The federal government’s Bill C-30 received Royal Assent on 29 June 2021 and is now law. Bill C-30 includes several measures proposed in the 19 April 2021 budget including changes to employee stock options announced in their 2019 federal budget.
The new federal rules would apply to stock options granted on or after 1 July 2021.
The intention is to limit the scope of the current stock option tax regime considering the public policy rationale for preferential tax regime is to support younger and growing Canadian businesses.
Under the old rules, when an employee exercises a stock option, a taxable employment benefit will arise equal to the difference between the exercise price and the fair market value of the shares on the date of acquisition. If certain conditions are met, employees are entitled to a 50 percent deduction against the taxable employment benefit. If the employee exercises a stock option of a Canadian-controlled private corporation, the taxable employment benefit is deferred until the employee disposes of the shares.
Under the new rules, the preferential tax treatment on employee stock options issued by certain employers would be subject to an annual vesting limit of CAD 200,000 per employee, in each year in which options becomes exercisable and based on the fair market value of the underlying shares at the time the options are granted. When an employee exercised stock options that exceed the CAD 200,000 cap (“non-qualifying security”), the stock option benefit will be taxed at ordinary tax rates without the benefit of the 50 percent deduction against the taxable employment benefit.
The amounts that exceeds this limit will be eligible, if certain conditions are met, to a new employer deduction equal to the value of the taxable benefit that will be included in the employee’s taxable income for that year. In addition, employers will be able to designate options that would otherwise fall within the annual limit and hence qualify for the stock option preferential tax treatment as ineligible entitling them to the tax deduction when employees exercise the stock options.
Employers would also be subject to new reporting requirements. For example, they must file a prescribed form with their annual corporate income tax return to notify the Canada Revenue Agency any granted options that are non-qualified stocks. They must also notify the employees of any options exceeding the annual limit of CAD 200,000 or of the options that will be designated as non-qualified securities.
These new rules would not apply to stock options granted by the following employers: Canadian-controlled private corporations (CCPCs) and non CCPCs or mutual fund trusts with gross revenue determined based on the last prepared financial statements of CAD 500 million or less determined on a consolidated basis where applicable.
The government of Quebec has recently announced that it will amend their legislation to incorporate, with adaptations on the basis of its general principles, the New Rules. Such changes will apply on the same date as the one retained for the application of the relevant provisions of the Federal Income Tax Act.
The new rules will have impact on both employees and employers.
Among many implications, the new rules will increase employers’ administrative burden, as they will have to implement new processes to keep track of non-qualified securities and report them to the tax authorities.
In light of the new rules, employers will need to: