Proposed tax changes put limit on employee stock-option deductions, modernise GST rules, says lawyer

Tax law changes are on the way that will modernise Canada’s sales-tax regime and limit the amount of stock options subject to favourable tax treatment in employee compensation, says Larry Nevsky, partner in Dentons’ national tax group in Toronto

The proposed changes were announced Nov. 30 by the federal government in its 2020 Fall Economic Statement. Along with the adjustments to employee stock options, the government plans to slap a sales tax on digital products and services such as Netflix, Amazon and Airbnb.

Currently, when employees exercise stock options contained in their compensation, if certain conditions are met, they are only taxed on half the taxable benefit. Under the new rules, the 50-per-cent deduction will not apply to benefits exceeding a $200,000 annual limit. But, when an employee’s stock options are in excess of the limit, the employer will be eligible to claim a corporate income tax deduction.

“So here, I really see a shift of the benefit from the employee to the employer, as opposed to an elimination of the benefit altogether,” says Nevsky, whose practice is focused on all aspects of income tax and corporate tax planning

But the federal government intends for the new $200,000-limit to apply to big multi-nationals and not homegrown start-ups. The Fall Economic Statement said the limit is for “high-income Canadians who work in large, established companies” but not Canadian-controlled private corporations or “start-ups, emerging or scale-up companies” with annual gross revenues of $500 million or less.

“I have to say, I'm happy that the government did not make the changes affect all start-up companies,” says Nevsky. “Because I think the start-up companies in Ontario – especially the Waterloo and Toronto region – rely on stock option plans to remain competitive.”

Also announced in the Fall Statement, the government is planning on enforcing GST/HST on foreign corporations selling digital products in Canada, which will have to start collecting the tax from Canadian consumers.

“The way I see it as a modernization of the GST rules for the current economy,” says Nevsky. “… as the economy has shifted so rapidly towards digital services, the sales-tax rules need to be adjusted to keep up.”

He adds that what has been dubbed the “Netflix tax” is not a new tax, just an existing tax that has not yet been enforced on these providers.

“It's not a new tax on Netflix, it's a new tax on the users of Netflix,” says Nevsky. “It is another tax on the consumer… all it's going to do is increase the cost of the consumer accessing those services.”

Also paying GST/HST will be operators of fulfillment centres stationed in Canada – those run by Amazon being one example. Fulfillment centres allowed companies to avoid being found to “carry on business in Canada” which saved them GST on importation, says Nevsky.

“All that's happened is it's become a lot easier, from a logistics perspective, to operate this way,” he says. “And then it became more prominent, and so the leakage has become too large to ignore. So, the government is now updating the legislation to capture that tax. And again, all it's going to do is increase the cost to the end-consumer buying those goods.”

"But it does level the playing field between the Canadian providers of similar goods and international providers of those goods, when they use this structure.

The same kind of changes will be applied to short-term accommodations, such as Airbnb, which will now have to charge GST/HST.

“That's, again, just evening the playing field between traditional hotels and people who are lending out their place into Airbnb or similar platforms,” he says.