Update on Timing of Proposed Changes to Taxation of Stock Options
Date: November 24, 2015
In remarks accompanying the new federal government’s first fiscal update, on November 20, 2015, Canada’s Minister of Finance provided further guidance on proposed changes to tax rules that would limit the annual deduction from income that employees can claim upon exercising stock options. Significantly, Minister Morneau indicated that any such changes would only apply to stock options awarded after the date that the proposed changes are officially announced.
This FTR Now discusses the potential impact of these proposed changes on existing stock options.
TAXATION OF STOCK OPTIONS
In connection with the exercise of stock options, an employee is required to include in his or her employment income a stock option benefit equal to the difference between the fair market value of the shares acquired and the exercise price paid by the employee to acquire those shares.
A significant tax advantage of stock options is that the employee can deduct one-half of the stock option benefit where certain conditions are met. In effect, the employment income relating to the exercise of stock options is taxed as if it were a capital gain.
PROPOSED CAP ON STOCK OPTION DEDUCTION
As part of its election platform, the federal Liberal party pledged to cap the amount that employees can claim as a stock option deduction, but indicated that “employees with up to $100,000 in annual stock option gains will be unaffected.”
With the Liberals forming a majority government following the election, some commentators had suggested that employees may wish to exercise their outstanding stock options sooner rather than later, to ensure that they benefit from the existing tax deduction rules.
Minister Morneau allayed some of this concern with his remarks, indicating that any changes would only apply to stock options issued after the proposed changes are officially announced. The Minister indicated that an official announcement of the changes may be forthcoming in the next few months. As such, it would appear unnecessary for employees who hold stock options to exercise them early solely out of concern for losing their deduction.
IMPLICATIONS FOR EMPLOYERS
Employers who utilize stock options as part of their compensation program should be aware that changes to tax rules may arrive early in 2016 that will make stock options less attractive to some employees than they have been in the past. Subject to good governance considerations, some employers may wish to consider whether it is possible to expedite 2016 grants to ensure that the options granted benefit from the current tax treatment.
Employers who utilize stock options may also wish to consider whether it is necessary or desirable to adjust the “mix” of incentive compensation awards they provide to key employees given that the stock option deduction may soon be limited.
We will continue to monitor legislative initiatives in this area and provide you with timely updates as they are available. If you have any questions about the impact of these changes on your existing compensation program, please contact any member of Hicks Morley’s Pension, Benefits and Executive Compensation group.
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