Employees Exercising Options Ahead of Liberal Tax: TD's McKenna

  • Retroactive tax on options wouldn't be very `Canadian'
  • Finance Minister Morneau says he'll give details in near term

Employees of Canadian corporations are already starting to exercise stock options ahead of tax changes from the country’s new Liberal government, said Frank McKenna, deputy chairman of Toronto-Dominion Bank.

"If you change that behavior by changing the legislation or creating the uncertainty there’s a real chance that people will take action on their own," McKenna said in an interview at Bloomberg’s Toronto offices. “A lot of people are doing it now."

Canadian Finance Minister Bill Morneau said Nov. 15 he’ll provide details in the "near term" on plans to tax stock options more heavily so people don’t take "inappropriate actions". Prime Minister Justin Trudeau’s Liberal Party pledged in the recent election campaign to limit the amount employees can claim through stock options deductions, though they provided few details on how and when the change will be made.

PricewaterhouseCoopers LLP, or PwC, recommended 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. 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.

Interests Align

Changes may not be as good for the country as anticipated, McKenna said. Any move to apply rules retroactively wouldn’t be very "Canadian," he said.

"My personal belief is that stock options align the interests of employees with
companies in a way that’s good for the company, and changing the tax regime is not as good for the country as you might think at first blush," the former Premier of New Brunswick said in an interview Pamela Ritchie on Bloomberg TV Canada. "If you treat that as employment income and tax it at 100 percent, you have to give the corporation a tax deduction for the same amount. So when you do that you probably take the economics out of changing the tax system."

The move will especially impact individuals making more than C$200,000 ($150,000), who will also be hit by the Liberal’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.

Retroactive UnCanadian

Executives are worried the rules could flood the market with shares while businesses will need to reconsider compensation packages. The issue of whether any changes will be applied retroactively is also a concern that’s causing angst on Bay Street.

"It’s pretty tough on an employee who’s had stock options for six or seven
years, as a part of the growth of their compensation for six or seven years,
and turn around now and say we’re going to destroy the value of that by
changing this retroactively," McKenna said. “That doesn’t seem very Canadian to me."

Morneau has declined to comment on the matter of grandfathering.

"The country has two issues to deal with: retroactivity, and whether there’s
an offset for the corporate deduction," McKenna said. “If they can figure those out most executives would say, going forward, if those are the new rules of the game
we’ll live with those rules of the game."

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