On June 17, 2019, Canadian Federal Finance Minister Bill Morneau released draft legislation (first announced in the Federal Budget released on March 19, 2019) that will impact on the preferential tax treatment of employee stock options. According to the Government, the policy objective for this preferential tax treatment is to help “smaller, growing companies” (such as start-ups) attract and retain talent, since these companies may not have significant profits or may have cash flow challenges that affect their ability to offer competitive salaries. The Government’s concern is that this preferential tax treatment is being used by “large, mature companies” to provide executives a tax-preferred form of compensation.

The key features of the proposals, which apply to options granted on or after January 1, 2020, are as follows:

  • if the employer is a “specified person” and therefore subject to the new rules, there will be a $200,000 (CAD) limit on the amount of options that may vest in the employee in the year and continue to qualify for the preferential tax treatment; and
  • the employer will be
    • entitled to a deduction in respect of the employment benefit associated with options that are either above the $200,000 (CAD) limit or designated by the employer as ineligible for the preferential tax treatment, and
    • required to report options granted in excess of the $200,000 (CAD) limit or designated as ineligible for the preferential tax treatment to the (i) employee in writing on the day the agreement is entered into, and (ii) CRA in prescribed form with its tax return for the taxation year in which the option is exercised.

The new rules will apply to every employer that is a “specified person”, which is defined as any corporation (or mutual fund trust), except a corporation (or mutual fund trust) that:

  • is a CCPC; or
  • meets prescribed conditions.

The proposals do not specify what these prescribed conditions are, and the Government is seeking stakeholder input on the characteristics of companies that should be considered “smaller, growing companies” and therefore continue to qualify for the preferential tax treatment. The deadline to submit stakeholder input is September 16, 2019.

Given that the proposals apply to options granted on or after January 1, 2020, employers that may be affected should consider granting options before then.

Further information on the proposed changes can be found here.

Please contact any member of our Canadian Tax Group if you have any questions about the proposals.