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The federal government dusted off an old campaign promise Tuesday by pledging in the budget to increase taxation on the stock option gains of some of Canada’s most highly paid executives, a move seen as an attempt to siphon support from the New Democratic Party.

“It’s a political move going into [this fall’s] election … they’re doing this to outfight the NDP,” said Toby Sanger, executive director of Canadians for Tax Fairness, a lobby group primarily funded by labour organizations. “They’re going after the 1 per cent” – the highest-income earners in the country.

But the government also shielded some options recipients from the higher taxes, particularly employees at technology startups. Those high-risk companies successfully petitioned the government to back down early in its mandate on its option-taxation promise from the 2015 election campaign by arguing it would hurt their ability to attract and keep employees.

The federal budget includes new spending in a range of areas including support for first-time homebuyers, ensuring seniors are enrolled in CPP and the further advancement of reconciliation.

Under current federal rules, employees who receive options – the right to buy a company’s stock at a set price during a defined future period, benefiting from its increasing value – are only taxed on 50 per cent of the gains. The benefits “disproportionately accrue to a very small number of high-income individuals,” the budget said. In 2017, 2,300 people each earning $1-million or more claimed more than $1.3-billion in combined stock-option deductions, according to the government. They made up just 6 per cent of option deduction claimants, but accounted for almost two-thirds of the cost to the public purse.

The budget proposes that options recipients will keep getting preferential tax treatment – but only for the first $200,000 worth of shares underlying their options. For example, an employee who gets an option to buy 10,000 shares at $20 or less a share would only be taxed on 50 per cent of the gains. Startup employees will also continue to qualify for the old preferential treatment, even if they exceed the $200,000 level.

The key element of the proposal is that employees of “large, mature companies” receiving anything more than $200,000 in underlying shares would have gains on the options over and above the threshold fully taxed when they exercise them. “The government does not believe that employee stock options should be used as a tax-preferred method of compensation” for executives of such companies, the budget stated.

While the move will hit higher-paid executives, their employers will also be able to fully deduct the amount of their compensation not subject to the preferential treatment, reducing their corporate taxable income.

Employees of companies not “deemed large and mature” – startups and emerging companies, in the government’s eyes – will avoid the new tax provision.

The government did not define which companies would qualify as “large and mature,” promising more information by this summer, at which point any changes will be applied only to newly granted stock options.

That element of the proposal will likely drive the debate going forward. “They have to provide more details” regarding which companies would be affected, said Bruce Ball, vice-president of tax with the Chartered Professional Accountants of Canada. “That’s where they’re a bit thin.”

“Startups should be easy, because it could be based on a time test, but my concern is how are you going to separate mature companies from growth companies,” Mr. Ball said.

Ben Bergen, executive director of the Council of Canadian Innovators, a group that represents more than 100 technology companies, said: “It would be untrue and imprudent to categorize any Canadian technology company as 'mature’ for purposes of stock option tax treatment.”

While the Canadian government “has a revenue problem,” Mr. Bergen said, small tech companies growing bigger “represent the country’s best chance to grow new revenues. ... The proposed rules could lead to no Canadian headquartered large technology companies.”

Bank of Montreal chief economist Doug Porter said the options taxation move may actually lead to higher pay for senior executives over time “to partially compensate for the increased tax hit,” he said. “I think ultimately they will not be much worse off.”

Hassan Yussuff, president of the Canadian Labour Congress, called the change “a move in the right direction to close a loophole that’s only benefited a small group of people to the detriment of a fair tax system for the rest of the country."

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