2021 FEDERAL BUDGET IMPLEMENTS STOCK-OPTION TAXATION CHANGES
START-UPS AND MATURE COMPANIES AFFECTED DIFFERENTLY.
As forecast by our earlier Client Advisories, the 2021 Federal Budget has confirmed the employee stock options taxation changes as described in the 2020 Fall Economic Statement. Following many delays and substantial input from stakeholder consultations, the federal government is removing the employee stock option deduction eligibility for certain stock options granted on or after July 1, 2021. This change will remove the beneficial income tax treatment whereby stock option gains are effectively taxed at one-half of the rate for ordinary income, with the following key condition:
- A $200,000 limit per vesting year applies to employee stock option grants that qualify for the 50% employee stock option deduction, based on the fair market value of the underlying shares when options are granted.
Responding to the government's previously stated objective that start-ups not be impacted by this change:
- Employee stock options granted by Canadian-Controlled Private Corporations (CCPCs) will not be subject to the new limit; and
- Recognizing that some start-ups are not CCPCs, non-CCPC employers with annual gross revenues of $500 million or less (as reflected in the granting company's last annual consolidated financial statements presented to shareholders or unitholders) will also not be subject to the new limit.
The government feels the proposed approach above will ensure that start-ups and emerging Canadian businesses can continue to grow and expand and attract key talent, while limiting the benefit of the employee stock option deduction for high-income Canadians who work in mature companies. It also anticipates the taxation change will generate additional tax revenues, although the magnitude of those additional revenues is debated.
Further information on these changes can be found on page 662 of the 2021 Federal Budget and in section 188.8.131.52 of the 2020 Fall Update.