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Updates on Employee Stock Option Deduction in Canada

    

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By now, you may have heard or read that in 2019, the Department of Finance Canada tabled legislation which related to limiting the preferential stock option treatment enjoyed by employees in Canada. Now in 2021, with updated draft legislation and inclusion with the 2021 Federal Budget, Bill C-30 could significantly impact many employees who receive stock options granted to them on or after July 1, 2021.

With July 1 just around the corner, now is the time to review the details of your corporate plan, consider the possible impact to your employees, and develop an appropriate communication strategy. With so much to unravel and questions to consider, we've highlighted some of the most important matters you should be thinking about.

The good news is, if you or your employees have already been granted stock options from a Canadian-controlled private corporation (CCPC), these changes do not apply and the old rules remain in place.

Stock options granted from non-CCPCs or from mutual fund trusts with gross revenue of $500 million or less are also excluded from this new legislation (revenue as determined on a consolidated basis for the ultimate parent entity). If you are an employee who received stock options, you will likely need to rely on the information provided by your employer to determine if you still qualify under the old rules.

For any individual that does not meet the above criteria, the new legislation will provide a $200,000 annual deduction limit on option grants that qualify for the employee stock option deduction. Any amount in excess will no longer be eligible for the stock option deduction. This change effectively doubles the rate of Canadian income tax on option income in excess of the $200,000 cap.

On the surface, this seems relatively clear, but there is an additional change which will again require companies to provide clear and concise correspondence to employees. The legislation was drafted to allow employers to grant stock options under either:

  • An option to acquire a “non-qualifying security,” which would be subject to the new tax rules (i.e., employees are not eligible for the 50% deduction, but the employer may be able to take a corporate tax deduction in the year of exercise); or
  • An option to acquire under the existing tax treatment (i.e., employees are eligible for the 50% deduction, but subject to the $200,000 deduction limit with no corporate tax deduction)

A company can deem any stock option to be non-qualifying which effectively denies the employee from the benefit of the stock option deduction. At the same time, under certain conditions for those non-qualifying securities, the company is eligible to deduct the amount of the stock option benefit. It is unclear if a company who issues qualifying options but deems them to be non-qualifying, will be allowed to reverse their decision. If they are allowed to reverse their decision, the next step is to see what the time frame will be to allow a reversal. We will be keeping an eye out for direction on this situation.

As part of the many required conditions to deem the stock option as non-qualifying, the company must, within thirty days of the option grant, advise the employee in writing that the share upon exercise will be a non-qualifying share AND must also advise the Canada Revenue Agency (CRA) in writing that the share is non-qualifying. Again, we will keep updated on what, if any, formal process will be implemented by the CRA as an ad-hoc approach will likely not be sufficient.

From a corporate administration perspective, this will require the employer to:

  • Track the stock option grants for the $200,000 limit for each employee for each vesting year
  • Ensure the correct payroll withholding rates are used
  • Provide timely written documents to the employee and to the CRA

Additionally, intercompany communication related to the stock options will need to be provided in an expedited manner to ensure the appropriate written documents are provided to the employee and the CRA. Even if all other conditions are met, failure to properly notify the employee and the CRA will mean the employer will not be able to take the stock option deduction.

With the previous legislation, there existed a level of assurance for employees surrounding the stock option deduction and the inherent benefit they would receive. With these new policies, there is a significant amount of uncertainty. It will take a strong team approach to safeguard the process, generate and track each situation for every employee, and most importantly to communicate cross functionality—between HR, Payroll, and Tax—to ensure the appropriate result for all parties. It will be imperative that you continue to monitor the legislation, rely on your external vendors for guidance, and continually educate your employees on the new rules and expectations.

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Author Randall Timm

 
Randall serves as a Director in GTN’s Canadian office where he leads GTN’s Canadian services, supporting clients with mobile employee populations throughout Canada. Randall has over 25 years of experience assisting multi-national companies with their globally mobile workforces, as well as assisting athletes and entertainers with their international tax affairs. His experience includes both Canadian and US income tax compliance, payroll, social tax, compensation, and tax policy consulting. His vast experience and understanding of the complexities of mobility tax allow him to uncover valuable insights and develop solutions that fit client needs. +1.343.804.4292 | rtimm@gtn.com
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