As of July 1, 2021, new rules will be imposed on employee stock options.
Employee stock options are a form of compensation that some companies offer their employees. They give an employee the right to buy a specific number of shares at a pre-set price. But they must be purchased within a specific time frame.
If you choose to exercise your employee stock option and acquire shares, you’ll receive an employment benefit equal to the fair market value of the shares less the price paid. Normally employment benefits would be 100% taxable like regular wages.
Currently, however, employee stock options receive preferential tax treatment, and, if specific conditions are met, receive a 50% stock option deduction so that they’re only 50% taxable.
As of July 2021, these rules will be changing. The preferential treatment will now be limited to a fair market value of $200,000 worth of stock options.
But there will be exceptions. To help support start-ups and budding Canadian companies, the limit will not be applied to stock options from Canadian controlled private corporations (CCPCs) and non-CCPCs with gross revenues of $500 million or less.
In addition, the employer will receive a deduction for stock options that are over the $200,000 limit or designated ineligible for the stock option deduction. This deduction will be in respect to the employment benefit associated with the stock option (fair market value less the price paid by the employee).
The reason these changes are being made is that large mature companies are using employee stock options to provide higher level employees with compensation that receives preferential tax treatment. While the original rules were put into place without concern for size or maturity of the business, the current federal government feels this benefit should be available to small emerging businesses as a way of helping them compete for talent.
For more information on changes to employee stock options, how the changes will affect you and your employees and what you need to do in preparation of the July 1 changes, contact us today.