Stock options could get a makeover which will impact high earners

Finance minister says current system is not working

Stock options could get a makeover which will impact high earners
Steve Randall

The way that corporate stock options are operating in Canada is the focus of a review by the federal finance minister.

Stock options can be a very important part of a compensation package, especially for women according to a Fidelity survey; and are also important for helping smaller, startup businesses to attract talent without impacting cash flow or reserves.

But in a Notice of Ways and Means Motion tabled in the House of Commons this week, finance minister Bill Morneau said that stock options are often used to reward executives at large, mature companies.

The minster wants to address the disproportionate benefit that high-income individuals derive from stock options.

He noted the example of 2017, when 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. In total, these individuals, representing 6% of stock option deduction claimants, accounted for almost two-thirds of the entire cost of the deduction to taxpayers.

"Our government has a plan to strengthen the economy by investing in the middle class—in people and in communities. But we need to complement these investments with a fair, efficient and competitive tax system,” Mr Morneau said.

The plan to change stock options

In keeping with the Budget 2019 announcement, the Ways and Means Motion proposes the following changes:

  • 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.
  • 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.
  • Employee stock options above the limit will be subject to the new employee stock option tax rules.
  • The new rules will apply to employee stock options granted on or after January 1, 2020.

The government is also seeking feedback on the definition of start-up, emerging, and scale-up companies for purposes of the prescribed conditions.

“Today's measures are just the latest in a series of steps we've taken to ensure that Canada's tax system is being used to support jobs and growth, rather than creating unfair tax advantages that disproportionately benefit the wealthy."