This article is taken from our quarterly newsletter, Canadian Overview, published by the Canadian member firms of Moore North America. The articles in our newsletter are part of our mission to become the partner of choice for your success by keeping you up to date.
A new set of rules for all stock options issued after December 31, 2019 was due to come into force on January1, 2020. However, the Ministry of Finance recently issued a statement to the effect that the effective date of the new rules will be disclosed in a future communication, probably at the same time as the budget. This will be published in March or April 2020. Under this new plan, a portion of the stock option benefit is no longer eligible for the stock option deduction.
Under the current rules, which apply to non-Canadian-controlled private corporations (CCPCs), an individual can claim a deduction for a stock option if the exercise price is greater than or equal to the fair market value of the underlying stock at the time the option was granted. The deduction represents 50% of the taxable benefit.
Under the new rules, a calculation is made to determine whether or not the value of options acquired during the year exceeds $200,000. This means that all share values for options that vest during a year must be taken into account to determine whether their value at the time of grant exceeds $200,000. Of this amount in excess of $200,000, a portion of the stock option benefit will not be eligible for the stock option benefit deduction. This means that even if, in economic terms, an individual has received the same amount on exercising options as in previous years, the amount taxed will increase.
When a person can stagger the vesting of options so that the vesting amount is less than $200,000 per year, he or she can save on taxes. However, there is a risk that this person may lose these stock options because they did not vest as quickly as in other circumstances.
The new rules bring another major change: corporations can now deduct the stock option portion of the benefit, whereas individuals cannot. There are notification rules that companies must follow, both for the individual and for the Canada Revenue Agency, in order to be authorized. In addition, only the person’s direct employer can claim the deduction. This can be a problem if the stock option is issued by a foreign parent company and not by the individual’s actual employer.
These rules can become quite complex. So it’s best to consult your local tax expert for advice on how best to manage these changes for you and your business.
Written by Howard Wasserman, CPA, CA, Certified Financial Planner (CFP), Trusts and Estates Specialist (TEP), of Segal LLP. This document was written for our quarterly newsletter, Canadian Overview, published by the Canadian member firms of Moore North America.
