Ottawa’s Promise to Retool Stock Option Tax Raises Tech Concerns in B.C.

Content provided by Business in Vancouver

Could an early Christmas gift turn into a lump of coal?

Details of the federal government’s new plan to cap deductions on stock options were scarce when Vancouver’s TIO Networks granted about $3 million in incentive stock options for directors, executives and employees on December 23.

But Hamed Shahbazi, CEO of the bill payments service, said those stock options still served as a good incentive for workers. It’s unclear, however, how long they will remain that way.

“We feel that in addition to salary and bonuses, that stock options are just an important part of [compensation] for people in the company, especially key people, managers who are obviously putting in more time and effort.”

He added that it’s also a good way to lure top talent from Silicon Valley and other parts of Canada to work at a startup.

But Shahbazi and others in the B.C. tech sector fear the Liberal government’s campaign promise to hike taxes on stock options threatens to make Canadian startups less competitive when attracting talent.

“The narrative can be extremely damaging if suddenly it goes viral that Canada just made this really tone-deaf move and has kind of turned a bunch of people off,” Shahbazi said.

Just days before TIO granted the options in December, representatives from tech Canadian startups met with federal ministers and bureaucrats in Toronto to discuss the repercussions of the campaign promise.

The Liberals had pledged in the fall to cap the amount employees can claim through stock-option deductions but details about the plan were limited. The former Conservative government allowed a 50% deduction on the benefit when employees exercised stock options.

The new government later clarified that employees with less than $100,000 in stock option gains would not be affected, while Finance Minister Bill Morneau said in November any new policies would only affect stocks issued after changes were instituted.

The Department of Finance Canada did not respond to Business In Vancouver by deadline.

Effectively, the government is expected to limit all employees to a $50,000 deduction related to stock option benefits.

Bill Tam, CEO of the BC Technology Industry Association, said that could spell trouble for startups.

Stock incentives are a key recruitment tool for Canadian startups that can’t compete with higher salaries found at larger tech companies, he said.

“We compete on a global scale with the best talent in the world, and we happen to live next door to one of the most prolific tech jurisdictions in the U.S. [San Francisco]. For the tech community, any action that deals with changes to the stock-option piece would be a step backwards.”

Tam added that capping the limit on stock-option deductions also unfairly penalizes startups compared with larger tech companies.

“The very nature of stock options is they tend to be a one-time event,” he said.

Whereas stock option gains might be realized over a number of years at a large corporation, startup employees generally receive gains only after an initial public offering or an acquisition.

Because the government only began its federal budget consultations on January 6, it’s unclear yet when Ottawa will release more details about changes to taxing stock options.

But Tam and Shahbazi each said they were hopeful the federal government was open to suggestions put forward by tech leaders at December’s meeting in Toronto.

“The devil is going to be in the detail,” Shahbazi said.

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