Starting July 1, new tax rules will be applied to company stock options. If share options are a significant part of your employment compensation, the rules could affect you. Kim Parlee talks with Pierre Letourneau, High Net Worth Planner, TD Wealth, about how company stock options will be taxed going forward and who this could impact.
- If part of your compensation involves stock options, new rules might make exercising those options a little more complicated. And it could mean something for your tax bill.
Pierre Letourneau is a high-net-worth planner with TD Wealth. He joins me now from Mississauga for today's "Ask MoneyTalk." Pierre, great to see you.
Here's the question. "My employer provides a large bonus every year in stock options. Will new upcoming changes affect me?" And maybe we should start with what the current rules are.
- Sure. Thanks, Kim. Well, remember, Kim, a stock option is a right to purchase a share of a company at a certain price, which we call the exercise price, regardless of the value of the shares. So stock options are generally not taxed when they are granted by the company. They're usually taxed either when the employee exercises the option-- so elects to purchase the shares for the exercise price-- or, in certain circumstances, if conditions are met when the shares are sold. So that could be years after exercise of the option.
So when the holder exercises the option, in most cases, the exercise price is lower than the actual value of the share. So they get a benefit by exercising the option. And that's the benefit that gets taxed. So it's the difference between the fair market value of the shares and the exercise price.
It's taxed as an employment benefit. And so an employment benefit is usually fully taxable. But there are specific rules for stock options that, if certain conditions are met, that employee benefit-- it can be reduced by 50%. So there's a 50% deduction if those conditions are met. So that could be a substantial tax savings for holders of the stock option.
- So what-- so those are the current rules. What are the expected changes that could maybe-- change this, in a way, it sounds like the people are not looking for and don't want?
- Right. So the proposed changes are set to apply to options that are granted on or after July 1 of this year. And what they would do is they would cap a-- the amount of options that could be-- that can benefit from that 50% tax deduction. So it would be capped on an annual maximum of $200,000 of options that vest in that year. And that $200,000 limit is based on the value of the underlying shares that have been granted.
- Is that $200,000 limit, and sorry, just to be really granular here-- is that something that affects the employees or employers? Are the employers only allowed to give out so much, or is that for employee?
- That's for the employees. So any options above that threshold would be fully taxable. The benefit would be fully taxable on that amount instead of a 50% deduction.
Now, with the employers, what would happen is in a situation where that-- the new rules would apply, they'd actually be able to claim a deduction on the amount that is no longer deductible to the employees. And furthermore, employers will also be able to designate certain shares that are issued as-- from a stock option that's being exercised as non-qualified securities. And if they are designated that way, then the employee no longer-- even if the new rules don't apply, even if the new shares would be eligible-- the options would be eligible for the tax deduction, they won't be able to get that 50% deduction if they're designated that way. And the employee-- the employer will be able to get a full deduction.
- Any exceptions to the new rules that are coming?
- Yes, there are. So Canadian-Controlled Private Corporations, what we call CCPCs-- so private companies-- are not subject to the new rules. And also, non-CCPC employees would also-- that have annual gross revenues of $500 million or less would be exempt from these rules as well.
So the goal of these rules is really to ensure that startups or smaller companies are still able to grow and attract talent by issuing stock options. But larger, more mature companies, will be limited in terms of the tax benefits that can be offered to their executives.
- Got it. Pierre, always a pleasure-- thanks so much.
- Thanks for having me.
- That's Pierre Letourneau from TD Wealth. And if you have any questions, you would like to ask MoneyTalk a question, you can send an email to email@example.com with the subject line "Ask MoneyTalk." Ask your question. We'll find someone to answer it. And you can find those questions answered on moneytalkgo.com.