The newly elected Liberal government has indicated in its electoral platform that it intends to make certain tax-related changes, including changes to the tax treatment of stock options.
What You Need To Know
- Current tax treatment of stock options. Paragraph 110(1)(d) of the Income Tax Act (Canada) provides employees with the ability to claim a deduction equal to one half of the employment benefit that would otherwise be required to be included in computing income on the exercise of certain qualifying stock options. These are options the exercise price of which is not less than the fair market value of the underlying shares at the date of grant of the options and that meet certain other conditions. The result of this particular rule is that qualifying stock options are effectively taxed at capital gains rates on exercise. In addition to the rule in paragraph 110(1)(d), which is the rule relied on in the case of stock options granted by public companies, other rules in the Income Tax Act (Canada) provide for similar favourable tax treatment on the exercise of options granted by a company that is a "Canadian-controlled private company" (a CCPC). The current rules relating to options granted by a CCPC provide for the taxation of the stock option benefit not on the exercise of the options, but rather at the time the shares acquired on the exercise of the options are disposed of and, if the shares are held for a period of not less than two years, only one half of the employment benefit would be included in income.
- Proposed changes. In its electoral platform, the newly elected Liberal majority government pledged to cap the amount that can be claimed under stock option deductions. The Liberal election platform also acknowledged that stock options are a useful compensation tool for start-up companies and that a new Liberal government would ensure that employees with up to $100,000 in annual stock option gains would be unaffected by the cap. The Liberal election platform did not distinguish between the rule in paragraph 110(1)(d) and the rules relating to CCPC stock options which suggests that both types of rules may be amended in an adverse manner.
- Timing and scope of changes uncertain. Although we continue to monitor developments on the tax treatment of stock options and other tax-related proposals, at the present time we do not have further information on how any proposed amendment to paragraph 110(1)(d), or to the CCPC stock option rules, would be implemented, or the effective date of any such amendments. Based on past practice with respect to certain recent amendments to the stock option rules, it is possible that the effective date of the amendments could be the "announcement date" (the date the amendments are announced), without any grandfathering period or other transitional rules for previously granted stock options.
Given the statements in the Liberal election platform relating to stock options and the uncertainty associated with the nature and timing of any possible amendments to the stock option rules, we would encourage companies to advise their stock option holders of these matters relating to stock options at the earliest opportunity.
If you wish to discuss these matters, including how you can assist your employees in possibly taking advantage of the current stock option rules before they are subject to a cap or other adverse amendment, please contact the authors or any other member of Torys’ Tax or Pensions and Employment practices.