The federal government has released draft legislative proposals to implement changes to the employee stock option tax regime announced in its 2019 budget.

As promised in the budget, the proposals will impose an annual cap of $200,000 on employee stock options eligible for the stock option deduction under the Income Tax Act. They also confirm that employer deductions will be available for the option benefits realized by employees — a suggestion that seemed something of a throwaway in the budget as it only appeared in a single sentence at the end of an example of how the cap would affect employees’ tax positions.

“There are a lot more details in the draft legislation than there were in the budget,” says Colena Der, a tax partner in Osler, Hoskin & Harcourt LLP’s Calgary office. “The original announcement was more of a high-level concept that left open a lot of questions.”

Read: Budget 2019: More proposals that could affect plan sponsors

The new regime, however, will only apply to options granted on or after Jan. 1, 2020. As well, they won’t apply to stock options granted by Canadian-controlled private corporations, or to non-CCPCs that are “startups, emerging or scale-up companies.” Those characteristics will be further defined by regulation following a consultation period that ends on Sept. 16, 2019.

“The government recognizes that there are a lot of companies with foreign control blocks that perhaps should be excluded from the new rules, and they’re looking for input on where to draw the line,” says Chris D’Iorio, a senior manager and executive compensation specialist at PwC Canada.

Under existing legislation, an employee who exercises an option realizes a taxable benefit equal to the difference between the option price and the price paid for the shares. In certain conditions, the employee can claim a deduction that results in a preferential tax rate that matches the rate applicable to capital gains.

Read: When is an employee benefit taxable?

However, from the employer’s perspective, the granting of the option and the exercise of the shares by the employee have no tax impact under the current rules. So while the introduction of the deduction represents a significant change in tax policy, it has been narrower than many expected.

“For example, the deduction would not be available where — as is very often the case — the eligible options have been granted by a parent corporation to employees of a subsidiary,” says Der. “But it’s unclear whether that was intended.”

As currently drafted, the proposals explicitly require a direct employment relationship between the employee receiving the options and the employer seeking the deduction.

Read: The pros and cons of employee share purchase plans

“What that means is that where you have a global corporation with a Canadian entity whose employees are part of a global stock option program, the Canadian entity would have no deduction at all because the stock option agreement is between employee and the global parent, as opposed to the Canadian company,” says D’Iorio. “There are also uncertainties in the rules as to how the order in which options are granted and exercised will affect which ones qualify for the cap.”

But he’s also hopeful further changes will follow the consultations. “My problems are not with the policy, but with the implementation.”

Copyright © 2019 Transcontinental Media G.P. Originally published on benefitscanada.com

Join us on Twitter

Add a comment

Have your say on this topic! Comments that are thought to be disrespectful or offensive may be removed by our Benefits Canada admins. Thanks!

* These fields are required.
Field required
Field required
Field required