I do not consider the tax treatment of options issued by CCPCs in this blog post), there were two significant tax changes to this base tax treatment: the changes made in 19.
As a result, this will be a long post and is based on a number of papers that I have coauthored in this area.
In addition, I have some question for the NDP that do indeed need to be answered.
It is important to understand that employee stock options are a form of compensation.
Rather than be paid in bonus or salary, employees forgo these forms of immediate compensation in exchange for future compensation (at least that is true for stock options granted either at or out-of-the money) that comes from stock options.
As you all know, the federal NDP announced on Friday it would repeal the employee stock option deduction and reallocate the savings to support low and middle income earners.
I have long been writing about this deduction and would like to think this policy idea is founded, at least in part, on my work (work that is joint with Daniel Sandler who wrote the book on venture capital and tax incentives).
In order to encourage the use of stock options as a compensation mechanism, the 1984 federal budget introduced paragraph 110(1)(d) of the ITA.
Under paragraph 110(1)(d), if a Canadian public company grants stock options to an employee, and the strike price is at least equal to the fair market value of the underlying share on the day the option was granted, the employee receiving the options is able to deduct 50 percent of the stock option benefit.
Assume that the individual faces a combined federal and provincial marginal tax rate of 45% and assume that the options vest after one year, meaning that the employee must hold the options for at least one year.