Canadian Parliament Building at Dusk
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The Liberal government is moving ahead next year with plans to impose a $200,000 limit on employee stock options taxed at a preferential rate.

The cap on stock options taxed effectively at the capital gains rate will be imposed on grants beginning July 1, 2021, the Liberals said Monday in their fall fiscal update.

The long-awaited measure was first announced in the 2019 federal budget. After a comment period on draft legislation last year, the Liberals said information about the rule change would come in the 2020 budget, which was delayed indefinitely due to the Covid-19 pandemic.

The $200,000 limit will be based on fair market value of the underlying shares, the government said, and Canadian-controlled private corporations (CCPCs) will not be subject to the new rules.

The Liberals also said Monday that non-CCPC employers with annual gross revenues of $500 million or less will be excluded.

“This approach will ensure that start-ups and emerging Canadian businesses that are creating jobs can continue to grow and expand and attract key talent, while limiting the benefit of the employee stock option deduction for high-income Canadians who work in mature companies,” the economic statement said.

The measure is expected to generate about $200 million in federal tax revenues each year.

The Liberals had promised that proposed stock option changes would not affect “start-ups and rapidly growing Canadian businesses.” The proposed carve-out of CCPCs and businesses with under $500 million of revenue in the fiscal economic statement represents “a bright line test” that provides businesses with clarity, said Jamie Golombek, managing director of tax and estate planning with CIBC Financial Planning & Advice. “We had no idea what those exceptions were going to be. So they picked a number, and now that’s the number.”

The Liberals have called the existing stock option regime “regressive.” According to the Department of Finance, 2,330 people who all earned more than $1 million claimed more than $1.3 billion in employee stock option deductions in 2017. While they only represented 6% of stock option deduction claimants, they accounted for nearly two-thirds of the total deductions.

The Liberals are also set to spend more on tax compliance. The economic statement proposed an additional $606 million over five years, starting in 2021-22, for new CRA initiatives and to extend existing programs targeting international tax evasion and “aggressive tax avoidance.”

“Specifically, the CRA will hire additional offshore-focused auditors to focus on individuals who avoid taxes by hiding income and assets offshore, enhance the audit function targeting higher-risk tax filings, including those of high-net worth individuals, and strengthen its ability to fight tax crimes such as money laundering and terrorist financing by upgrading tools and increasing international cooperation,” the document said.

With files from Rudy Mezzetta