Update on Taxation of Employee Stock Options

June 27, 2019

On June 17, 2019, the Department of Finance released draft legislation regarding the taxation of employee stock options. This highly anticipated Notice of Ways and Means motion tabled the legislative amendments which were first announced in the 2019 federal budget. The highlights of this Notice of Ways and Means motion are as follows:

Effective Date

The proposed changes apply to employee stock options which are granted on or after January 1, 2020. This effective date represents a change from the initial statements put forth in Budget 2019 which suggested that the amendments would be effective upon release of the legislative proposals this summer.  

New $200,000 Annual Limit

The proposed changes introduce a new annual $200,000 limit on the amount of employee stock options that can vest in an employee in a year and continue to receive tax-preferred treatment (i.e., the 50% deduction) under the current employee stock option tax rules. The number of options that qualify for the annual vesting limit is based upon the fair market value of the underlying shares at the time the options are granted.  

In general, the “vesting year” in respect of an employee stock option is either (i) the calendar year in which the taxpayer’s right to the share under the option agreement first becomes exercisable, if the option agreement specifies a calendar year, or (ii) in any other case, the first calendar year in which the option can reasonably be expected to be exercised.

Exception for CCPCs and “Start-Ups, Emerging or Scale-up” Companies

The proposed changes do not apply to “Canadian-controlled private corporations” or to start-ups, emerging or scale-up companies that meet certain prescribed criteria. The prescribed criteria has not yet been enumerated.  

The Government is seeking stakeholder input as to the characteristics of companies that should be start-ups, emerging or scale-up companies for these purposes. Submissions will be open until September 16, 2019.  

Employer Deduction

An employer will be entitled to claim a deduction when options which do not qualify for the preferred tax treatment are exercised. Interestingly, the deduction is only available if the employee would have otherwise been entitled to the preferred tax treatment (i.e., the 50% deduction) had he or she been under their $200,000 annual limit.  

Employers are also given the ability to designate specific stock options as being ineligible for the preferred tax regime (even if the employee was below their $200,000 limit) and instead claim a corporate tax deduction.

Next Steps

The upcoming federal election is scheduled to take place on October 21, 2019 and it is unlikely that the Notice of Ways and Means motion (tabled on June 17, 2019) will be passed prior to this date.  

Other than the Liberal Party, Canada’s major political parties have not indicated an intention to either implement, adjust, or abandon the Government’s proposed changes to the current stock option regime. Final implementation of these changes therefore may be dependent on the outcome of the federal election.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

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