The Center Block and the Peace Tower in Parliament Hill

The Liberal government’s proposal to change tax rules for employee stock options is unlikely to be adopted before the federal election this fall.

The 2019 federal budget said the government would impose a $200,000 annual cap on employee stock option grants taxed effectively at the capital gains rate.

The measure is not included in the budget implementation bill, C-97, which is currently before the House of Commons. With Parliament scheduled to rise for the summer on June 21 and not reconvene until after the fall election, it’s unlikely that legislative changes for stock options could be passed before then.

Elizabeth Roscoe, senior vice-president and national public affairs lead at lobby firm Hill and Knowlton Strategies in Ottawa, said the Department of Finance has been accepting comments on the proposal from the financial industry.

However, the Liberals have made it clear their pre-summer legislative priorities are C-97 and C-69, the bill affecting pipeline regulation.

“I do not anticipate that we’re going to see any clarity before the election,” Roscoe said of the stock options measures.

The budget said details on the stock option changes would be released before the summer. When asked whether the government was still proceeding and how it was consulting, a Department of Finance spokesperson repeated the timeline.

Any legislation tabled in the remaining weeks would have to compete with other bills to make it through the House and Senate. Bills that don’t make it through would die and need to be reintroduced in the next Parliament.

Other budget measures impacting the financial industry also aren’t in the budget implementation act. Bill C-97 doesn’t mention the proposed advanced life deferred annuities (ALDAs), measures impacting how holders of mutual funds and ETFs are taxed or changes to prevent individual pension plans from being used to avoid tax on commuted values.

The bill does contain budget measures dealing with carrying on a business in a TFSA, changes to registered disability savings plan time limitations and measures affecting first-time homebuyers.

Governments typically table a second budget implementation bill during Parliament’s fall sitting to address measures not included in the first one. However, once Parliament rises in June, it’s unlikely to reconvene until after the federal election scheduled for Oct. 21.

The future government, whether led by the Liberals or another party, may not move ahead with measures in the previous budget. The Liberals trail the Conservative Party in several public opinion polls.

Clarity needed on stock options, groups say

The 2019 budget measure targets executives at large companies who are compensated with stock options currently taxed at the preferential capital gains rate. New rules would apply “for employees of large, long-established, mature firms” but would not change for “start-ups and rapidly growing Canadian businesses,” the budget said, without defining those terms.

Bruce Ball, vice-president of taxation at the Chartered Professional Accountants of Canada (CPA Canada), said the “vague” description in the budget makes it difficult for industry groups to plan or offer feedback. He said there should be a two-part consultation.

“I don’t think they explained the rule to the degree they usually do when they announce something like this,” Ball said. “They really should almost complete the budget announcement by giving more details in terms of what the intention is, and then ask for feedback before releasing final draft legislation.”

CPA Canada and the Canadian Bar Association’s joint committee on taxation is putting together a submission to the Department of Finance.

Because the changes would affect employers and employees, companies will need “a lot of lead time” to plan for the changes, Ball said. “It really upsets the apple cart.”

The budget said the changes would apply on a go-forward basis and not affect employee stock options granted before legislative proposals are announced.

Stephen Rupnarain, a partner in RSM Canada’s tax group, also said more clarity is needed on how a “large, mature company” is defined and how the cap would apply to non-executives.

The budget pointed to 2017 tax figures showing that 6% of stock option deduction claimants accounted for almost two-thirds of total stock option deductions, claiming more than $1.3 billion. These 2,330 people all earned more than $1 million.

Stock options shouldn’t be used “as a tax-preferred method of compensation for executives of large, mature companies,” the document said.

Rupnarain said companies don’t yet know how the proposal would play out in different scenarios.

“What if you’re talking about somebody who has a very low salary and is largely compensated with options, so the fair value of their options may be high but their take-home pay may be low—whether that person is an executive or not?” he said.

Venture capital groups, private equity funds and large companies that acquire smaller companies use stock options as a tool to retain executives at smaller companies, he said. And in complex corporate groups comprising large as well as small companies, the large company may issue stock options to employees of the smaller companies.

“Are they going to be subject to this cap as well, even though, technically, they’re not employees of these large companies?” he said.

Applying the rule to private corporations is another potential challenge, Rupnarain said, since the limit would be based on the shares’ fair market value.

“When you’re dealing with a private company that doesn’t have a trading value, the question we’re being asked by some of our clients who use options is, ‘Am I going to have to get a valuation done every single time I issue options?'” Rupnarain said.

He also pointed to potential issues with timing.

“Part of the nice thing with options is you can manage when people get their options—[employees] have to meet certain performance metrics [and] may have to stay with the company for a certain number of years,” he said.

“Taxing people on the receipt up front is going to create a whole new dynamic for those individuals that you want to give equity compensation to.”

Corporations will also want to know how employer deductions would apply if the full amount from stock options above the $200,000 threshold is to be included in employee income, he said. Corporations don’t currently receive deductions for stock-option-based compensation.