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Clarification of stock option deduction rule changes announced in 2019 federal budget

Crowe BGK
7/15/2019
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As previously announced in the 2019 Budget, on June 17, 2019, Finance Minister Bill Morneau implemented a Notice of Ways and Means Motion in the House of Commons with respect to the taxation of stock options.

Stock options give employees the right to acquire shares of their employer at a designated price, as an alternative form of compensation. Stock option compensation can provide employees with a preferential tax treatment in some cases. In fact, employees are required to include in their income a taxable benefit when they exercise a stock option granted by their employer and acquire shares pursuant to the terms of the stock option plan. In some cases, when the employer is a Canadian-controlled private corporation (CCPC), tax on the stock option benefit can be deferred until the shares are disposed of. Irrespective of the timing of taxation of the stock option benefit, employees may sometimes benefit from a preferential tax treatment on the stock option benefit. In certain circumstances, for federal tax purposes, employees may claim a deduction equal to 50% of the stock option benefit. When this preferential treatment applies, the effective tax rate on the stock option benefit is equal to the tax rate applicable to capital gains.

Finance Minister Morneau has proposed the following changes:

  • A $200,000 annual limit will apply on employee stock option grants that can receive tax-preferred treatment under the current employee stock option tax rules. The $200,000 limit will be based on the value of the option’s underlying shares at the time the option is granted;
    • Employee stock options granted by 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 conditions will be announced at a later date and the government is accepting comments on this until September 16, 2019;
  • Where the $200,000 annual limit applies, employers granting stock options will be entitled to claim a new tax deduction for the amount of stock option benefits included in the employee’s income in excess of the $200,000 limit. The deduction may be claimed in the taxation year that includes the day on which the employee exercised the stock option.
  • Employers will need to ensure compliance with the $200,000 limit. This will include a requirement that an employer notify its employees in writing whether options granted are subject to the new rules at the time the options are granted. In addition, employers will be required to notify the Canada Revenue Agency if they issue securities subject to the new rules.
  • The new rules will apply to employee stock options granted after December 31, 2019.

With the coming changes to the federal legislation resulting in the narrowing of the preferential tax treatment of employee stock option plans, it may be advisable to set up and/or accelerate the issuance of large stock options to benefit from the current preferential tax treatment.

About the Author:

Aaron P. Belcher, CPA, CGA, is a Tax Specialist at Crowe BGK

Connect with him: ap.belcher@crowebgk.com

Éloïse Lafortune Viger, Atorney, is a Tax Specialist at Crowe BGK

Connect with her: e.lafortuneviger@crowebgk.com

Sam Lackman, CPA, CA, is a Senior Tax Manager at Crowe BGK

Connect with him: s.lackman@crowebgk.com

Isabelle Nadeau, B.C.L., LL.B., LL.M. Tax, is a Partner at Crowe BGK

Connect with her: i.nadeau@crowebgk.com