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Everything you need to know about the government’s new stock option taxation rules

Employee stock options are used by some corporations as part of their total compensation package to entice and retain skilled workers./iStockphoto

Last week, the federal government introduced draft legislation that proposes to limit the preferential tax treatment associated with certain employee stock options. The new rules, originally introduced in the March 2019 federal budget, fulfill a 2015 Liberal party election platform promise to limit the benefits of the stock option deduction by placing a cap on how much can be claimed. At the time, the Liberals quoted a Department of Finance estimate which found that 8,000 “very high-income Canadians deduct an average of $400,000 from their taxable incomes via stock options.”

In the backgrounder accompanying the draft legislation, the government updated the data to show that in 2017, 36,630 Canadians claimed, in aggregate, nearly $2.1 billion-worth of stock option deductions on their 2017 tax returns. Among these taxpayers, 2,300 individuals, each with a total personal annual income of over $1 million, accounted for nearly two-thirds of the $2.1 billion in stock option deductions claimed.

Here’s a quick overview of how employee stock options work, the current and proposed tax treatment, along with some other considerations.