Tax Treatment of Employee Stock Options: The Role of Financial Advisors

Kristin Ramlal

Employee stock options can help companies attract and retain talented employees by providing a supplementary source of compensation that is linked to the future success of the company. Current tax rules provide a preferential personal income tax treatment in the form of a stock option deduction, which effectively tax stock option income like capital gains. But that’s about to change, and advisors working with HNW executives need to come up to speed.

Employee stock options, which provide employees the right to acquire shares of their employer at a pre-determined price, continue to be a popular form of employment compensation among a variety of companies, especially in the technology, junior mining and exploration and cannabis industries. The draft legislation makes it clear that the new limitation will not apply to any CCCPs or start-ups. But if you are working with an executive of a large, mature public company, planning for future stock options needs to be discussed before year end, as the new rules will not apply to benefits received prior to 2020.

This preferential tax treatment of employee stock options was originally implemented to encourage and support start-up and emerging Canadian businesses to help create more jobs within the country. However, the Government highlighted in the 2019 Budget that it does not believe that the stock option deduction is effectively meeting this goal. Instead, it appears to be providing a tax-preferred compensation for executives of large mature companies, disproportionately giving the tax benefits to only a very few high-income individuals.

In the hopes of establishing a fairer and more equitable employee stock option regime for Canadians, the Government announced on June 17th, 2019, its intention to move towards aligning the tax treatment of employee stock options with that of the Unites States for employees of large and mature firms.

The motion proposed a $200,000 annual vesting limit (based on the fair market value of the underlying shares at time of grant) for certain companies on employee stock options grants that can be taxed effectively at the capital gains rate, beginning with stock options granted on or after January 1, 2020.

The Government is currently seeking stakeholder input on the proposed changes for mature firms. That consultation will end September 16, 2019. You may wish to submit your comments to fin.ESO-OAAE.fin@canada.ca.

Thus, employees of publicly traded companies will need to understand the existing and proposed tax implications associated with funding their current and future cash flow needs, through exercising their options, while preparing them for retirement and/or departure of their employer. See the tax perspective and a clear example of the tax implications in another article in this issue of Knowledge Bureau Report.

Consequently, Financial Professionals should consider taking this time to evaluate the potential impact that these changes may have on their clients with publicly traded stock options and implement the financial and investment planning strategies necessary prior to Jan 1, 2020. For executives close to retirement, timing will also be a factor.

A multi-advisory team of experts; for example personal tax specialists and, if required, cross border specialists, may be at the table with you to consider alternatives and in particular, to weigh in on retirement income planning.

Written by guest author Kristin Ramlal PFP, CIM, FCSI - Securities Specialist and Credential QTrade Advisor

Kristin is a proud young professional woman in wealth advisory, with over 15 years’ experience in the financial services. Her experience includes Canadian/US personal banking and lending, retail and institutional investment account management, portfolio analysis/construction, security research and trading, and financial and estate planning. She is an IIROC Licensed Securities Specialist and has a growing passion for holistic wealth advisory. Kristin is a firm believer in the important of financial education and is committed to a multi-stakeholder approach to real wealth management.

At DAC, Kristin will be the Master of Ceremonies on Day 1 and will be speaking on the topic of STOCK INCENTIVE AND BENEFIT PLANS and how they fit within a Real Wealth Management Plan.

Additional educational resources : For further information on the financial planning considerations of executing stock options, please join me at the 2019 Distinguished Advisor Conference . At DAC, I will provide an overview of employee stock incentive and purchase programs as well as financial and investment planning considerations for those clients who are employees of publicly traded companies and who have stock incentives and/or participate in a stock purchase programs. The full conference agenda is available online.

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