Canada’s new employee stock option tax rules are raising a number of questions for employers, says David Crawford, a partner at Hugessen Consulting Inc.
The new rules — part of the 2021 federal budget signed into law on June 29 — include an annual limit of $200,000 that will apply on stock option grants that can qualify for the employee stock option deduction under the Income Tax Act.
The changes will apply to employee stock options granted on or after July 1, 2021, according to Bill C-30, which noted employee stock options granted by Canadian-controlled private corporations, as well as non-CCPC employers with annual gross revenues of $500 million or less, won’t be subject to the new limit.
Crawford says many companies and boards are waiting to see how things play out, particularly in regards to the potential tax benefits. While qualified stock options provide the individual with the preferred tax treatment, unqualified options favour the employer.
“As a Canadian taxpayer, if I exercise those [unqualified] options and I’m paying full tax, my company now gets corporate tax deductions. That’s brand new — options weren’t a deductible expense before this. The problem is every company has a different tax situation. At some of the higher-growing technology companies, they’ll have to wait for significant profits to generate because a lot of those companies have a lot of tax loss carryforward. It’s not as valuable to them compared to a chartered bank, which every year, is paying significant taxes.
“There’s a lot of decisions to be made here. The company might decide, in the next stock option grant in January 2022, to maximize the number of options in that grant which could receive the favourable tax treatment or they could spread it among grants. . . . The company could also unqualify everything and make option holders pay full tax and give the company the full deductible. There’s a number of ways it could play out.”
The new rules also raise a number of administrative questions. “It hasn’t really been worked out what happens in Quebec, since they have slightly different tax rules. They already increased the portion of stock option gains being included for taxation. . . . There are also some potential headaches and decisions on the corporate tax deduction as it relates to transfer pricing, such as having a U.S. head office or a Canadian office in the U.S.”