Special Update on Taxation of Stock Options
Volume No. 15-09
“Only new stock options affected by tax changes”, says Minister Morneau.
Today new Federal Finance Minister Morneau said that any changes to the taxation of stock options will only affect stock options issued from the date the changes are announced. “Any decisions we take on stock options will affect stock options issued from that date forward,” said the Minister.
Any stock option issued prior to that date will be treated under the tax regime that was in effect at the time.
Although the wording in this announcement is not “crystal clear”, it appears that stock options granted before the date of any announced changes to the taxation of stock options will remain subject to the old rules. Currently, if certain conditions are met, a deduction of 50% of the benefit realized on exercise of a stock option can be taken as a deduction. This essentially means that only half of the stock option benefit is subject to tax.
During the Federal election campaign, the Liberals announced that the deduction allowed for stock options would be limited to $100,000 annually, because stock options are widely used as a tax perk by wealthy Canadians, and are not normally available to the middle class. There has been considerable speculation as to how the proposed changes would be implemented, and even more significantly, when they would apply. Many people thought that stock options exercised in 2015 would benefit from the full 50% deduction, whereas if exercised in 2016, the deduction might be limited to $100,000. Consequently, many people had been exercising stock options, or at least considering this, before the end of the year.
The Minister’s announcement seems to provide some comfort that existing stock options and those created before any changes are announced, whether exercised or not, will continue to benefit from the full 50% deduction, where eligible, and that only stock options granted after a date in the future on which the new rules will be explained in more detail will be affected.
In any event, because of the proposed tax rate increase, which may apply from 2016 onwards, of 4% for high income individuals (taxable income over $200,000), it may still be beneficial to exercise stock options in 2015 rather than 2016.
It should be noted that the tax considerations are only one factor in determining whether or not to exercise stock options. There are other issues to consider, such as whether to hold the shares or sell the shares, which is a financial and investment decision. There is also the funding of the amount necessary to exercise the stock options and corresponding taxes payable on benefits realized. Lastly, it should be noted that if the stock decreases in value from the price on the exercise date, the decline in value will be a capital loss. The stock option benefit is considered employment income, and a capital loss cannot be applied to reduce employment income.
A by-product of the Minister’s announcement is that it may be possible to grant additional stock options today which will fall under the grandfathering. The window of opportunity may be short-lived as no one can predict when the rules will be outlined, which will mark the effective date of the change (there could be an announcement in December, or the matter could be raised for the first time in a Federal Budget which might possibly be scheduled for February 2016). There may be a window of opportunity, but it may not be a large one. In any event, granting of a stock option is not itself normally a taxable event. Thus, there would appear to be little downside to accelerating the granting of stock options in suitable circumstances.
For an individual consultation concerning stock options, please contact us.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.
TAX TIP is provided as a free service to clients and friends of Cadesky Tax.
The material provided in Tax Tip is believed to be accurate and reliable as of the date of posting. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Cadesky Tax cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.
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