Joint Committee suggests issues for consideration in drafting the new employee stock option restriction rules

The Joint Committee has provided comments on the 2019 Budget proposals to align Canada’s employee stock option rules with those in the U.S. through applying a $200,000 annual cap on employee stock option grants (based on the fair market value of the underlying shares) that may receive tax-preferred treatment for employees of large, long-established, mature firms (i.e., the s. 110(1)(d) deduction). Heads of commentary included:

• The need for an adequate consultation period and subsequent transition period
• The desirability of clarity as to the distinction between “large, long-established, mature firms” and “rapidly growing Canadian businesses” while at the same time having the distinction be grounded in the policy objective (and notes as to the somewhat intractable nature of this distinction).
• The need for a methodology for distinguishing between options that are within the $200,000 annual cap and those that are not where only a portion of the employee’s options are exercised.
• Confirmation that, where the employee is subject to the proposed restriction (i.e., is fully taxable on the benefit), an employer deduction will be available at the same time irrespective of other ITA provisions such as ss. 7(3)(b) and 143.3.
• Moreover, there also should be full contemporaneous employer deductibility for phantom stock units, performance share units and deferred share units regardless of whether such compensation is ultimately paid in cash or in kind.
• Confirmation that the proposed rules do not apply to the s. 110(1)(d.1) deduction.
• The desirability of rectifying the prescribed share definition (as described in the Committee’s November 15, 2016 submission) at the same time as the introduction of the new rules.

Neal Armstrong. Summaries of Joint Committee submission, “Employee Stock Option Changes Announced in 2019 Federal Budget,” 14 May 2019 under s. 110(1)(d) and s. 7(3)(b).