June 17, 2019 – Ottawa, Ontario – Department of Finance Canada
The Government is committed to building an economy that works for everyone—making life more affordable for Canada's middle class and people working hard to join it.
This started with a middle class tax cut in which the wealthiest Canadians were asked to pay a little bit more so that taxes could be reduced for the middle class. That middle class tax cut is now helping more than nine million Canadians save money each year, and will mean $13.3 billion in tax relief for the middle class over four years. In line with this approach, the Government also looked at federal tax expenditures with the goal of eliminating inefficient tax measures that unfairly benefit the wealthiest Canadians.
Today, Finance Minister Bill Morneau took the next step toward a fairer tax system by tabling a Notice of Ways and Means Motion in the House of Commons on stock options.
Stock options give employees the right to acquire shares of their employer at a designated price, as an alternative form of compensation. The public policy rationale for preferential tax treatment of employee stock options is to help smaller, growing companies such as start-ups—that do not have significant profits and may have challenges with cash flow—attract and retain talent.
However, as highlighted in Budget 2019, the current employee stock option deduction is not effective in meeting its intended goal. In many cases, it is being used to provide tax-preferred compensation for executives of large, mature companies. As such, its benefits are disproportionately going to a very small number of high-income individuals. In 2017, for example, just over 2,300 individuals, each earning more than $1 million in that year, were able to claim more than $1.3 billion in tax deductions on their employee stock options. In total, these individuals, representing six per cent of stock option deduction claimants, accounted for almost two-thirds of the entire cost of the deduction to taxpayers.
To address this unequal and unfair outcome, the Government announced its intention to move toward aligning the tax treatment of employee stock options with that of the United States for employees of large, long-established, mature firms.
In keeping with the Budget 2019 announcement, today's Ways and Means Motion proposes the following changes:
- A $200,000 annual limit will apply on employee stock option grants (based on the fair market value of the underlying shares at the time the options are granted) that can receive tax-preferred treatment under the current employee stock option tax rules.
- Employee stock options granted by Canadian-controlled private corporations (CCPCs) will not be subject to the new limit.
- In recognition of the fact that some non-CCPCs could be start-ups, emerging or scale-up companies, those non-CCPCs that meet certain prescribed conditions will also not be subject to the new limit.
- Employee stock options above the limit will be subject to the new employee stock option tax rules.
- The new rules will apply to employee stock options granted on or after January 1, 2020.
In addition, the Government is seeking stakeholder input on the characteristics of companies that should be considered start-up, emerging, and scale-up companies for purposes of the prescribed conditions. The Government would also be interested in stakeholder views on the administrative and compliance implications associated with putting such characteristics into legislation.
In establishing the prescribed conditions, the Government will be guided by the two key objectives established in Budget 2019:
- to make the employee stock option tax regime fairer and more equitable for Canadians, and
- to ensure that start-ups and emerging Canadian businesses that are creating jobs can continue to grow and expand.
Stakeholders are invited to submit comments with respect to the prescribed conditions for the consideration of the Department of Finance by September 16, 2019 to fin.ESO-OAAE.email@example.com.
Written correspondence related to this consultation can also be mailed to:
Tax Policy Branch
Department of Finance Canada
90 Elgin Street