Initially, there was going to be a new set of rules for any stock options issued after December 31, 2019, effective January 1, 2020. However, the Department of Finance recently released a statement that the effective date of the new rules will be disclosed in a future communication- likely the budget released in March or April of 2020. Under this new regime, a portion of the stock option benefit may no longer be eligible for the stock option deduction.

Under the current rules, applicable to a non-Canadian Controlled Private Corporation (CCPC), an individual may be able to claim a stock option benefit deduction if the exercise price is greater than or equal to the fair market value of the underlying share at the time the option was granted. The deduction is 50% of the benefit.

Under the new rules, there is a calculation to determine whether or not the value of the options that vest in the year have a value that exceeds of $200,000. That is, all the values of shares for options that vest in a year must be considered to determine if their value at the time of the grant exceeds $200,000. Of this amount exceeds $200,000, a portion of the stock option benefit will not be eligible for the stock option benefit deduction. This means that even though, economically, an individual has received the same amount on the exercise of options as in previous years, the tax will increase.

Where an individual can stagger the vesting of options, so that the vesting amount is less that $200,000 in a year, it would save taxes for that individual. However, there must be a consideration of whether the individual could lose those stock options because they are not vesting as quickly as they would otherwise.

The other major change in the new rules is that corporations may be able to deduct that portion of the stock option benefit that the individuals cannot deduct. There are notification rules that the corporation must adhere to, for both the individual and CRA, in order for this to be allowed. Additionally, it is only the direct employer of the individual who can claim the deduction. This could be an issue if the actual stock option is being issued by a foreign parent company and not the actual employer of the individual.

These rules can become quite complex. It would be best to consult your local tax expert for advice on how to best navigate these changes for you and/or your business.