2020 Fall Federal Economic Statement

The Federal Government is clarifying proposed rules for the taxation of employee stock options, effective for stock options granted after June 30, 2021. The measures announced at the 2020 Fall Federal Economic Statement build upon those previously announced in 2019 and are summarized below. 

• A $200,000 annual limit is proposed on the amount of employee stock option grants that can qualify for the 50% employee stock option deduction. This limit will be based on the value of the shares underlying the options at the time the options are granted.

• An employer deduction will be available for the amount of stock option benefits that exceeds the new annual limit.

• Employee stock options granted by Canadian-controlled private corporations (CCPC) would generally not be subject to this $200,000 limit, thus excluding many start-ups from these measures.

• Non-CCPC employers with annual gross revenues of $500M or less should also not be subject to these measures. For a member of a corporate group that prepares consolidated financial statements, gross revenues would be as reported in the most recent consolidated annual financial statements of the group presented to shareholders, or unitholders, prior to the date that the stock option is granted, at the highest level of consolidation.

Employee Tax Treatment

Generally, an employee is subject to a taxable benefit if they acquire shares of their employer under a stock option agreement and the fair market value of the share at the time of exercise exceeds the amount paid by the employee to acquire the share. A stock option deduction equal to 50% of the taxable benefit is available to the employee if certain conditions are met.

A $200,000 limit is proposed on the amount of employee stock options that may vest in an employee in a calendar year and qualify for the 50% employee stock option deduction. For the purpose of this limit, the amount of employee stock options that may vest in any calendar year would be considered to be equal to the fair market value of the underlying shares at the time the options are granted. Where an employee exercises a stock option that exceeds the $200,000 limit, the 50% stock option deduction would not apply to taxable benefits realized on a related portion of those options.

The $200,000 limit would generally apply to all stock option agreements between the employee and their employer or any entity that does not deal at arm’s length with the employer. If an individual has two or more employers that deal at arm’s length with each other, the individual would have a separate $200,000 limit for each of those employers.

The proposed measures also clarify that an employee donating publicly listed shares acquired under a stock option that is in excess of the $200,000 limit would not be eligible for the additional stock option deduction equal to 50% of the employee stock option benefit. Combined with the “regular” 50% stock option benefit, this additional deduction could otherwise result in the entire employee stock option benefit being excluded from income. The employee should still be entitled to claim the charitable donation tax credit for the full value of the donated shares.

Employer Tax Treatment

The portion of an employee's stock option employment benefit in a year that does not qualify for the 50% stock option deduction under these new measures may be deductible by the employer in the year that the options are exercised. Employers subject to the new rules would be able to choose whether to grant employee stock options under the existing tax treatment, up to the $200,000 limit per employee, or to grant employee stock options under the new tax treatment. Under the latter option, employees would be ineligible for the 50% employee stock option deduction, and instead the employer would be eligible for a deduction for corporate income tax purposes.

Employers subject to the new rules would need to ensure compliance with respect to the $200,000 limit and would be required to notify their employees in writing whether options granted are subject to the new tax treatment. Employers would also be required to notify the Canada Revenue Agency if the options granted are subject to the new tax treatment.

A number of the support programs initially rolled out by the government in response to COVID-19 have been extended to reflect the anticipated continuation of the impact of the virus. These programs include the Canada Emergency Wage Subsidy (CEWS), Canada Emergency Rent Subsidy (CERS) and Lockdown Support programs, which will continue to provide support to businesses until March 13, 2021.

The extension relates to the following periods:

• Period 11 - December 20, 2020 to January 16, 2021

• Period 12 - January 17, 2021 to February 13, 2021

• Period 13 - February 14, 2021 to March 13, 2021

Canada Emergency Wage Subsidy (CEWS)

In anticipation of the second wave and its significant economic impact, the government has proposed to increase the maximum subsidy rate for active employees by 10% (from 65% to 75%) for the above periods. This proposed increase would increase the top-up wage subsidy from 25% to 35% (the maximum base subsidy would remain at 40%), thereby providing enhanced support to those businesses most impacted by COVID-19.

Based on the proposed increase, employers in businesses will be eligible for the following:   

*increase from 25%

**increase from 1.25

The Federal Government has also proposed that the weekly wage subsidy for a furloughed employee from December 20, 2020 to March 13, 2021 be the lesser of: 

• the amount of eligible remuneration paid in respect of the week; and

• the greater of: 

• $500, and

• 55% of pre-crisis remuneration for the employee, up to a maximum subsidy amount of $595.

Read more on eligibility and application process for the CEWS

Canada Emergency Rent Subsidy (CERS) and Lockdown Support Programs

The 2020 Fall Federal Economic Statement proposes to extend the CERS and Lockdown Support programs, which provide support to eligible tenants and property owners. This extension would cover three additional periods, ending March 13, 2021. The rates for support through these programs would remain the same, therefore the current base subsidy rate of 65% for CERS would continue to be available to eligible businesses which have experienced a revenue decline of at least 70% for the relevant period. In addition, the supplementary 25% top-up of Lockdown Support would continue to be available to qualifying organizations (i.e. businesses forced to close doors or substantially stop operations due to public health requirements).

The qualifying criteria and related rules for these programs remain the same.

Learn more on the CERS, and Lockdown Support programs

Canada Emergency Business Account (CEBA) Loan

The deadline to apply for the CEBA program has been extended to the March 31, 2021. Read more about the CEBA program and participating financial institutions here.

Additional tax-free Canada Child Benefit (CCB) support will be provided to recipients in 2021 based on the number of children under the age of six and family net income. In total, there will be four supplementary payments, calculated per child under the age of six, of either:  

• $300, if family net income is, or below, $120,000 or below, or

• $150, if family net income is above $120,000.

The first additional payment will be made after the enabling legislation has passed, and the following three payments will be made in the months of April, July and October 2021. The family net income used to determine the 2021 first quarter and April payments will be based on family net income for 2019 while the 2021 July and October payments will be based on the family net income for 2020. 

With the impact of COVID-19 on Canadians, the Federal Government is proposing temporary relief from Goods and Services Tax/Harmonized Sales Tax (GST/HST) by zero-rating or similar relief on certain specified face masks and face shields starting on December 7, 2020 until Canadian public health officials say that these items are no longer recommended for the COVID-19 pandemic.

With the increase in popularity of private short-term accommodation operations, the Federal Government is proposing measures to require GST/HST registration for short-term accommodation platforms (such as Airbnb) for property owners that are not GST/HST registered. This will ensure that traditional short-term providers of accommodation such as hotels will remain competitive.

In order to help Canadian businesses remain competitive with non-resident non-registered digital and traditional businesses, the Federal Government will require non-resident vendors supplying both digital and non-digital products or services to end-use consumers in Canada to register for GST/HST effective July 1, 2021.

To ensure the GST/HST system applies in a fair and efficient manner to the growing digital and global economy, the government proposes: 

• All non-resident vendors supplying digital products or services (including traditional services) to end-use consumers in Canada must register for GST/HST and collect and remit the tax to the CRA on their taxable supplies to Canadian end-use consumers; a simplified GST/HST registration and remittance framework will be available to non-resident vendors and distribution platform operators not previously required to register.

• Companies that run distribution platforms (e.g. Amazon) in Canada must register under the normal GST/HST rules and collect and remit the GST/HST on products that are sold by third-party vendors on those platforms and shipped through Canadian fulfillment warehouses (unless the vendor is already registered for GST/HST).

• Companies that run short-term accommodation platforms (e.g. Airbnb) must collect and remit the GST/HST on accommodations offered through these platforms (unless the property owner is registered for GST/HST); a simplified GST/HST registration and remittance framework will be available to non-resident accommodation platform operators that are not carrying on business in Canada and not previously required to register.

Please note that where simplified GST/HST registration is allowed for non-resident non-registrant sellers, the amount of GST/HST is to be charged to end-use consumers based on where the end-use consumers are located in Canada, or in the case of short-term accommodation, where the Canadian property is located. The simplified GST/HST registration process is intended for supplies made to end-use consumers only, not to businesses that are registered for GST/HST. Also, no input tax credits (“ITCs”) are available for Canadian GST/HST paid by the non-resident sellers using the new simplified GST/HST registration.