The tax perk for wealthy CEOs that will cost Canada $840M this year
It’s called the stock option deduction — a tax break for employees that critics say largely benefits wealthy corporate executives. According to the finance department, keeping this perk intact will cost Ottawa a projected $840 million this year.
That’s one reason many critics would like to see the deduction eliminated.
“It’s outrageous,” says Dennis Howlett with the advocacy group, Canadians for Tax Fairness. “Why would we give more money to those who are already overpaid and extremely wealthy?”
The federal Liberal Party at one time agreed. As part of its 2015 campaign promise “to target tax loopholes that particularly benefit Canada’s top one per cent,” it pledged to cap the stock option deduction.
Then five months after winning the election, the new Liberal government quietly abandoned the plan in its first budget.
Howlett and other critics hope that in Wednesday’s second budget, Ottawa will finally live up to its election promise and claw back the perk. Howlett claims the move would generate millions of dollars for social programs.
“To not do anything would be totally unjustifiable,” he says. “We’re throwing the money away.”
Income taxed at a discount
Stock options are a potentially lucrative part of employee compensation where executives and sometimes other employees can purchase company stock at a set price. When they cash in the stock, if certain conditions are met, any profit is typically taxed at only half the rate of regular income.
In other words, people who already benefit from stock options also get an added bonus of a major tax discount.
Advocates of the perk argue that it encourages innovation by helping startups and smaller companies attract new talent.
“It’s just part of the small company culture, really, because they can’t pay large salaries,” Rod Thomas, president of the Prospectors & Developers Association of Canada, told CBC News in March.
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But most employees who are granted stock options are already pulling in fat salaries, argues David Macdonald, senior economist with the Canadian Centre for Policy Alternatives. The organization is a left-leaning think-tank focused on economic and social policy.
“If you are getting paid in stock options, it’s fairly likely you’re pretty wealthy,” says Macdonald. “It’s incredibly concentrated among the richest CEOs.”
Tax breaks for top earning CEOs
A recent study by the Centre for Policy Alternatives reported that in 2011, about 99 per cent of the benefits from the stock option deduction went to Canada’s top 10 per cent of income earners.
In a second study on CEO salaries, the organization reported that among the highest paid 100 CEOs in Canada in 2015, 75 received stock options as part of their pay package.
Top earners included Hunter Harrison, then the CEO of Canadian Pacific Railway. According to the report, he earned $2.8 million in base pay. On top of that, his stock options were worth an estimated $5.2 million.
If he had cashed them in, presumably that $5.2 million would be taxed at half the rate of his base salary.
“[CEOs] get big breaks on this,” says Macdonald.
Howlett says the government could protect smaller businesses by capping the amount that is taxed at the lower rate, instead of axing the lower stock option deduction altogether.
The Liberals came up with this idea themselves during the election, pledging to fully tax individual stock options gains over $100,000.
Then in March, according to the Canadian Press, Finance Minister Bill Morneau halted the plan, stating that he was informed by “many small firms and innovators that they use stock options as a legitimate form of compensation for their employees.”
“I don’t know why they weren’t smart enough to say, ‘OK, we’ll just put a cap on it so it still helps the startups but closes this loophole that helps all the big rich CEOs,'” says Howlett.
CBC News asked the government why it backtracked on its plan to cap the stock option deduction.
“Our government is committed to strengthening the middle class,” wrote department of finance spokesperson Annie Donolo in an email to CBC News. As part of its commitment, the government is reviewing the tax system as a whole “to ensure fairness, simplicity and effectiveness,” she said.
She made no mention of the deduction helping startups, the reason the Liberals gave last year for not changing it.
Donolo would not say if the taxation of stock options will be addressed in the upcoming budget.
A federal budget review issued last week by RBC stated that there is speculation that the budget will increase taxes on capital gains — profit from the sale of a capital asset which is also currently taxed at half the rate of regular income.
Any change to the capital gains tax could also affect the stock options deduction.
“That move could be hard to square with the government’s billing of the document as an innovation budget, given that some sectors use stock-based compensation to attract talent,” said the RBC report.