After outcry over possible changes to the taxation of stock options, the Liberal government has left the existing regime in place — at least for now.
In the weeks leading up to the budget, Finance Minister Bill Morneau stated there would be a $100,000 cap on favourable tax treatment for stock options. He later said there would be grandfathering for options issued prior to budget day.
But the budget, announced on March 22, makes no mention of changes to the existing regime. Morneau said the government was listening to the objections of entrepreneurs who compensate early employees with stock options in lieu of pay.
“I heard from many small firms and innovators that they use stock options as a legitimate form of compensation for their employees,” said Morneau. “So we decided not to put that in the budget.”
When asked if it would be in a future budget, he said: “It’s not in our plan.”
Read: The Liberals have won. Should you worry about the TFSA?
The government is trying to stimulate innovation and economic growth, and stock options are a key part of attracting the talent needed for that, says Nancy Graham, portfolio manager at PWL Capital.
“This isn’t just about somebody in a large, established, company getting stock options,” she says. “Even so, we still want [to incentivize] top talent in large established corporations.”
How things work now
Employers issue stock options as part of employee compensation packages. These awards give employees the right to purchase company stock at a predetermined price on a future date. This benefits employees if the exercise price is lower than the trading price of the stock. For instance, if the exercise price is $100, and the stock is trading at $170, the employee makes $70 per share. (If the exercise price is above the trading price, the option is worthless.)
When employees exercise their options, they realize a taxable benefit equal to the fair market value minus the exercise price, Ana-Luiza Georgescu, a tax partner with KPMG in Montreal, told Advisor.ca before budget day.
If the stock option plan meets certain conditions, only half the benefit is taxable. “That is often referred to as capital gains treatment because it does give the same result overall,” said Georgescu.
Read: Canadians confused about TFSAs
This article was originally published on Benefits Canada‘s companion site, Advisor.ca