In the 2019 federal budget, the Canadian federal government announced changes to the taxation of employee stock options. On November 30, 2020, in its Fall Economic Statement, the federal government announced it was moving forward with plans to amend the tax treatment of employee stock options and released further information. Beginning July 1, 2021, stock options granted on or after this date will be impacted by these new rules.
Under the current rules, when an employer (a corporation, either Canadian or foreign, or a mutual fund trust) grants an employee a stock option, which the employee exercises, a taxable employment benefit will arise equal to the difference between the exercise price and the fair market value (or market price) of the shares on the date of the acquisition of the options. Where certain conditions are met, employees are entitled to a 50 percent deduction against the taxable employment benefit. In effect, only half the benefit is included in income of the employee and subject to tax at marginal rates. While normally the benefit (either 100 percent or 50 percent of the taxable employment benefit, if qualifying) is included in the employee’s income on the date of exercising the stock options, if the employee exercises a stock option of a Canadian-controlled private corporation (“CCPC”), the taxable employment benefit is deferred until the employee disposes of the shares acquired on exercising the options.
For an employee who is granted stock options from an employer impacted by the new rules, a $200,000 annual vesting limit (based on the value of an option’s underlying shares at the date of grant) is imposed for options that can qualify for the 50 percent employee stock option deduction. The amount of the benefit arising from the exercise of the stock options over the $200,000 vesting limit will not be entitled to the 50 percent deduction and will be fully included in income.
For employee stock options in excess of the $200,000 limit, the employer will be entitled to an income tax deduction in respect of the stock option benefit fully included in the employee’s income. An employer may also elect to claim a deduction for stock options below the $200,000 limit but the employee will not be entitled to the 50 percent reduction against the taxable employment benefit in respect of the amount claimed as a deduction by the employer.
Corporations that are CCPCs, or not CCPCs but it, or the consolidated group of which it is part, have annual gross revenues of less than $500 million, are exempt from these new rules. This may include American employer corporations with Canadian employees, so those will existing stock option plans, or those considering the set-up of a new plan, may wish to consult their tax advisors.
If you have any questions or would like further information, please contact Jennifer C. Leve in the Toronto, Canada office of Dickinson Wright at 416-777-4043.