Stock option deductions: Clarity and certainty needed

The federal government is consulting on how to cap employee stock option benefits. Find out how the draft legislation echoes advice from CPA Canada and the Canadian Bar Association on this Budget 2019 measure.

Budget 2019 announced the government’s intent to limit the use of the current employee stock option tax regime to make it fairer and more equitable for Canadians, while ensuring that start-ups and emerging Canadian businesses that are creating jobs can continue to grow and expand.

CPA Canada believes it is in the public interest to limit stock option benefits in some cases. However, it’s just as important that the detailed proposals provide clarity, certainty and objectivity in their application, as stated in a submission to the Department of Finance Canada from the Joint Committee of Taxation of CPA Canada and the Canadian Bar Association (“Joint Tax Committee”) in May 2019

Many details were announced on June 17, 2019, when Finance released draft legislation and a backgrounder for a consultation that ends September 16, 2019.

Highlights of the proposals are as follows:

  • A $200,000 annual limit will apply on employee stock option grants (based on the fair market value of the underlying shares when the options are granted) eligible for the current employee stock option deduction.
  • The new limit won’t apply to employee stock options granted by Canadian-controlled private corporations (CCPCs) and some non-CCPCs — i.e., start-ups, emerging and scale-up companies — that meet prescribed conditions.
  • The new rules will apply to employee stock options above the limit granted on or after January 1, 2020.
  • Employers will be able to claim a corporate-level deduction for employee stock option benefits that do not qualify for the deduction.

These details suggest that Finance has listened to and addressed many of the Joint Tax Committee’s concerns.

About the effective date, for example, the committee called for a reasonable lead time so employers and employees alike can take the impact of tax into account in negotiating the level and mix of compensation. The committee also emphasized the importance of clarifying whether the restriction would apply to CCPCs and whether employers would be able to claim the corporate-level deduction for benefits over the threshold.

The Joint Tax Committee recommended consultation on where the line is between “large, long-established, mature companies” and “start-ups and rapidly growing Canadian businesses.” Finance’s announcement specifies that it is seeking stakeholder input on the characteristics of companies that should be considered start-up, emerging, and scale-up companies under these rules.

This news is especially welcome. As the committee pointed out, taxpayers and Canada Revenue Agency (CRA) need to know which companies are affected by the rules clearly and objectively so they know what needs to be done to comply. Any uncertainty about these definitions will cause more disputes between taxpayers and the CRA. This could simply discourage the use of stock options as employee compensation, even by firms that, from a policy perspective, are intended to be protected from the new restrictions.

The length of the consultation period is also in line with the Joint Committee’s recommendation that Finance, with the help of stakeholders, needs a reasonable amount of time to properly assess the proposals’ impact and address any unforeseen results. Finance’s approach will likely help reduce uncertainties for employees and employers until the final rules are in place.

Some unknowns raised by the committee have yet to be clarified, however. Among others, the proposals do not say how the $200,000 restriction would apply when an employee only exercises a portion of their available stock options in a year.

We look forward to continuing to offer our insights and ideas to Finance and the CRA as the detailed proposals are finalized, enacted and implemented in practice. In particular, the Joint Committee plans to make a submission in response to the request made in the announcement by Finance on June 17th.


What other issues do you think Finance should keep in mind as it designs detailed rules to implement this measure? Post a comment below.

CPA Canada’s Tax Blog is designed to create an exchange of ideas on tax policy and practice issues, and their impact on those who practice tax. Your comments can provide helpful input into the public interest advocacy positions developed by CPA Canada.


The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.

About the Author

Bruce Ball, FCPA, FCA, CFP

Vice-president, Taxation, CPA Canada