Shift in taxes will cut into employee stock options for those with smaller gains, such as junior executives
The proposed changes to capital-gains taxes in the 2024 budget will make little difference to top Canadian executives who make millions a year from their stock options, but will hit harder for those with smaller gains.
To get how all of this works, you’ll need to understand how employee stock options qualify for a tax benefit and how they’re taxed once they do.An option is the right to buy a share of stock at a set price, and it gets more valuable as the stock goes up. Buying a share for $20 when it’s currently worth $50 sure sounds like a healthy capital gain.
These options are, appropriately, called “qualified.” Even though the tax benefit comes when the option is exercised, the company makes the determination of qualified versus non-qualified when it makes the grant. Only $200,000 worth of options per year that vest – or become usable by the recipient – can be considered qualified. The remainder of the options do not.
To illustrate the impact, The Globe and Mail developed two scenarios, adapting from examples crafted by Hugessen Consulting Inc., a company that specializes in executive compensation. The Globe asked tax lawyers from Gowling WLG Canada LLP; Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC; and Stikeman Elliott to review the examples.
The numbers look different, however, for executives or managers whose option grants are much smaller. Because they stand to gain less than the big dogs, much or all of their option profits may be qualified. That means that much or all of their profits will see increased taxes under the new rules.
Option Deduction Profit Tax Executive Cent Company Options Toronto Stock Exchange Ferris Globe
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