Wealth Strategies: Federal Budget Legislation Moves Forward - Stock Options & Annuities in Registered Plans

New Federal legislation is moving forward and will adopt several measures from the prior proposals drafted in June 2019, as these were stalled due to the onset of the pandemic last spring.

The bill will specifically implement changes to the Income Tax Act to limit the benefit of the preferential 50% employee stock option deduction. The newly imposed $200,000 annual vesting limit of stock options will apply to those granted beginning July 1, 2021.

This means stock options above the $200,000 annual limit will no longer receive preferential tax treatment but will instead be taxed as regular income based on the individual’s marginal tax rate.

The $200,000 cap will be based on the fair market value of the underlying shares at the date of the grant; however, this does not apply to Canadian-controlled private corporations. The proposed new rules also clarify that an employee donating publicly listed shares acquired via stock options that exceeds the $200,000 limit will not be eligible for the stock option deduction. The employee would however be able to claim the charitable donation tax credit for the full value of the shares donated.

Under the current employee stock option rules, employees who exercise stock options must pay tax on the difference between the value of the stock and the exercise price paid. If certain conditions are met, the employee can claim an offsetting deduction equal to 50% of the taxable benefit. This in essence reduces the tax payable by half, which is significant; in addition, there is no upper limit on the amount of options.

The newly drafted bill also moves forward with two new types of annuities for registered plans that were proposed prior. Specifically, advanced life deferred annuities (ALDAs) and variable payment life annuities (VPLAs).

The ALDA would allow a client to transfer additional savings from their registered retirement accounts to an annuity deferred until age 85. Annuities purchased with registered funds generally commence income at age 71, as do RSP’s, LIRA’s and LIF’s. A purchase maximum was set at 25% of the original plan, up to a maximum of $150,000.

As always, proactive planning with a qualified professional is valuable in determining the best course of action for the individual.