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The Liberal government’s changes to employee stock option deductions should go further to prevent high earners from benefiting, a report from the C.D. Howe Institute says.

The federal government proposed changes in the 2019 budget to impose a $200,000 annual cap on employee stock option grants taxed effectively at the capital gains rate. The change targets executives at large companies who are compensated with stock options currently taxed at the preferential rate, and will not apply to some small start-up firms.

The policy rationale for the preferential tax treatment, according to the budget, is to support younger and growing  businesses. However, most of the deductions go to a small number of claimants who earn more than $1 million.

Report author Nick Pantaleo said the measures should include an income test in order to meet the policy objective of a more equitable tax regime.

The test would exclude those earning more than $200,000—including deferred compensation, such as pension benefits—in the period the options are outstanding and the year they’re exercised.

Employees’ lifetime stock option deduction should be capped at $500,000, he said.

Additionally, the total stock option deduction a person claims should reduce the amount of net capital losses available to offset non-income capital gains in the year of death, the report said.

Finance Minister Bill Morneau tabled a ways and means motion in June that would see the measure enacted on options granted beginning Jan. 1, 2020. He also launched an industry consultation on the measures that will run until Sept. 16.

The consultation will help determine which companies should be considered “start-up, emerging, and scale-up companies,” a Department of Finance release said.

Read the C.D. Howe report.