Proposed Limits On Employee Stock Option Deductions

Introduction

The long-standing tradition of using employee stock options to reward and retain employees in Canada is expected to change for some employees due to limits proposed by the federal government to the current advantageous tax treatment available to employees in certain circumstances. Generally, these proposals will not impact Canadian-controlled private corporations; they will impact all corporations (including non-Canadian controlled private corporations and public companies) and mutual trust funds that have annual gross revenues in excess of $500 million.

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