This report covers a recent Canadian Notice of Ways and Means Motion indicating new legislative proposals to institute a $200,000 annual cap for certain employee stock options that qualify for deduction.
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Canada’s Department of Finance has released new legislative proposals to institute a $200,000 annual cap for certain employee stock options that qualify for the stock option deduction granted on or after January 1, 2020.1 (All dollar figures expressed are Canadian dollars.)
The Department of Finance has also clarified that stock options granted by Canadian-controlled private corporations (CCPCs) and certain “highly innovative, fast-growing companies” will be exempted from the new limit, and is seeking comments from stakeholders on the criteria that these companies must meet to be excluded. Comments on this issue are due by September 16, 2019.2
For the full report, see “Finance Reveals More Details on Stock Option Deduction Cap,” in TaxNewsFlash-Canada (2019-29, June 19, 2019), a publication of the KPMG International member firm in Canada.
For additional background, see our earlier report in GMS Flash Alert 2019-058 (March 27, 2019).
These new legislative proposals provide for a significant change in the tax treatment of stock options. Specifically, the proposals considerably increase the personal tax burden of certain executives, and provide a corporate tax deduction that has not previously been available to Canadian employers for stock-settled options.
Under the new proposed rules, employers will (1) have to notify employees in writing whether the stock options granted are subject to the annual cap, and (2) notify the Canada Revenue Agency (CRA) if they issue securities subject to the new rules by filing a prescribed form with their tax return for the taxation year in which the option was granted.
Where, as a result of these new rules, the employee is not entitled to the stock option deduction, the proposed legislation allows qualifying employers to claim a corporate tax deduction that equals the employee’s stock option benefit. To qualify, the employer must:
Where these conditions are met, employers can claim a corporate tax deduction for agreements to sell or issue securities that are entered into after 2019.
Finance has outlined several examples of how the proposed rules will work. Assume that, in 2020, an individual is granted stock options as follows:
Then, if the individual exercises all of these options in 2024, at which time the price of the shares has increased to $70, then $3.68 million (($70 - $50) x 184,000) will be fully taxed at ordinary rates (with a deduction to the employer), while only $320,000 (($70 - $50) × 16,000) may be eligible to receive preferential personal income tax treatment resulting in a 50-percent deduction of the stock option benefit (with no deduction to the employer).
The proposed legislation was introduced as a Notice of Ways and Means Motion to Parliament and is not yet in the form of a tax bill. Parliament commenced its summer recess, so this legislation will not pass as a tax bill until later this summer. Furthermore, since the consultation period for this legislation ends September 16, 2019, it is unlikely that further details on these important definitions will be determined before late summer or early fall of 2019.
Affected companies may want to consider the following in readiness for January 2020:
1 See the June 17, 2019 Department of Finance News Release “Government of Canada to Make Tax System Fairer, Launches Consultations on Stock Options.” Readers can also find at that link, the related Notice of Ways and Means Motion and a Department of Finance “Backgrounder.”
This article is excerpted, with permission, from “Finance Reveals More Details on Stock Option Deduction Cap,” in TaxNewsFlash-Canada (2019-29, June 19, 2019), a publication of the KPMG International member firm in Canada.
The information contained in this newsletter was submitted by the KPMG International member firm in Canada.
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