TAX ALERT

June 21, 2019

Proposed Changes to the Taxation of Stock Options Released

The federal government has introduced proposed legislative changes to the taxation of stock options. The proposed changes, announced June 17, 2019, are in keeping with commitments made in Budget 2019 and will apply to employee stock options granted on or after January 1, 2020.

Annual Vesting Limit

The proposed changes set a $200,000 annual limit (based on the fair market value of the underlying shares when the options are granted) on the amount of employee stock option grants that may be eligible for the stock option deduction that is available under the current employee stock option tax rules.

Exemption for Canadian Controlled Private Corporations and Start Ups

Employee stock options granted by Canadian controlled private corporations (CCPCs) will not be subject to the new limit. Further, in recognition of the fact that some non-CCPCs could be start-ups, emerging or scale-up companies, these non-CCPCs that meet certain prescribed conditions will also not be subject to the new limit.

Note that these prescribed conditions have not been defined to date. Stakeholders have been invited to submit comments for the Department of Finance’s consideration by September 16, 2019.

Tax Implications

I. Employee

Where an employee exercises an employee stock option that exceeds the $200,000 annual limit, the difference between the fair market value of the share at the time the option is exercised and the amount paid by the employee to acquire the share will be treated as a taxable employment benefit. The full amount of the employment benefit will be included in the income of the employee for the year the option is exercised, consistent with the treatment of other forms of employment income. The employee will not be entitled to the stock option deduction in respect of this employment benefit.

II. Employer

Employers subject to the new rules will be able to choose whether to grant employee stock options subject to the current tax treatment (up to the $200,000 limit per employee) or whether to designate employee stock options would otherwise be subject to the current tax treatment as being subject to the new rules.

To comply, employers will be required to notify:

1. Employees in writing whether the options granted are subject to the new rules at the time the options are granted, and
2. Canada Revenue Agency to the extent they issue securities subject to the new rules.

Corporate Deduction

Employers subject to the new rules will be entitled to a deduction for income tax purposes where the employee would have been entitled to the stock option deduction had they been granted under the existing rules. The deduction can be claimed in the taxation year that includes the day on which the employee exercised the stock option.

How MNP Can Help

For more information or to evaluate the effects and implications of these new legislative proposals for your company, please contact an MNP Tax Advisor in your region.