Stock Option Changes 2021: $200K Limit for Large Employers

Key takeaways

• Employee stock option benefits are included in income in the year the option is exercised
• A 50% deduction (reducing the inclusion to 50%, similar to capital gains treatment) applies to qualifying options — limited to $200,000 of annual vested options starting 2021
• The $200,000 limit applies only to employees of non-CCPC employers that are not start-ups, emerging companies, or scale-ups
• Options on CCPC shares continue to receive the deferral available under the prior rules
• Start-ups and scale-ups are exempt from the $200,000 cap under transitional rules

Stock option reform in the 2021 federal budget changed the tax treatment of employee stock options at large public and non-CCPC companies. The reform addressed the government's concern that highly compensated executives at large corporations were receiving unlimited tax-preferred compensation through stock options.

Before and after the 2021 reform

Before the reform, all employee stock option benefits (the spread between exercise price and fair market value at exercise) qualified for a 50% inclusion deduction — equivalent to capital gains treatment. There was no dollar limit. After the reform (for options granted after June 28, 2021), the deduction is limited for employees of large, non-CCPC companies to $200,000 of annual vested options. Options above $200,000 per year are fully included in income — no deduction.

CCPC stock options

Options granted by Canadian-controlled private corporations are not affected by the $200,000 cap. CCPC option holders get a deferral — the income inclusion is triggered not when the option is exercised, but when the shares are sold. At that point, the 50% deduction applies. This makes CCPC options particularly valuable for startup employees: tax is deferred until exit, and the tax rate is lower.

Start-up and scale-up exemption

Companies that qualify as Canadian start-ups, emerging businesses, or scale-ups under prescribed criteria were given an exemption from the $200,000 cap. The purpose is to allow growth companies to compete with large corporations for talent without being disadvantaged by the new cap. These companies must apply to the CRA for certification under the prescribed criteria.