New CRA Tax Rules for Stock Options Reduce Taxable Benefit Effective in 2020
The June 2019 budget rolled out new tax laws, which will become effective in January 2020. The new rules will generate more tax for the government’s coffers stemming from employee stock options.
In addition to salaries, bonuses, and commissions, businesses can choose to compensate their employees by offering stock options at a discounted rate relative to the fair market value. However, the difference between the fair market value and the price offered to the employee to obtain the stock is deemed a taxable benefit to the employee.
The proposed CRA tax rules will eliminate this deduction on stock options granted on or after January 1, 2020, but will not apply to:
- Canadian-controlled private corporations (“CCPCs”);
- The first $200,000 of employee stock options granted by non-CCPCs that vest in a calendar year. This $200,000 limit refers to the fair market value (“FMV”) of the underlying shares at the time the stock options are granted; and
- Certain non-CCPCs, which meet prescribed conditions as “start-ups, emerging or scale-up companies.” The Federal Government is seeking input from stakeholders, to be submitted by September 16, 2019, to determine what characteristics a company must have to meet these conditions.
If you are an employee that is subject to the new regime, you will now be subject to a $200,000 annual limit that will apply on employee stock option grants (based on the aggregate FMV of the underlying shares at the time the options are granted) that can receive tax-preferred treatment under the current employee stock option tax rules. Employee stock options above the limit will be subject to the new employee stock option tax rules. Note, if an employee is subject to the new rules – and thus taxable on an amount in excess of the $200,000 limit – the employer will be able to deduct a corresponding amount from its income.
It is important that employers and employees understand how these new tax laws impact the value of their stock options and how much of their benefit is subject to tax.
Contact a lawyer at Kalfa Law to assist you in your tax planning when it comes to employee compensation schemes through stock options.
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