Proposed changes to employee stock option tax rules apply July 1, 2021‎

On November 30, 2020, as part of the Fall Economic Statement 2020, Supporting Canadians and Fighting COVID-19, the Canadian federal government released updated legislative proposals (“Updated Proposals”) to limit the tax benefit for employee stock options. If enacted, the new rules will generally apply to stock options granted on or after July 1, 2021, but will not apply to Canadian-controlled private corporations (“CCPCs”) or non-CCPCs with annual gross revenue of CDN$500 million or less.

Background

Employee stock options currently enjoy preferential tax treatment in Canada, in that the benefits associated with them may be taxed like capital gains (50% taxable) as opposed to regular employment income (100% taxable). In particular, an employee who exercises a stock option realizes a (100% taxable) employment benefit equal to the fair market value of the underlying share less the strike price, but may (if certain conditions are met) claim a deduction equal to 50% of that benefit (“Stock Option Deduction”). 

On March 19, 2019, as part of Budget 2019, the government announced its intention to move forward with changes to limit the benefit of the Stock Option Deduction for employees of “large, long-established, mature firms”, but preserve the benefit for employees of “start-up, emerging and scale-up companies”.

On June 17, 2019, the government released legislative proposals (“Original Proposals”) to impose a CDN$200,000 limit on the amount of stock options that may vest in an employee in a calendar year and continue to qualify for the Stock Option Deduction.

We discussed the Original Proposals in a previous article available here.

The Original Proposals left open the question of which employers will be subject to the new rules. The government consulted stakeholders and the Updated Proposals answer this highly anticipated question.

Updated Proposals - Which employers will be subject to the new rules?

Under the Updated Proposals, the new rules will apply to every employer that is a corporation or mutual fund trust, OTHER THAN a corporation or mutual fund trust that:

• is a CCPC; or
• has annual gross revenue of CDN$500 million or less.

For determining gross revenue:

• for an entity that is a member of a corporate group that prepares consolidated financial statements, gross revenue would be as reported in the group’s most recent consolidated annual financial statements (at the highest level of consolidation) presented to shareholders (or unitholders) before the stock option is granted; and
• for any other entity, gross revenue would be as reported in its most recent annual financial statements prepared in accordance with generally accepted accounting principles and presented to shareholders (or unitholders) before the stock option is granted (or as would have been so reported had the financial statements been prepared in accordance with generally accepted accounting principles).

A welcome change for employers subject to the new rules is they will now have 30 days from the day the stock option is granted to notify the employee the option is subject to the new rules (whereas under the Original Proposals employers would have had to notify the employee on the day the option is granted).

If enacted, the Updated Proposals will apply to employee stock options granted on or after July 1, 2021 (except certain options that replace options granted before July 1, 2021).

Other than the changes described above and certain minor technical changes, the Updated Proposals are essentially the same as the Original Proposals.

Please contact any member of our National Tax Group if you have any questions about the Original Proposals or Updated Proposals.  

This article provides only general information about legal issues and developments, and is not intended to provide specific legal advice. Please see our disclaimer for more details.