As part of the 2019 Federal Budget, the Canadian government recently announced a proposed cap on the amount of the 50% stock option deduction for employees of “large, long-established, mature firms.” Under current law, provided certain conditions are met, employees are entitled to exclude 50% of the spread at option exercise for income tax purposes. If implemented, the proposed cap would significantly limit availability of this deduction.

Key points:

  • The proposal would cap the 50% deduction for stock options at CAD $200,000 annually, calculated based on the fair market value of the underlying shares at grant. For example, if an employee were granted in one year options to acquire 100,000 shares with a fair market value of CAD $50 per share at grant, the employee would be entitled to claim a deduction for only 4,000 of those options (CAD $200,000 / CAD $50 = 4,000). The full spread at exercise from the remaining 96,000 options would be included in the employee’s taxable income.
  • The proposed cap would not apply to stock options granted by “start-ups and rapidly growing Canadian businesses.” It is not yet clear how these businesses will be defined.
  • A corporate tax deduction may be available for stock options granted in excess of the annual cap.
  • The cap would only apply on a prospective basis to stock options granted after the announcement of any legislative proposals.

Further details about the proposal are expected before summer 2019. Companies should watch for further developments as the proposed changes, if implemented, could significantly impact stock option taxation for both employees and employers in Canada.