Leaders of some of Canada’s most prominent technology companies say they are alarmed by “nebulous” language about stock options in this week’s federal budget, fearing it would target their executives for higher personal taxes – and make it harder to attract talent.
Ottawa proposed to increase taxation on option gains of some of Canada’s most highly paid executives, a move regarded by some as an attempt to siphon supporters from the New Democratic Party.
Under current rules, employees who receive options – the right to buy a company’s stock at a set price during a defined period and benefiting from its increasing value – are taxed on just 50 per cent of the gains. The government, which stated the benefits “disproportionately accrue to a very small number of high-income individuals,” wants to drop the preferential tax treatment for anyone receiving more than $200,000 worth of shares underlying the options.
Companies in Canada’s vibrant tech sector successfully pressured the government three years ago to back down on pledges to tax options as young tech firms typically use them to woo employees in lieu of higher salaries. The new measures will not apply to those working for “startups and rapidly growing … [and] emerging Canadian businesses,” but target “high-income individuals employed at large, long-established, mature firms,” the budget stated.
But that vague language raised the concerns of a particular class of technology companies – those that have scaled up well past the startup phase to become relatively large and established leaders in their fields, but are still expanding at a fast clip and see options as a vital tool to attract top-level talent.
“The second I heard about this the alarm bells went off for us,” said Brandon Nussey, chief financial officer of Lightspeed POS Inc., a 14-year-old Montreal software firm with 470 employees in Canada that generated US$72-million in revenue in 2018 and went public this month.
The companies say it’s unclear whether the government would regard them as mature, established and large – therefore subjecting their top executives to the tax change – or as “startups and rapidly growing” businesses. Finance officials declined to provide further clarification until the department releases more details later this spring.
Stock options are “a core tool we use to attract and retain employees, and certainly a frustrating part of this is just how nebulous this language in the budget has been,” Mr. Nussey said. “I don’t know what ‘mature’ means; I sure hope it doesn’t mean Lightspeed. [If so] it would have an immense impact [on] our ability to attract and retain talent,” which is already subject to relatively higher personal income taxes than U.S.-based employees.
David Ossip, chief executive of Ceridian HCM Holding Inc., which is based in Minneapolis but has most of its senior leaders and 1,700 employees in Canada, said the “large, long-established, mature” label “shouldn’t apply” to his company. Ceridian is 87 years old and had US$746.4-million in revenue last year, but has radically transformed under Mr. Ossip’s leadership from a declining payroll provider into one of the world’s top-performing human resources software firms. It went public last year in the largest technology initial public offering ever on a Canadian exchange.
“We are precisely the type of fast-growing emerging tech company that the government wants to encourage to grow, attract talent and create more good jobs here in Canada,” Toronto-based Mr. Ossip said. “Typically these candidates have multiple job offers from U.S.-based companies. Given Canada’s higher tax rates versus the U.S., historically, option grants have allowed us to attract and hire these leaders. Any negative changes would make it very difficult to attract already scare tech talent to Canada and would mean that fast-growing tech companies would have to base these leaders" elsewhere.
Carl Rodrigues also expressed worries that the proposal could hamper his 24-year-old Mississauga-based mobile communications software firm SOTI Inc. The rapidly growing 1,000-person company generated US$100-million in revenue in its last fiscal year and is creating its first stock-options plan after the defection of several executives.
Mr. Rodrigues, SOTI’s founder, CEO and majority owner, said options are a tool for companies “to lure top talent that can grow businesses. Growing businesses create jobs. You take away the tools, you take away jobs in Canada. If you want to compete on the global stage you need the top people.”
Ben Bergen, executive director of the Council of Canadian Innovators, which represents scaling Canadian tech firms, said his group hopes to “receive assurances [from Ottawa] that Canadian technology scale-ups, especially the most successful ones, will be spared” from the stock options changes. “These are precisely the companies we need to be nourishing, not clipping their wings.”