An NDP campaign pledge to change the tax treatment for stock options would raise no additional revenue and would actually end up being a negative to the government's coffers, according to a new analysis by tax-policy researcher Jack Mintz.
Mr. Mintz, an economist at the University of Calgary's School of Public Policy, said he supports the proposal to fully tax the gains from stock options because it is appropriate policy to treat options like all other forms of employee compensation. But he said he doesn't agree with NDP claims that the change will generate $500-million a year in new federal revenue that can be applied to poverty-reduction programs.
Mr. Mintz believes the change would actually result in a net loss of $12-million a year to federal and provincial government tax revenues if the federal government makes what he argues is a necessary corresponding change to allow companies to write off the cost of stock options as a compensation expense.
"I personally agree with full taxation of stock options with a corporate deduction, and having similar treatment for all types of compensation," he said Wednesday. "But there's no revenue in it."
Under current rules, only 50 per cent of the gains from exercising stock options are subject to tax, which is the same favourable capital-gains tax rate paid by investors when they sell shares. The NDP has called the tax treatment a "loophole" that benefits CEOs and the wealthiest Canadians, saying they would change the rules to ensure the gains are fully taxed. The party has said, however, that it would create an exemption for early-stage companies that use options as a cheap form of compensation.
The Liberals have also proposed to fully tax stock-option gains, but say they would allow the first $100,000 of annual gains to remain taxed at the 50-per-cent tax rate to ensure the change doesn't hurt startups.
In a report released Wednesday, Mr. Mintz and co-author Balaji Venkatachalam say the current tax treatment is undeniably favourable for those exercising options, but the tax code also contains an offsetting provision that prohibits companies from writing off the cost of stock-option compensation as a business expense.
Mr. Mintz argues an NDP or Liberal government charging full tax on options gains would have to make a corresponding change to allow companies to have a writeoff for options, ensuring the tax treatment is the same for all forms of compensation. Companies currently can write off the expense of other forms of pay, such as cash or share units.
"I can think of no country in the world that brings in full taxation on stock options but then no deduction for the corporation," Mr. Mintz said.
If there is no corresponding adjustment, Mr. Mintz said many companies will stop issuing stock options because there is no favourable treatment for either party to make them attractive. He said options are already falling out of favour as a compensation choice at many companies, and a tax change would spur even more companies to abandon their use.
Under his analysis, Mr. Mintz argues the revenue gain from fully taxing options in 2015 would add $1.2-billion to federal and provincial tax revenue but the amount would be offset by a matching company writeoff for option compensation, which would cost $1.3-billion using 2015 projections.
The analysis says there would also be some tax gain – estimated at $138-million – if companies receive a tax deduction for option costs and use the money to pass along more dividends and capital gains to their shareholders, creating more tax for the government on those amounts. The final tally would be a net tax loss of $12-million.
Mr. Mintz also questioned the NDP's plan to create an exemption for startup companies, saying it is difficult to define true startups and it could even lead some companies to wind down and reincorporate to continually qualify as startups.
He expressed concerns with the Liberal pledge to exempt the first $100,000 of annual option gains from full taxation, saying it would give people an incentive to exercise smaller amounts under $100,000 each year, rather than the full amount in one year, reducing the potential revenue gain from the tax change.
Mr. Mintz said the parties should also "grandfather" existing options from the tax change because it isn't fair to change the rules on compensation that has already been granted, but said that would further reduce tax gains from the change.