer may qualify for a deduction in the amount of the stock option benefit. This is presumably meant to match the tax result if the employer had remunerated its employee by paying a salary rather than offering a stock option: the salary would be a deductible expense when the employer computed its own taxable income.

To qualify for the deduction, the employer must:

  • Be a specified person;
  • Have employed the individual at the time the employee-stock-option agreement was entered into; or
  • Meet the notification requirements.

The Canada Revenue Agency has not yet clarified what constitutes a "specified person" nor how to meet the notification requirements.

Corporations can claim this corresponding corporate tax deduction for agreements to sell or issue securities that are entered into after 2019 if these conditions are met. Corporations and employees should seek the advice of an experienced Canadian tax lawyer to determine whether the corporation meets the necessary conditions to be exempt from the finance cap or if the corporation can take advantage of the corresponding corporate tax deduction.

CRA indicated that the cap is for large, long-established, mature companies and not for start-ups or fast-growing Canadian businesses. Finance is still seeking consultation, and the proposed legislation is not yet a tax bill. The consultation period for the bill ends on September 16, 2019; therefore, it is unlikely that further details on this bill will be released until fall of 2019.

Which Stock Options Qualify for the Stock Option Deduction if Multiple Stock Options Vest in a Year:

Multiple stock options per employee may vest in a year exceeding the $200,000 annual limit. The proposed legislation clarifies that the employee stock options that are granted first would be the first to qualify for the stock option deduction.

Additionally, an employee may have several identical stock options, and some may be eligible for the existing treatment and others subject to the new rules. In this situation, stock options qualifying for the current treatment will be considered to be exercised by the employee before the stock options subject to the new rules.

Tax Tip – The Importance of Planning Around the Stock Cap

Corporations that currently or plan on giving stock options as part of their compensation plans should seek the advice of an experienced Canadian tax lawyer because some corporations might be exempt, and others might be able to take advantage of a corresponding corporate income tax deduction.

Additionally, an experienced Canadian tax lawyer can advise whether companies may want to reconsider their compensation plans that are currently in effect because the proposed legislation will come into effect on January 1, 2020. Companies will want to consider the timing of the granting of stock options and stock-based awards. For example, companies may want to develop methods to analyze and track the different options eligible for stock option deductions that have been given to employees such that the cap is not surpassed and to prepare for new compliance requirements for reporting. Likewise, corporations may want to grant additional stock options before the new rules come into effect, or change compensation plans for employees to utilize the maximum stock option deduction under the new rules and consider plans vesting over the course of a few years to benefit from the $200,000 annual cap.

Our experienced Canadian tax lawyers can help corporations and employees assess the effect of the proposed stock option cap on their business plans and finances. Additionally, we can develop an optimal tax plan taking advantage of any tax benefits or easing the impact of corporate or personal taxes.

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.

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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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