Fewer options for employees with stock options

The 2010 federal budget included a number of proposed changes to the rules governing the taxation of stock options. The first proposed change impacts hybrid stock option plans. These are plans that allow you to either exercise your options or dispose of your option rights in exchange for a cash payment from your employer.

Under the current rules, if you choose the “cash out” option, your employer can fully deduct the cash payment as a business expense, while you may also be able to claim a deduction equal to 50% of the stock option benefit included in your income (i.e., the amount by which the fair market value of the shares at the time the option is exercised exceeds the price you paid for them). It’s proposed that the 50% stock option deduction will only be available on the “cash out” option if your employer waives its right to deduct the cash payment.

Another change affects stock options exercised by public company employees. Under the current rules, you can file an election to defer the taxation of the stock option benefit from the tax year in which the options are exercised to the tax year in which the shares acquired under the agreement are sold. The ability to file this election will be eliminated for public company stock options exercised after the March 4 budget date. Relief is also proposed to address situations where you filed this election but, as a result of the recent downturn in the markets, ended up having insufficient proceeds of disposition on the sale of the shares to cover the tax payable on the stock option benefit.

If you have entered into any stock option agreements, you should become familiar with the proposed changes to determine if you will be impacted by them. Further information can be found in a tax article addressing some of the recently announced changes to the tax treatment of employee stock options.