• PWC advises clients to prepare for taxing stock options
  • Federal Liberals pledged to cap amount for options deductions

Canadian Finance Minister Bill Morneau said he will provide details soon on his plans to tax stock options more heavily in order to eliminate uncertainty over the matter.

Information will be provided in the “near term” so people don’t "take inappropriate actions," Morneau told reporters in Antalya, Turkey, where he is attending summit of Group of 20 nations with Prime Minister Justin Trudeau.

“We will do it in a way that responsibly deals with the issues that current holders of stock options might have,” Morneau said.

While Trudeau’s Liberals pledged in the recent election campaign to limit the amount employees can claim through stock option deductions, they’ve provided little detail on how and when the change will be made. That’s prompted PricewaterhouseCoopers LLP, or PwC, to recommend in a Nov. 12 note to clients that Canadian employees consider exercising stock options as soon as possible to “lock-in" a favorable tax treatment.

It’s a problem for companies. Executives worried about the rules could flood the market with shares, while businesses will need to reconsider compensation packages going forward.

“I’ve been getting a lot calls,” said Jerry Alberton, partner in tax at PwC Canada in Toronto. “We’re flying blind. Right now we have that one sentence that is contained in the Liberal party policy platform. One sentence is all we have to go with.”

Less Attractive

The tax change will make stock options a less attractive remuneration strategy, PWC said in the note. The accounting firm advised employees and employers to prepare by knowing what they can do to reduce the “tax bite” and be aware of other share-based compensation alternatives.

The move will especially impact individuals making more than C$200,000 ($150,000), who will also be hit by the Liberal Party’s plans to increase the top personal income tax rate to 33 percent from 29 percent. Under current tax rules, employees who exercise stock options can claim a deduction of as much as 50 percent of the benefit, effectively cutting the tax rate in half, PwC said.

The Liberals have said workers with no more than C$100,000 in annual stock option gains will be unaffected.

Much will depend on whether the new rules will exempt the accrued value of stock options, Alberton said. In its note, PWC said there are risks in exercising stock options early if the changes provide “grandfathering” under the current rules.

Grandfathering

If someone is sitting on a large stock-option gain, there’s a strong incentive to exercise the options if they’re worried there isn’t going to be any grandfathering provisions, PwC’s Alberton said. Morneau declined to comment on the matter of grandfathering.

“We don’t know, and that is what has people panicked,” Alberton said.

On the other hand, if you believe there might be grandfathering clauses, you can wait, he said.

“The problem is this is a big decision,” Alberton said. “It’s going to cost them an extra 25 to 29 percentage points in tax. So, it’s a big risk.”

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