To provide some background for non-Canadians: Rather than having entirely separate rates, capital gains in Canada are taxed as "half income" based on the normal tax brackets. So if you earn $X of regular salary and I earn no salary but make a capital gain of $2X (or if I earn $X/2 salary and make a capital gain of $X) then we pay the same amount of income tax.
If you buy a stock option, it ends up resulting in a capital gain or loss; either you dispose of the option and directly produce a capital gain or loss, or you exercise the option and it counts towards the book value of the shares you acquire, resulting in a capital gain/loss later.
The tax treatment of incentive stock options is weird, because they don't consider you to "own" the options in question. So instead of getting a capital gain as the stock option gained value, you're considered to be paid the ultimate value of the stock option as "earned" income. People realized this was dumb, so a rule was put in place to "fix" this: Incentive stock options would be 50% tax-exempt, bringing them down to the capital gains tax rate.
The issue at hand here was whether that "fix" should be removed, limited, or left intact. Right now inventive stock options receive the same net tax treatment (via a different route) as purchased stock options; the proposal was to tax employees at a higher rate than investors.
If this proposal had passed, it wouldn't have yielded any significant increase in tax revenues, since there was a simple workaround: Rather than granting stock options to employees, pay them a small bonus and then have them buy the stock options from you. The lawyers would have made plenty of money drawing up the paperwork, but nobody else would have benefited.
[I am neither a tax lawyer nor an accountant. This is not legal or tax advice.]
I benefit from Canada's favourable option plan, but it is still bullshit. These tax loopholes are how a VP of Marketing at an obviously going-to-be-successful company like Shopify makes $1m / year while only paying half the top marginal tax rate.
Even more if they are clever. I'm not sure if they've closed the loophole but you used to be able to max out their TFSA by exercising their options, claiming the share certificates, then putting them into their brokerage account before the Series A is closed. It only costs $500 / year at RBC to do this you / your family just can't ever own 10% of the stock in question and it is completely legal. Then when your $40k of shares grows to $4m after the IPO you have a perpetual tax free investment account.
But these tricks are nothing new. Businesses have all the flexibility in the tax code. The only year I was in the 1% in terms of income I paid an effective tax rate of 12%, and this wasn't because I qualified for the capital gains exemption tax when my business was acquired (the business wasn't was too young, your business needs to be at least 2 years old to qualify).
Investment income should be taxed the same as normal income with one caveat: losses should decrease normal income and should be _after_ inflation. Right now the biggest pushback I hear (that I think is legitimate) to raising the capital gains / dividends rate is about inflation; which makes sense for 4% blue chip bonds, but falls apart on 40% yoy options that are more like deferred income plans than they are investment schemes.
Edit: Downvote me all you want. People disagree with things that challenge situations that are good for them.
You can't put shares into your TFSA if you don't operate at arm's length from the company. And if you're operating at arm's length from a company yet are able to predict which shares are going to increase in value, you should be running a VC fund.
You at the very least can once you're leaving the company, which were the circumstances of someone I know who has done this. Even if you are right (I can't quickly find a good definition for "Arms length" as it relates to non-C level employees) it doesn't materially change my point that people in our position pay substantially less tax than people in the medical or legal profession.
Whether it's bulk asset sales and dividends, or Hong Kong holding companies and tax treaties, or capital gains exemption to "retain top talent" if Canadians actually knew how it worked 90% of the time they would never stand for it.
You at the very least can once you're leaving the company, which were the circumstances of someone I know who has done this.
Sure. But then you have to put in the shares (or options) at their fare market value, which is going to be pretty high if there's an IPO on the horizon.
Fair point. Although I still feel the way we value startups (at the last funding event) warps decision making greatly. The person I knew did this with a company about 6 months before they raised their next round. So the company was valued at around $15m for 2.5 years, person invests, then BAM company valued at $45m on year 3 6 months later. And I think if you're in a company that is really going to make it you know. Especially if you've been in startups for a while.
the way we value startups (at the last funding event)
That may be how you value startups, but I guarantee you that if the CRA looks closely it's not how they would value the shares on the eve of a deal which values the shares much higher.
My experience is that short of being 60 days before a deal the CRA generally accepts the previous funding round as the valuation. I agree that the actual eve of the deal wouldn't fly though.
I don't understand, TFSA max contribution for the year is 5.5k with current cumulative of 46.5k so how can you end up with a perpetual tax free account for more than that?
Any gains made to assets inside of the account are tax free. So if you put in $4k worth of stocks one year and they increase in value by 1000%, that's still allowed by the TFSA rules.
If you never contributed at all and were starting today, that is when are restricted to the cumulative amount.
While nerve racking, this ended up being quite civil. A party proposed a tax plan, the community gave great feedback, and they revised. Thanks to Tobi, OMERS and everyone who spoke up.
I'm sure that it also helped that one of the new parliamentary secretaries (Terry Beech) ran a startup before running for office. I know from talking to him during the campaign that he was well aware of the problems which would result from changing the tax treatment of incentive stock options even before the topic came up when talking to the rest of the tech community.
But they were only going to raise them for options worth more than $100k right? Other than people "winning the lottery", and C-level staff, how many startup employees would be affected by this? My understanding is that comp packages above $100k are much rarer in Canada than in the US?
If you buy a stock option, it ends up resulting in a capital gain or loss; either you dispose of the option and directly produce a capital gain or loss, or you exercise the option and it counts towards the book value of the shares you acquire, resulting in a capital gain/loss later.
The tax treatment of incentive stock options is weird, because they don't consider you to "own" the options in question. So instead of getting a capital gain as the stock option gained value, you're considered to be paid the ultimate value of the stock option as "earned" income. People realized this was dumb, so a rule was put in place to "fix" this: Incentive stock options would be 50% tax-exempt, bringing them down to the capital gains tax rate.
The issue at hand here was whether that "fix" should be removed, limited, or left intact. Right now inventive stock options receive the same net tax treatment (via a different route) as purchased stock options; the proposal was to tax employees at a higher rate than investors.
If this proposal had passed, it wouldn't have yielded any significant increase in tax revenues, since there was a simple workaround: Rather than granting stock options to employees, pay them a small bonus and then have them buy the stock options from you. The lawyers would have made plenty of money drawing up the paperwork, but nobody else would have benefited.
[I am neither a tax lawyer nor an accountant. This is not legal or tax advice.]