Stock-option tax increases aimed at big companies, not startups

OTTAWA — Executives at big established companies who get paid with large stock grants will owe more in tax under changes promised in the new federal budget.

Under the current rules, employee stock option benefits are taxed at half the normal rate of personal income — the same rate as capital gains.

The plan announced in the federal budget Tuesday will put a $200,000 annual cap on the stockoption grants that get the preferential treatment, but only for employees of large firms. Startups and rapidly growing businesses, which typically can’t pay big salaries, are excluded from the cap so they can continue to attract and reward employees.

“We will take action to limit the benefit of the stock option deduction for executives of large, long-established corporations — while ensuring that everyday employees aren’t affected, and that start-ups and emerging Canadian businesses can continue to grow, attract talent, and create more good jobs,” Finance Minister Bill Morneau said.

The rationale for preferential tax treatment of employee stock options is to support younger and growing businesses, the government says, noting that it does not believe the options should be used to reward executives of large, mature companies, only because they come with favourable tax treatment.

However, Ben Bergen of the Council of Canadian Innovators, which represents the fast-growing tech sector, said it would “imprudent” to categorize any Canadian technology company as “mature” for the purposes of stock-option tax treatment.

“The proposed rules could lead to no Canadian headquartered large technology companies, which would have a negative impact on our prosperity and competitiveness for decades to come,” Bergen said. “Our members are anxious to ensure theses changes do not hinder a high-growth company’s ability to access and retain skilled talent and Canada’s long-term economic prosperity.”

Further details of the plan are to be released in the summer.

Bruce Ball, vice-president for taxation at the Chartered Professional Accountants of Canada, said the details of the plan will be key. “They have to figure out exactly which companies the new rules will apply to and which ones they don’t,” Ball said. “There are references to start-up companies and growth companies and there are references to mature companies at the other end, so I think we’ll need some sort of clarification in the middle.”

The Liberals set themselves up similarly in their 2017 budget, promising changes to restrict the use of private corporations by professionals such as doctors to get better tax treatment for their incomes, with details to come. When Morneau released those details the following summer, the angry reaction ultimately caused the government to back down.

In their 2015 campaign platform, the Liberals had promised to set a cap on how much could be claimed through the stock option deduction, but Morneau backed away from the plan in his first budget in 2016 after he said he heard from smaller companies that use stock options.

“Capping the stock option deduction is a welcome surprise in this budget to partially close one of the most regressive tax loopholes. However, it should be the start, and not the end, of addressing and capping regressive tax expenditures,” said David Macdonald, senior economist at the Canadian Centre for Policy Alternatives.

The government noted the change to the taxes on stock options will only apply to options granted in the future and will not apply to those granted before the announcement of legislation to implement the new plan.

Employee stock options allow workers to buy shares of their employers at a set price.