Update on Proposed Changes to the Tax Treatment of Employee Stock Options

December 19, 2019 – Ottawa, Ontario – Department of Finance Canada

The Government of Canada is committed to ensuring that Canada's tax system is fair, efficient, and functioning as intended to make sure that our economy is working for the middle class and all Canadians.

Earlier this year, the Government announced its intention to move forward with changes to the tax treatment of employee stock options. Today, Finance Minister Bill Morneau provided an update on the proposed changes.

Many smaller, growing companies—such as start-ups—do not have significant profits, which can limit their ability to attract and retain talented staff. In these cases, employee stock options can be a helpful form of remuneration that is linked to the future success of the business.  

It is essential that these emerging businesses be able to continue to grow and expand. However, as shown in the table below, the tax benefits of the employee stock option deduction disproportionately accrue to a very small number of high-income individuals. The Government does not believe that employee stock options should be used as a tax-preferred method of compensation for executives of large, mature companies. 

To address this inequity, the Government intends to move forward with changes to limit the benefit of the employee stock option deduction for high-income individuals employed at large, long-established, mature firms. In its approach, the Government will be guided by two key objectives: to make the employee stock option tax regime fairer and more equitable for Canadians, and to ensure that start-ups and emerging Canadian businesses that are creating jobs can continue to grow and expand.

On June 17, 2019, the Government tabled a Notice of Ways and Means Motion in the House of Commons proposing changes to the taxation of employee stock options.

As part of the June 17 announcement, stakeholders were invited to provide input on the characteristics of companies that should be considered start-up, emerging, and scale-up companies for purposes of this measure. Such corporations would not be subject to the new rules. The consultations closed on September 16, 2019, and Minister Morneau thanks all those who contributed.

The Government is carefully reviewing the input received during the consultations to ensure that the new regime meets both of its key objectives. As a result, the proposed changes to the tax treatment of employee stock options will not come into force on the previously proposed date of January 1, 2020.

The Government will announce details on how it intends to move forward with the measure in Budget 2020. The new coming-into-force date, to be announced in Budget 2020, will provide individuals and businesses time to review and adjust to the new employee stock option tax rules.