Ottawa goes after stock option loophole in budget

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Ottawa goes after stock option loophole in budget

The Canadian Press Published Thursday, March 4, 2010 4:29PM EST

A general view of the TSX board in Toronto's financial district shows a heavy increase on Wednesday, May 6, 2009. The Toronto stock market surged upward by more than 200 points Wednesday - topping 10,000 for the first time in six months. (Chris Young / THE CANADIAN PRESS)

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OTTAWA - Ottawa is closing a lucrative tax loop hole for companies and executives who receive stock options that will bring in an extra $270 million for government coffers in the upcoming fiscal year.

"The proposed measure will also help preserve symmetry in the tax treatment of stock-based compensation," according to the budget Thursday.

"That is, where preferential tax treatment is provided to the employee on stock-based benefits, the employer is generally not allowed a tax deduction for the cost of such benefits."

The amount of tax revenue generated by the change is expected to increase to $300 million in the 2011-12 and to $320 million in 2012-13.

Under the current tax rules, an employee can cash out their options for a payment from their company and be eligible for a stock option deduction, while the payment is also fully deductible for the company.

The change which will go into effect immediately will allow only one or the other -- the employee or the company -- to be eligible for the deduction.

The government said the change brings Canada in line with the tax rules in the United States. Those rules allow companies to make a deduction for stock option plan cash pay outs, but do not allow employees the deduction.

Jason Safar of PricewaterhouseCooopers said if a company isn't making a profit, it will likely allow the employee to make the deduction, but the decision becomes more difficult for profitable companies.

Companies making money and paying taxes may want to keep the deduction for themselves.

"What it will mean though is that they just cut their executives' compensation by some amount as far as their executives are concerned," Safar said if companies deny their employees the deduction.

"So, I would think ultimately the cost is going to be borne by the corporation."

Safar cautioned that the tax revenue will only come if the stock market goes up and the stock options held by employees are worth anything.

"Part of that pay out is based on how valuable the stocks are," he said.

Ottawa estimated that roughly 78,500 individuals claimed a stock option deduction in 2007 with the lion's share by those making more than $500,000. The budget said 7,985 individuals making more than $500,000 claimed an average amount of $393,000 for a total of $3.14 billion.