Fall Economic Statement Announces Proposals Related to Employee Stock Options and Home Office Expense Deductions
Date: December 17, 2020
On November 30, 2020, the Department of Finance released Supporting Canadians and Fighting COVID-19: Fall Economic Statement 2020 (Fall Economic Statement). In this FTR Now, we focus on two key proposals contained in the Fall Economic Statement that will be of interest to employers and human resources professionals: (i) proposed amendments to the employee stock option tax rules, and (ii) a simplified procedure and flat-rate for home office expense deductions.
The Canada Revenue Agency (CRA) subsequently released, on December 15, 2020, the details of how the home office expense deduction will apply for the 2020 tax year, including the release of a simplified Form T2200 and the circumstances in which the Form T2200 will not be required. The CRA has also temporarily softened its position on expenses related to commuting between home and work, employer-provided parking, and reimbursement of home office equipment and home internet expenses.
Our firm communication on the details of the Canada Emergency Wage Subsidy (CEWS) that were announced in the Fall Economic Statement can be found in our FTR Now of December 3, 2020.
Employee Stock Options
Employees who receive qualifying stock options are eligible for a deduction that effectively results in the difference between what the employee pays for the options at exercise and the sale price being more favourably taxed like a capital gain (i.e., only 50% of the gain is subject to tax). In its 2019 budget, the federal government announced its intention to limit the deduction on stock options for “high-income individuals employed at large, long-established, mature firms”. The preferred tax treatment for those individuals would only apply to annual option grants of up to $200,000, based on the fair market value (FMV) of the underlying shares at the time of the grant. The government indicated that “start-ups and rapidly growing Canadian businesses” would not be affected by the new limit.
In June 2019, the federal government released draft legislative proposals and launched consultations seeking stakeholder input on the characteristics of start-up, emerging, and scale-up corporations that should not be subject to the new limit.
In December 2019, the federal government announced that the proposed changes to the tax treatment of employee stock options would not be coming into force on the previously anticipated date of January 1, 2020, and indicated that it would announce details of how it intends to move forward with the proposed changes in its 2020 budget.
Fall Economic Statement
The Fall Economic Statement contains draft legislation to amend the Income Tax Act (Canada) (ITA) provisions governing employee stock options, based on input received from stakeholders during the consultations held in 2019. The proposed amendments include the following:
- Annual Limit: a $200,000 annual limit on the amount of employee stock options that may vest in an employee in a calendar year and qualify for the stock option deduction. Where an employee exercises an employee stock option that is in excess of this limit, the difference between the FMV of the share at the time it is exercised and the amount paid by the employee to acquire the share would be treated as a taxable benefit, to be included in the employee’s income for the year the option is exercised.
- Vesting: an option would be considered vested when it first becomes exercisable, a determination that would be made at the time the option is granted. If the year in which the option vests is not clear (for example, it is based on performance criteria or a change in control event), the option would be deemed to vest on a pro-rata basis over the term of the option agreement, up to a five-year period.
- Employers Subject to the New Rules: qualifying options issued by Canadian-controlled private corporations (CCPCs) will continue to be eligible for the stock option deduction. In recognition of the fact that some non-CCPCs could be start-ups, emerging or scale-up companies, the Fall Economic Statement explains that employee stock options granted by non-CCPCs with annual gross revenues of $500 million or less would also generally be exempt. Gross revenue will generally be determined based on the most recent financial statements prepared prior to the grant of the option.
- Employer Deduction: for employee stock options in excess of the $200,000 limit, the employer would be entitled to an income tax deduction in respect of the stock option benefit included in the employee’s income.
- Reporting Requirements: the employer will be required to notify the employee within 30 days of the grant if there are options being granted that will not be eligible for the stock option deduction. It must also notify the CRA by the employee’s tax filing deadline for the year of the grant, but the method for doing so has not yet been specified.
If passed in their current form, these new rules would apply to employee stock options granted on or after July 1, 2021. The existing rules would continue to apply to options granted before July 2021, including qualifying options granted after June 2021 that replace options granted before July 2021.
Home Office Expenses
Employees who wish to deduct home office expenses on their tax returns must meet certain conditions. Normally, with respect to the home office space expenses, they must be “required by the contract of employment” to pay for the expenses, and the home office must be the place at which they “principally perform” their employment duties during the year (i.e., where they work more than 50% of the time). To support their deductions, they must obtain from their employer a signed Form T2200, Declaration of Conditions of Employment.
In recognition of the increase in employees working from home as a result of the COVID-19 pandemic, the Fall Economic Statement indicated that the CRA would be releasing details of a simplified procedure for claiming home office expense deductions. In many cases, this might avoid the need for employers to sign a version of the Form T2200.
On December 15, 2020, the CRA published a background document setting out the following details regarding home office expense deductions for the 2020 tax year:
- Eligible Employees: Employees can claim a deduction for home office expenses for the period that they worked from home, if they meet all of the following criteria:
- The employee worked from home in 2020 due to the COVID-19 pandemic, or the employer required the employee to work from home. Of note, even if the employee could have worked at their regular work location but chose to stay at home (with the permission of their employer), the employee will be considered eligible for the deduction;
- The employee worked more than 50% of the time from home for a period of at least four consecutive weeks in 2020;
- The employee has obtained a completed and signed Form T2200S or Form T2200 from the employer. This Form is only applicable if the detailed method is used, as explained further below; and
- The expenses were used directly in the employee’s work during the period.
- New Temporary Flat Rate Method (Flat Rate Method): The Flat Rate Method is available to employees who have worked more than 50% of the time from home for a period of at least four consecutive weeks in 2020 due to the COVID-19 pandemic. Under the Flat Rate Method, eligible employees can claim $2 for every day that they work from home during that period, plus any additional days that they worked from home in 2020 due to the COVID-19 pandemic. The maximum amount that an individual employee can claim using the Flat Rate Method is $400 (200 working days). Multiple individuals working from the same home can each make a claim, provided that each individual meets the eligibility criteria. The Flat Rate Method can only be used for the 2020 tax year.
- Working Days: For the purposes of the Flat Rate Method, only days that the employee worked full-time or part-time hours from home count as working days. Vacation days, sick leave days, and other days off and leaves of absence do not count as working days.
- Simplified Process: Eligible employees who use the Flat Rate Method are not required to: (i) calculate the size of their work space for the purpose of claiming the home office expense deduction, (ii) keep documents to support their claim, or (iii) have a signed Form T2200 or Form T2200S (explained further below) from their employer.
- Covered Expenses: The Flat Rate Method can only be used to claim home office expenses. Employees cannot claim other employment expenses (such as motor vehicle expenses) if they are using the Flat Rate Method.
The detailed method (Detailed Method) can be used instead of the Flat Rate Method to claim a deduction for home office expenses. The CRA has taken the following steps to simplify the process for using the Detailed Method for employees who worked from home in 2020 due to the COVID-19 pandemic:
- Form T2200 and Form T777S: The CRA has created a simplified Form T2200S, Declaration of Conditions of Employment for Working at Home Due to COVID-19, and Form T777S, Statement of Employment Expenses for Working at Home Due to COVID-19.
- Form T2200S is a shortened version of Form T2200 that employers can complete for eligible employees who are using the Detailed Method to claim their home office expense deduction. For employees who are required to pay for expenses other than home office expenses, employers should complete the Form T2200 instead of the Form T2200S.
- Form T777S is used to calculate the employee’s claim for home office expenses. Employees will be required to complete and attach Form T777S to their tax return in order to deduct home office expenses for the year.
- Calculator: An online calculator is now available to help employees determine the home office expense deduction to which they are entitled.
- Electronic Signatures: For the 2020 tax year only, the CRA will accept an electronic signature on Form T2200S and Form T2200.
Employees who use the Detailed Method are required to keep documents to support their claim.
The CRA has also published a comprehensive list of eligible home office expenses. Notably, the CRA has expanded the list of eligible expenses that can be claimed to include home internet access fees.
The online calculator and comprehensive list of eligible home office expenses is available here.
These announcements are expected to reduce the likelihood of employers being asked to complete Form T2200S for the 2020 tax year, but will not eliminate them. Employees who would normally receive a Form T2200 and claim other employment expenses, such as motor vehicle expenses, will continue to need the form completed, and there may be some employees who request a Form T2200S so that they can use the Detailed Method to claim home office expenses rather than the Flat Rate Method.
Home Office Expense Reimbursements
In a separate background document published on December 15, 2020, the CRA released details of its administrative position on certain employer-provided benefits pertaining to commuting and home office costs. These positions are effective from March 15, 2020 to December 31, 2020.
Among other updates, the CRA has confirmed its previously announced position that, in the context of the COVID-19 pandemic, the CRA will not consider an employee to receive a taxable benefit where their employer pays for or reimburses up to $500 of computer or home office equipment to enable the employee to carry out their employment duties, provided that the reimbursement is conditional on the employee submitting a receipt. The $500 reimbursement amount is in respect of each employee rather than each piece of computer or home office equipment that an employee may purchase. This position does not apply to flat-rate allowances provided to an employee by their employer that are not tied to reimbursement of a specific item.
The CRA has also explained that, if an employer pays for or reimburses the cost of an employee’s cell phone service plan or home internet access fees to help carry out their employment duties, the portion used for employment purposes is not a taxable benefit.
Commuting Costs and Parking
In light of the pandemic, the CRA has temporarily softened the taxable benefit rules that normally apply to travel between home and work and employer-provided parking. These rules are also in effect from March 15, 2020 to December 31, 2020.
It will not be considered a taxable benefit if an employer reimburses an employee for additional commuting costs incurred for travelling between home and their regular work location during the pandemic. For example, this might apply to use of the employee’s vehicle to travel to work rather than public transit. If the employee is working from home due to the pandemic because their regular place of employment is closed, it will also not be considered a taxable benefit if the employer reimburses commuting costs incurred by the employee to travel between home and their regular place of work for purposes such as obtaining equipment or otherwise enabling them to perform their duties of employment.
Employer-provided parking will not be considered a taxable benefit during the period the employee’s work location is closed due to the pandemic.
The employer must keep appropriate records to support its taxable benefit reporting.
Should you have any questions or require further information, please contact any member of our Pension, Benefits and Executive Compensation Group.
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