New Proposed Limits On Employee Stock Option Deductions

Introduction

The long-standing tradition of using employee stock options to reward and retain employees in Canada may change due to limits proposed by the federal government to the current advantageous tax treatment available to employees in certain circumstances.

Currently, subsection 7(1) of the Income Tax Act (Canada) affords favourable tax treatment to employee stock options if certain conditions are met. One such condition is that the exercise price at the time the option is granted is at least equal to the fair market value of the subject shares at the time of the grant. The favourable treatment entitles an arm's length employee to deduct one-half of the taxable benefit that is realized at the time of exercise, effectively treating the benefit like a capital gain.