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Economy Tax changes won’t apply to existing stock options, Morneau says

Canada's Finance Minister Bill Morneau listens to a question during a news conference upon the release of the economic and fiscal update in Ottawa on Nov. 20, 2015. Mr. Morneau said any tax changes the Canadian government makes on stock options will only take effect once the changes are made.

CHRIS WATTIE/REUTERS

Finance Minister Bill Morneau said any tax changes the Canadian government makes on stock options will only take effect once the changes are made, effectively grandfathering existing options.

"Any decision we take on stock options will affect stock options issued from that date forward," Mr. Morneau said Friday in Ottawa after delivering the Liberal government's first fiscal update. The Liberals have said workers with no more than $100,000 in annual stock option gains will be unaffected.

Prime Minister Justin Trudeau pledged in the recent election campaign to limit the amount employees can claim through stock-option deductions, though the Liberals provided few details on how and when the change would be made. That had some Canadian employees wondering if they should exercise the options to lock-in favorable tax treatment.

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"Any stock options that have been issued prior to that date will be under that taxation regime that was in effect prior to that date," Mr. Morneau said. "That I hope should relieve those Canadians who have that concern from taking actions that would be inappropriate."

The move will especially affect individuals making more than C$200,000 ($150,000), who will also be hit by the Liberal Party's plans to increase the top personal income tax rate to 33 percent from 29 percent. Under current tax rules, employees who exercise stock options can claim a deduction of as much as 50 percent of the benefit, effectively cutting the tax rate in half, according to a study by PricewaterhouseCoopers LLP.

Michael Sabia, Chief Executive Officer of Caisse de Depot et Placement du Quebec, Canada's second-biggest pension fund manager, said the task of a finance minister is to balance "the redistributive consequences and importance of tax policy on the one hand but also the very real consequences that capital gains taxation has on capital formation."

Stock options provide incentives, Sabia said during an interview Friday with Bloomberg TV Canada, "but I don't think that they're the only way to do things. If you stand back, what's important here is finding financial instruments that align the interests of management, boards to some degree, with shareholders and investors' interests and there are a lot of different mechanisms for accomplishing that."

Other measures companies can use include deferred stock units or restricted stock units, in which an employee is awarded shares in the future, Sabia said.

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